China’s Chalco Abandons SouthGobi Bid on Regulatory Hurdles

Aluminum Corp. (2600) of China Ltd., the nation’s largest producer of the metal, said it dropped its C$925 million ($938 million) bid for coal producer SouthGobi Resources Ltd. (SGQ) as it’s unlikely to win regulatory approval.

“The proposed transaction has minimal prospect of obtaining the necessary regulatory approvals within an acceptable time frame,” Vancouver-based Turquoise Hill Resources Ltd., SouthGobi’s largest shareholder, said today in a statement. “As a result, Turquoise Hill and Chalco have agreed to terminate the lock-up agreement, including Chalco’s obligation to make a proportional offer.”

Chalco’s plans to acquire a stake in SouthGobi have been hindered by the Mongolian government, which passed a law in May restricting foreign state-owned companies from controlling key assets. The Chinese company was due to make a takeover bid by tomorrow after it agreed with Turquoise Hill (TRQ) to extend the deadline for a second time.

Chalco proposed in April to buy as much as 60 percent of SouthGobi for C$8.48 a share. Shares of the Vancouver-based company fell to C$2.69 at the close in Toronto on Aug. 31.

“There is no clear way forward” for the proposal, SouthGobi Chief Executive Officer Alex Molyneux told investors and analysts on Aug. 14. The company hasn’t had “any meaningful contact from Chalco for over a month,” he said at the time.

Chalco shareholders approved the acquisition plan in June. Chalco wants to diversify from aluminum smelting as weak prices and higher fuel costs led the company to swing to a net loss of 3.25 billion yuan ($510 million) in the first half, it said on Aug. 16.

Rio Tinto Unit

Turquoise Hill, a unit of Rio Tinto Group whose name was changed from Ivanhoe Mines Ltd. last month, has a 58 percent stake in SouthGobi, according to data compiled by Bloomberg. Turquoise Hill is building the $6.2 billion Oyu Tolgoi copper and gold mine in Mongolia with Rio Tinto, scheduled to begin production next year.

Foreign companies seeking more than 49 percent of strategic assets will need approval from parliament, according to a statement on the Mongolian parliamentary website in May. The restriction means Mongolia joins Indonesia and Argentina in seeking to control ownership of resource assets to secure their economic future.

To contact the reporters on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net; Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; John Viljoen at jviljoen@bloomberg.net

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