Investing in Mongolia
Chalco drops bid for SouthGobi
On 3 September of this year Chalco, the aluminium company of China, decided to drop its proposed US$926 billion takeover of a controlling interest in Vancouver based mining company SouthGobi Resources. This event, although normally routine, in terms of developed stock markets for corporate control, has in this case much wider implications. It threatens to impact severely on the future inflow of investment into Mongolia, a country that is heavily reliant on foreign direct investment (FDI). The principal reason for this is that the deal was killed, not because of any problems with its price, shareholder issues or with its economic and commercial aspects, but instead as a result of hostility expressed by leading Mongolian politicians and an increasingly uncertain regulatory environment within that country.
The Mongolian government’s strong opposition to the sale of a majority stake in the Canadian listed energy company SouthGobi Resources to Hong Kong listed Chalco seemed excessive. On the face of it was just a routine share transaction transferring ownership between two parties which should be regulated only by the rules of the relevant stock exchanges. The proposal by Chalco to buy up to 60% of the equity in SouthGobi Resources was not hostile and the deal had the approval of Toronto and Hong-Kong listed company’s controlling shareholder Turquoise Hill Resources Ltd., a subsidiary of Rio Tinto. The political problems which killed the deal arose because Chalco is an aluminium company controlled by the Chinese government and SouthGobi Resources owns significant operational and developmental coal projects close to the border with Mongolia’s giant southern neighbour. The aborted transaction has led to a situation tha