* 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 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
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
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
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
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
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
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)