SouthGobi deadline extended

The Aluminum Corp. of China (Chalco) and Ivanhoe Mines (IVN-T, IVN-N) have agreed to wait a month before Chalco makes an official offer to buy Ivanhoe’s stake in SouthGobi Resources (SGQ-V), as doubts remain as to whether the Mongolian government will allow the deal to go through.

Chalco, which had initially agreed to make the takeover offer by July 5, plans to bid for at least 56% and as much as 60% of SouthGobi’s shares by Aug. 3.

The revised timeline comes only days after SouthGobi announced it was ramping down production at its Ovoot Tolgoi coal operation in Mongolia because of an unco-operative government and dwindling coal contracts. The news sent its share price down as much as $1.59 to close at $3.81 on June 28.

Meanwhile, the terms of the Chalco deal announced in early April consist of the Chinese aluminum giant buying Ivanhoe’s 104.8 million shares of SouthGobi for $8.48 per share, which is a 28% premium to the $6.62 closing price of the stock a day before the deal was announced. Chalco stated that otherwise the terms of the deal remain unchanged, which helped bring SouthGobi’s share price up to $4.75 by July 4.

But the Mongolian government  may not accept the deal. The country has just wrapped up parliamentary ­elections, and questions about mining benefits and resource nationalism were major issues. With neither front-running party winning an outright majority, one of the parties may form a coalition with the ­Mongolian People’s Revolutionary Party, which campaigned on a platform of resource nationalism and opposes foreign investment in mining.

On May 17 the Mongolian government passed a law that would let it assess foreign investments, though the exact scope of the law is unclear. According to University of British Columbia researcher Julian Dierkes, the law includes a listing of strategic sectors to which it applies, which includes mining; a minimum ownership threshold that triggers a review, apparently 49%; a minimum transaction value of $75 million; and lower criteria when foreign state-owned entities are involved, as in the case of Chalco. Dierkes notes that the law resembles the Investment Canada Act, which blocked the takeover of Potash Corp.

In their July 3 co-statement Ivanhoe and Chalco reiterated that they will co-operate with the government of Mongolia to ensure any requirements under the country’s strategic foreign investment legislation are satisfied.

Meanwhile SouthGobi has been struggling with its operations since the government threatened to suspend its licence, though the company received no official notification regarding suspension. The company reports that the uncertainty about the suspensions has meant that many government departments have not issued approvals and permits to SouthGobi, while customers have been hesitant to sign contracts with the company.

SouthGobi cited the delay in approval of a revised environmental impact assessment for a dry coal-handling facility from the Ministry of Environment, which might not operate without the issuance.

The company also noted contracts were down because of a lack of border crossing capacity — brought on by government delays, repair issues and extended holidays — and deteriorating coal market conditions.

The combined difficulties have led the company to curtail activity at its Ovoot Tolgoi mine, with the company expecting to mine only 200,000 tonnes in the quarter and then halt operations entirely at the end of the quarter. The company expects new coal contracts of between 200,000 and 300,000 tonnes for the second quarter, but has not put out a guidance for third-quarter sales because of the uncertainty with its operations and the regional coking coal market in general.

Ovoot Tolgoi produced 4.57 million tonnes of coal last year, up from 2.79 million tonnes in 2010. In 2011 SouthGobi posted record annual gross profit of US$51.7 million, up 424% from 2010, and record annual revenue of US$179 million — a 124% increase over 2010.