China has fallen silent in its pursuit of a deal that would have unlocked
vast seams of Mongolian coal ahead of a deadline that expires next week, as
politics and a slowing Chinese economy likely scotched the proposed $920
million investment.

It is now all but certain that Aluminum Corp. of China Ltd. won”t pursue its
bid for Mongolia-focused coal miner South Gobi Resourced Ltd., according to
SouthGobi Chief Executive Alexander Molyneux.

The Chinese metals major, also called Chalco, hasn”t contacted SouthGobi in
recent weeks on a bid it once hotly pursued, Mr. Molyneux told Dow Jones
Newswires on Friday, with the deadline that Chalco set for the deal to be
completed set to expire Tuesday.

“We still haven”t heard anything from Chalco, [and] my strong feeling
is still that it”s likely the Chalco bid won”t happen,” he said.

Mr. Molyneux said in mid-August that SouthGobi hadn”t been in contact with
Chalco for more than a month, after the Chinese company said in early August it
would have until Sept. 4 to make its offer for a controlling stake in
SouthGobi.

“I don”t think the deadline for the deal will be extended any
further,” Mr. Molyneux said. “I think it will be canceled.”

Chalco”s spokesman didn”t respond to a call for comment Friday.

Chalco”s bid in April for SouthGobi, which sits on potentially 800 million
metric tons of coal resources, triggered political hostility in the Mongolian
capital of Ulan Bator. The government in May suspended SouthGobi”s mining
licenses on national-security grounds and unveiled a new law to cap foreign
investments in strategic sectors including resources.

Deep-seated historical suspicions appear to have unraveled a potential
economic relationship whose benefits seemed obvious.

Landlocked Mongolia abuts the northern edge of China, and is rich in a range
of resources—including copper and gold—that China seeks to supplement its
hunger for economic development.

Mongolia heavily depends on foreign investment to ride its commodity boom,
but rapid mineral-driven wealth has also created a groundswell of frustration
among ordinary Mongolians that the spoils of resource development would favor
foreigners, a sentiment that became a campaign issue during legislative
elections in June.

The looming SouthGobi debacle isn”t the only bilateral mining-focused deal
that appears to have run into trouble.

Development of the Mongolian giant copper-gold deposit Oyu Tolgoi, scheduled
to launch commercial production in the first half of next year, may be
threatened if a long-term power-supply agreement with China isn”t reached.

Australian miner Rio Tinto”s subsidiary Turqoise Hills Resources, which is
developing Oyu Tolgoi, has said power supply from China would be required by
early October in order for the commissioning to remain on schedule.

A deal with China hasn”t yet been struck, with no likely timetable forecast
for it to be secured.

The threatened SouthGobi deal also came at a time of China”s economic
slowdown, which has taken a heavy toll on Chalco.

Chalco said last week it swung to a net loss of 3.25 billion yuan [$511
million] for the first half of the year, as falling aluminum prices and the
slowing economy hit earnings.

“At current aluminum prices, the profit for the second half is unlikely
to be materially better than the first half,” Barclays Research said in a
note.

Global aluminum prices, a mainstay product for Chalco, have fallen more than
20% this year, while domestic prices are down about 10%.

“Chalco”s attempt to diversify into other commodities, [such as] coal
and iron ore, is expensive and fraught with risks, in our view,” Barclays said.

In mid-August, Mr. Molyneux told an earnings conference that his company saw
“no clear way forward” for Chalco”s offer given the political
opposition to the deal in Mongolia.

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