China Investment Corp., the Chinese sovereign wealth fund, lends $500 million to SouthGobi Energy Resources
Toronto-listed SouthGobi Energy Resources yesterday announced that China Investment Corporation (CIC) has agreed to provide a $500 million loan to finance the expansion of the company's mining and exploration operations in the south of Mongolia. This is the first significant deal in Mongolia since its government signed the Oyu Tolgoi investment earlier this month.
The loan is in the form of convertible debentures issued by SouthGobi to CIC. The interest shall be 8% per annum, of which 6.4% shall be payable in cash and the remainder in SouthGobi shares. The maximum term of the loan is 30 years and $120 million of the total amount can be used for working capital.
The conversion price will be C$11.88 ($11.16) or the 50-day volume-weighted average price (VWAP) on the conversion date, whichever is lower. The floor price is C$8.88 a share. CIC can convert the debentures one year after issuance, while SouthGobi can call for conversion of up to $250 million of the loan two years after its issue, if its share price goes over C$10.66, or if the company goes public.
If CIC converts the full loan at C$11.88 after SouthGobi has achieved a 25% public float, the sovereign wealth fund will have a 22% stake in the company.
The deal is the second CIC has struck with a Canadian company this year. In July CIC paid $1.5 billion to buy 17.2% of Canadian mining and processing company Teck Resources.
The loan gives CIC the right to nominate one director to SouthGobi's board. And in addition to the financing, CIC will assist SouthGobi with issues relating to the sale of goods to China.
The money will be used to expand the Ovoot Tolgoi mine, an open-pit coal mine in Mongolia 40 kilometres away from the Chinese border. The company's target is to increase its production to 8 million tonnes a year from its current 1.5 million. It shall also develop a nearby mining operation. SouthGobi's measured and indicated coal resource base is currently 307.6 million tonnes.
Local transportation will also get a boost. Not only will SouthGobi improve the surrounding road network, it shall also look into working on the development of a cross-border rail line that would connect its mine to a coal shipment terminal on the Chinese border.
"It has been very hard for Mongolian mining companies to raise capital," said Masa Igata, founder and CEO of Frontier Securities, an Ulan Bator-based securities company. "Local banks have been reluctant to lend money as their non-performing loans are staying at 15% or so and they do not want to take additional risk."
The company said in a press release that "the improving investment climate in Mongolia" allowed it to secure the financing. The outlook for the landlocked country started to look a lot better earlier this month when a key investment agreement relating to one of the country's largest deposits was finalised and signed by the government and the key investors. The project, Oyu Tolgoi, is a copper and gold deposit that is being developed by Ivanhoe Mines, a Canadian company in which Rio Tinto is a major shareholder.
For years, interested parties were waiting for the Oyu Tolgoi mine to get the go ahead. The deal's slow progress was generally seen to be a major obstruction to the development of the national mining industry. With Oyu Tolgoi in the bag, sentiment is running high in Mongolia, something that the SouthGobi deal can only add to. It's also a cause for cheer among international investment banks, which are seeking to do business in the country, such as Macquarie, which advised SouthGobi, and Citi, which advised CIC.
The next big event to happen in Mongolia is the sale of a stake in Tavan Tolgoi, the country's largest mineral deposit. The gargantuan coal project is reported to have eight shortlisted bidders, and the government is expected to choose the winners by the end of the year.