SouthGobi Shares Surge After Chalco Buys Ivanhoe Stake

Shares of Hong Kong-listed SouthGobi Resources surged on Monday after Chinese aluminum producer Chalco agreed to buy Ivanhoe Mining's controlling stake in the Mongolia-focused mining company for $926 million.

Aluminium Corp of China (Chalco) [2600.HK 3.68 -0.07 (-1.87%) ] said in a statement on Monday that it will acquire the 57.6 percent stake for C$8.48 per share, a 28.1 percent premium to South Gobi's [1878.HK 60.35 9.30 (+18.16%) ] Friday closing stock price. The Hong Kong price of the offer is HK$65.97, the company said. Chalco is diversifying into other resources in the face of a tough aluminium market.

SouthGobi Resources hit an intraday high of HK$61.30 on Monday but retreated, trading at HK$59.80, a 16.8 percent gain from its close on Friday.

The deal, if successful would be beneficial for SouthGobi's shareholders, Chief Executive Officer, Alexander Molyneux, told CNBC Monday.

"We have a big brother which has more than 50 percent (stake), which is Ivanhoe Mines in 58 percent, and if the transaction closes as proposed, we will have a new big brother being Chalco that happens to be, you know, a company that is closer to our region and very, very powerful on the Chinese side of the border," Molyneux said.

"We can get much better rail through this transaction, move more coal more efficiently, so I think there's almost no change in SouthGobi itself, as a listed company, but there are some synergies this big brother brings."

Chinese miners are scanning the globe for natural resources to feed the country's fast growing energy needs and Chalco's move to buy control of a Mongolian coal company is part of that strategy. Chalco, China's biggest aluminium maker, has been battling lower metal prices and higher costs and has warned of losses in the quarter of 2012 after reporting a bigger than expected loss in the fourth quarter of last year.

"This is a very surprising acquisition and should be positive to Chalco's share prices as earnings growth in the company's aluminium business is limited and diversifying into coal is a good move," Robin Tsui, an analyst at BOCI Research said.

Chalco's total liabilities totaled 99 billion yuan ($15.7 billion) at the end of 2011.

"Chalco is debt heavy but it is a central government-owned company and should have no problem in terms of funding, and have no danger of default," Tsui added.

Chalco said it will fund its acquisition with internal funds and bank loans. Chinalco owns 12.9 percent stake in Rio Tinto [RIO.L 3501.00 55.00 (+1.6%) ], which in turn holds 51 percent stake in Canadian miner Ivanhoe Mining. Chinalco is the parent of Chalco.

Canadian and Hong Kong listed SouthGobi mining company is focused on Mongolia. It owns four coal projects in Mongolia and three development projects, the Soumber Deposit, Zag Suuj Deposit and the Ovoot Tolgoi Underground Deposit. In addition, SouthGobi holds mineral exploration licences in Mongolia.

The company will remain listed on the Toronto and Hong Kong stock exchanges, Molyneux said. Chalco intends to retain the current management team, he said, adding that the board has not formed a view of the deal.