Mongolia-focused coal miner SouthGobi Resources Ltd (SGQ.TO)
(1878.HK)
said on Tuesday that it expects China”s state-controlled Chalco (2600.HK)
to drop its $926 million takeover bid in the face of opposition from the
Mongolian government.

The proposed deal has the backing of
SouthGobi”s majority shareholder, Turquoise Hill Resources Ltd (TRQ.TO),
formerly known as Ivanhoe Mines Ltd, but it faced opposition almost immediately
within Mongolia, which is becoming wary about the growing Chinese presence in
its mining sector.

“I personally believe Chalco is not
continuing to work on the deal,” SouthGobi Chief Executive Alex Molyneux
told Reuters.

“The evidence I have before me seems
highly unlikely that the bid is going to go forward,” Molyneux said by
telephone, citing Mongolia”s recent efforts to block the deal. “It”s 100
percent clear that Mongolia has made the deal impossible.”

Aluminum Corp of China Ltd (601600.SS),
or Chalco, this month said it had decided to extend its offer for up to 60
percent of the common shares of Toronto and Hong Kong-listed SouthGobi
Resources for the second time as it needs more time to “engage with the
Mongolian government and review the terms and conditions of the
transaction”.

The company in April had announced the
C$8.48-per-share bid for a controlling interest in SouthGobi, which owns large
coal projects in Mongolia close to China, which has a huge appetite for energy
and minerals to feed its giant economy.

Chalco has until September 4 to formalize its
bid.

Mongolia, a former Soviet satellite
landlocked between China and Russia, passed a controversial law in May aimed at
capping foreign ownership in “strategic” industries like mining.

FRIENDLIER INVESTMENT CLIMATE?

The law stipulates that foreign investors are
allowed to own a maximum of 49 percent of companies involved in the mining,
finance, media and telecommunications sectors before being subject to scrutiny
by a government panel. The rule only applies to deals valued at above $75
million, or ones involving state-owned companies like Chalco.

But recent changes in Mongolia politics have
raised hopes for a friendlier investment climate. Norov Altanhuyag of the
Democratic Party was confirmed as prime minister last week. The Democratic
Party, broadly in favor of the free market, is expected to comprise 75 percent
of the new cabinet.

SouthGobi”s shares, which last traded at
C$3.7 in Toronto, have wilted. Its Hong Kong-listed shares were down nearly 4
percent.

SouthGobi had had no formal contact from
Chalco for more than a month, another sign that the deal will not happen,
Molyneux said.

Chalco board secretary Liu Qiang, asked by
Reuters whether Chalco was still pursuing a takeover, said she had no comment.

SouthGobi said late on Monday its
second-quarter profit plunged on lower output after Mongolia suspended its
mining license following Chalco”s bid.

Operations at its flagship Ovoot Tolgoi mine
in the south of the country had been “fully curtailed” since June 30
and were not expected to resume in the third quarter, SouthGobi said.

The company”s second quarter net income
attributable to equity holders fell to $237,000 from $67.3 million a year
earlier.

“They (Mongolian government) have done
everything in their power to roadblock the deal by the Chinese state
company,” Molyneux said, adding that profits were also hurt by weakening
demand for coking coal in China.

Chalco is the largest aluminum producer in
China. It has been investing in coal, iron ore and electricity projects as the
profit margin for its core aluminum business shrinks.

It said on Monday that it would buy a 35.3
percent stake in China”s Ningxia Electric Power Group Co for 2.02 billion yuan
($319 million).

Reuters