Mongolia Miner SouthGobi Resources Filing Indicates Pending Sale

The sale of Hong Kong-listed SouthGobi Resources Ltd. (SGQ), a Mongolia coal miner, may be agreed by June 30, according to a filing by the company on June 3.

The term sheet has sections redacted, including the name of a third party that is “contemplating” purchase of all shares owned by Turquoise Hill Resources Ltd. (TRQ) Vancouver-based Turquoise Hill holds 56 percent of SouthGobi and is itself 51 percent owned by mining giant Rio Tinto Group.

The potential sale of SouthGobi is a stress test for Mongolia, which saw a flight of investment following two years of nationalist-fueled legislation and strained relations with key investors. Prime Minister Altankhuyag Norov last month began a 100-day economic acceleration campaign to jump start the economy.

The filing explains the terms of a $10 million revolving credit facility for short-term working capital requirements. SouthGobi last month said it was seeking additional financing to continue operations and pay interest due on a $250 million debenture held by China Investment Corp (CIC), which owns more than 16 percent of the company.

In 2012, Chinese state-owned Aluminum Corp of China Ltd., also known as Chalco, offered to buy SouthGobi for $926 million. That led to new legislation in Mongolia, the Strategic Entities Foreign Investment Law (SEFIL), which ultimately blocked the deal.

Chilling Effect

SEFIL had a chilling effect on the Mongolian economy, which expanded a world-beating 17.5 percent in 2011. The regulations, designed to curb investments from state-owned entities in China, helped push down foreign investment by 52 percent in 2013.

Weak coal prices and SEFIL combined to drive down the share price of SouthGobi from a peak of $20 in January 2010 to the current price of $0.64 on the Toronto Stock Exchange.

SouthGobi is planning to furlough approximately half of its 405 workers until mid-July, due to “management of financial resources and the demand for coal”, Chief Executive Officer Ross Tromans said in a phone interview yesterday.

Tromans declined to comment when reached by phone today and referred question to Turquoise Hill. Spokesman Altanbagana Bayarsaikhan didn’t pick up calls.

The company produced 640,000 tons of raw coal in the first quarter at its flagship Ovoot Tolgoi mine, located 40 kilometers (25 miles) north of the Mongolian-Chinese border. Revenue reached $5.1 million in the first quarter, according to operating results published on May 12.

SouthGobi is embroiled in a lawsuit with the Mongolian government, as the nation’s anti-corruption body has investigated the company for tax evasion. The government says its owed $50 million in unpaid taxes, which the company denies.

Three former employees, American Justin Kapla and Philippine nationals Hilarion Cajucom and Cristobal David, have been banned from leaving the country since mid-2012 as the tax investigation continues.

To contact the reporter on this story: Michael Kohn in Ulaanbaatar at mkohn5@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Peter Langan, Indranil Ghosh

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