SouthGobi Shares Tumble On Concerns Chalco Bid May Be Derailed, Auditor Quits
04/17/2012| 07:01am US/Eastern
--SouthGobi's shares fall more than 13% On possible mining suspension
--Deloitte quits as auditor of the firm effective April 2
--SouthGobi appoints PricewaterhouseCoopers as new auditor, effective April 2
(Recasts top four paragraphs and adds Chalco's comments in paragraph 6.)
By Joanne Chiu
Investors cast fresh doubt Tuesday on SouthGobi Resources Ltd. (1878.HK) after the Mongolian government sought a temporary suspension of some exploration and mining licenses, raising fears that Aluminum Corp. of China Ltd.'s bid to buy a controlling stake in the company might be in jeopardy.
SouthGobi, 14% owned by Chinese sovereign wealth fund, China Investment Corp., said in a statement late Monday that the Mongolian government made the decision on national security concerns following Chalco's bid to take control of the Mongolian miner whose main asset is the Ovoot Tolgoi Mine which produces coking and thermal coal used in the production of steel and power generation. SouthGobi also added that the suspension was initiated to allow the government of Mongolia to review the proposed change of ownership.
Efforts to reach officials at the Mongolian government were unsuccessful. Chalco, which agreed to buy a controlling stake in SouthGobi from Canada's Ivanhoe Mines Ltd. for up to $927.1 million on April 2, said Tuesday in a statement it is assessing the impact, but it didn't elaborate.
Land-locked Mongolia needs to tread cautiously in balancing between its giant neighbors to the north and south. While China is keen to take much of the country's future exports of coal and metals, Mongolia wants to ensure it has access to other markets, and for this it needs export routes to the Pacific that bypass China. Chinese miners have been stepping up overseas acquisitions of natural resources to feed the country's rapidly growing energy demand. The deal by Chalco, as the Chinese company is known, is its latest in an effort to diversify from aluminum.
"If the acquisition falls through, it would have a negative impact on SouthGobi which relies very much on Chalco for financial support to ramp up its production," said Robin Tsui, an analyst at BOCI Research.
Uncertainties over the deal weighed on the share prices of SouthGobi and Chalco Tuesday. SouthGobi tumbled 10% Tuesday to a more than three-week closing low of HK$49.90 in Hong Kong. The closing price is 24% lower than the HK$65.97 cash offer by Chalco for each of SouthGobi's shares. Chalco's stock ended 1.6% lower at HK$3.70 Tuesday.
SouthGobi said it has requested that Ivanhoe and Chalco discuss the proposed deal with the Mongolian government. The company said it has also informed Rio Tinto Ltd. (>> Rio Tinto plc), which has a 51% stake in Ivanhoe, and CIC.
A CIC representative couldn't immediately be reached for comment.
Separately, SouthGobi said Deloitte & Touche resigned as its auditor before its contract with the miner expired, and the auditor didn't express any concerns in its reports about the company for the two most recent fiscal years. The company named PricewaterhouseCoopers LLP to replace Deloitte & Touche effective April 2.
Deloitte & Touche and PricewaterhouseCoopers couldn't immediately be reached for comment.
-By Joanne Chiu, Dow Jones Newswires; 852-2802-7002; email@example.com
--Simon Hall contributed to this article