Canadian miner SouthGobi Resources Ltd’s Hong Kong shares fall on fear of failed takeover

Canadian coal miner SouthGobi Resources Ltd’s Hong Kong shares plunged on Tuesday on concerns the Mongolian government may scupper a bid by top Chinese aluminium maker Chalco to buy a controlling stake in it.

Earlier this month, state-run Aluminium Corp of China Ltd, known as Chalco, agreed to pay $926 million for a majority stake held by mining billionaire Robert Friedland’s Ivanhoe Resources in SouthGobi. Ivanhoe owns 57.6 percent of SouthGobi.

Chalco’s offer appears to have caught the Mongolian government by surprise. Government officials within the mineral-rich and land-locked neighbour of China moved to suspend certain exploration licenses that SouthGobi holds.

SouthGobi said in a statement late on Monday that the Mongolian government suspended exploration and mining licenses for its Ovoot Tolgoi coal mine following Chalco’s bid.

“The suspension would be initiated to allow the government of Mongolia to review the proposed change of ownership,” SouthGobi said.

While Mongolia has opened its doors to foreign investors over the past decade, Chinese companies have found it hard to access Mongolia’s vast copper and coal mines. Analysts say there has been a historic mistrust between the two countries.

Helen Lau, an analyst with UOB Kay Hian said that in a worst-case scenario, the move by Mongolia’s government signals that the deal could collapse.

“The Mongolian government’s intervention appears like a political move rather than commercial decision. This will increase the political risk for Chinese state companies looking to acquire Mongolian assets,” Lau said.

STOCK FALLOUT

SouthGobi’s Hong Kong shares fell as much as 13.3 percent on Tuesday to a one-month low, before cutting their losses to be down 11 percent by midday, heading for their biggest one-day fall in just over a year. Its Canada shares fell 12.4 percent on Monday on the Toronto Stock Exchange.

The coal miner said if it receives an official ruling from the Mongolian government, it may need to suspend operations until an injunction is granted.

SouthGobi, which sells metallurgical and thermal coal mainly to customers in China, has requested Ivanhoe and Chalco to discuss the proposed deal with the Mongolian government. It has also informed Rio Tinto RIO.L RIO.AX, which has a 51 percent stake in Ivanhoe.

Shares of Ivanhoe, which has a market value of C$9.50 billion, fell 5.6 percent to a more than two-year closing low of C$12.03 on Monday on the Toronto bourse.

SouthGobi -- which owns four coal projects in Mongolia, three development projects and a mineral exploration license -- said it has no reason to believe its licenses are not in good standing.

Proven and probable surface coal reserves at Ovoot Tolgoi are estimated to be 175.7 million tonnes as of Dec. 11, 2011, according to the company’s website.

SouthGobi said more than two-thirds of the reserves are in the proven category.

Separately, SouthGobi said on Tuesday that Deloitte & Touche LLP resigned as the company’s auditor and has been replaced by PricewaterhouseCoopers.