UPDATE 2-Mongolia policy worries hit SouthGobi deal

Thu Apr 26, 2012 7:09pm BST

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* Mongolia eyes rules to review investments by foreigners

* Legislation in parliament this week

* Chalco says bid contingent on winning regulatory nod

* Chalco says approval terms must be satisfactory to it (Adds comments from SouthGobi)

By Euan Rocha and Sonali Paul

TORONTO/MELBOURNE, April 26 (Reuters) - Speculation mounted on Thursday that Chinese aluminium giant Chalco's plan to buy a majority stake of Canadian coal miner SouthGobi Resources Ltd and take control of its projects in Mongolia could be sideswiped by new Mongolian government legislation.

Wary of its giant neighbor China, Mongolia looks set to enact new investment rules that would allow it to review deals involving foreign companies that have assets in Mongolia.

After state-owned Chalco announced in early April its $926 million bid to gain a majority holding in SouthGobi from Australia's Ivanhoe Mines, the Mongolian government said it would to suspend SouthGobi's licenses for its several large coal projects, which are close to the Chinese border. It then said it would introduce new foreign investment legislation.

Chalco - its full name is the Aluminium Corp of China Ltd - responded on Wednesday by saying it would not move forward with the deal until it has all the necessary regulatory approvals from Mongolia in place.

Mystery surrounds what exactly is in the new legislation.

Some analysts have speculated that it may just be a ploy ahead of elections in June and predict the deal will go through. But others say Mongolia fears all its coal will go to China, the world's biggest coal consumer, where it fetches much lower prices than in the seaborne market, and that the government is serious about safeguarding its interests.

"This is not an election stunt. There has been a long-standing fear of domination of the Mongolian economy by Chinese state-owned enterprises," said an Ulan Bator-based senior executive, declining to be identified due to the sensitivity of the matter.

Historical mistrust between the two countries has meant that while Mongolia has opened its doors to foreign investors over the past decade, Chinese companies have found it hard to win access to Mongolia's vast coal and copper mines.

SouthGobi, which owns a number of coal assets spread across Mongolia including the big Ovoot Tolgoi coal mine, said on Thursday that mining at its flagship asset was continuing.

"We haven't received any official notification of the suspension, so all operations at Ovoot Tolgoi are continuing as normal," said Steven Feldman, a company spokesman.

"We feel that there is no reason to suspend the licenses," he said. "At the end of the day, what benefit does it have shutting down the mine and having hundreds of Mongolians laid off?"

Chalco is also pressing ahead with securing more Mongolian coal interests, buying a stake of almost 30 percent in Hong-Kong listed Winsway Coking Coal Holdings Ltd, a big buyer of Mongolia's coal. It also sells coal from Mongolia's prized Tavan Tolgoi mine.

Chalco and Ivanhoe said in a joint statement on Wednesday that they intend to cooperate with Mongolia to ensure their deal proceeds and meets requirements under any new laws enacted by the country.

Chalco said it believes the proposed deal will be of "net benefit to Mongolia and the Mongolian mining industry," echoing arguments made by a range of foreign investors who say the country needs foreign investment to develop its abundant resources.

OTHER DEALS DELAYED

Even though the legislation is on the Mongolian parliament's agenda for the next two days, it is still not clear what the legislation includes, a lawyer involved in foreign investments in Mongolia said.

The government has been looking at other countries' foreign investment laws as a potential model, including those in major resource producers Australia and Canada, the lawyer said.

Australian and Canadian guidelines call for protecting the national interest and closer scrutiny on deals where state-owned enterprises are acquiring assets.

Ulan Bator-based broker Frontier Securities said in a note this week that communications from parliament and Mongolian media create the impression that the bill would likely be approved speedily.

Uncertainty over rights in Mongolia has meant other deals have also been delayed.

SouthGobi has extended the closing date on plans to sell its Tsagaan Tolgoi thermal coal project in Mongolia to Australian-listed Modun Resources Ltd to as late as Dec. 31. The $30 million deal had been supposed to close by June 1.

The planned sale of part of Mongolia's Tavan Tolgoi coal mine, estimated to have as much as 7.5 billion tonnes of coal, has also been held up due to concerns over foreign ownership.

Bidders for the its western block include China's Shenhua Group, U.S. coal miner Peabody Energy, a Russian-Mongolian consortium headed by Russian Railways, and Japanese and South Korean firms.

The government may decide to hold on to the block, given the difficulties of a consortium coming together, chief operating officer of state-owned Erdenes-Tavan Tolgoi, Graeme Hancock, said this week.

But Peabody has not given up and remains optimistic that it will be a part of any long-term development of Tavan Tolgoi, company spokesman Vic Svec said in a comment emailed to Reuters. (Reporting By Euan Rocha and Sonali Paul; Editing by Peter Galloway and Edwina Gibbs)

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