Mongolia’s treatment of the Chinese bid for coal-producer SouthGobi shows
that the state which birthed Genghis Khan has lost none of its warlike spirit.
Politicians seem determined to spike an offer from China’s state-owned
Aluminium Corp of China (Chalco), which also involves mega-miner Rio Tinto and
China’s sovereign wealth fund. A truce is possible, but public investors look
likely to lose out.

Chalco’s $925 million offer for a 60 percent stake in SouthGobi in April
produced an unfriendly response: a new investment law limiting foreign
companies to 49 percent ownership of mines. More insidiously, Mongolia has
dragged its feet over renewing some of SouthGobi’s licences, scaring away
customers and squashing production. SouthGobi’s shares now trade at less than
half the value of Chalco’s April approach, which stands until September.

For a tiny country, Mongolia has picked some hefty targets. Rio Tinto
indirectly holds a controlling stake in SouthGobi, through its controlling
position in Toronto-listed Turquoise Hill, known until last week as Ivanhoe
Mines. China Investment Corp also owns 13 percent of SouthGobi, bought at
around the level of Chinalco’s bid – and now deep underwater.

Mongolia’s protectionism looks short-sighted, but its opponents are unlikely
to fight back too hard. Rio Tinto won’t want to jeopardise its 66 percent
interest in world-class Mongolian copper mine Oyu Tolgoi and many Chinese steel
mills depend on Mongolian coking coal.

There is room for compromise. Mongolia needs capital and customers – and
China controls its main trade routes. That makes it risky to boot Chalco out
entirely. The Chinese miner could turn a crisis into an opportunity, lower its
offer price and settle for less than half of the company in return for some
certainty of supply. It might also buy out some of CIC’s shares too to mitigate
the fund’s losses. Without Chinese control, Mongolia’s nationalists should be
happy to leave SouthGobi in relative peace.

Negotiating with the Mongolians is easier now than in Genghis’ day. A likely
resolution would leave everyone with something – except the many investors who
bought in back when SouthGobi shares were almost double their current price.

By John Foley

Reuters