When Alexander Molyneux went looking for a large financing for SouthGobi Energy Resources Ltd., he quickly found that sovereign wealth funds were offering better terms than anyone else.
“Typical institutions are a little too short-term focused,” said Mr. Molyneux, chief executive of SouthGobi, which is 80% owned by Robert Friedland’s Ivanhoe Mines Ltd.
“If you try and do a large-scale placement, you find that the sovereign wealth funds have a longer-term attitude to investment, and that’s really what suits us,” he said in an interview.
Of all the funds that expressed interest, it was the one with the highest profile in the fastest-growing major economy, China Investment Corp. (CIC), that emerged with the best proposal for the Vancouver-based company.
Monday, the two sides announced that CIC will invest US$500-million in SouthGobi through a convertible debenture financing.
SouthGobi, which is will use the money to accelerate development of its coal mining and infrastructure projects in Mongolia.
It is one of many recent foreign investments by Chinese state-owned entities that are hungry for natural resources.
Back in July, CIC agreed to a $1.74-billion financing with another Canadian miner: Teck Resources Ltd. Both Teck and SouthGobi used the same rationale for dealing with CIC: it gives them a valuable ally in China, the most important end market for any resource company.
In SouthGobi’s case, having strong relations with China is especially important, because its Ovoot Tolgoi coal mine is literally 40 kilometres from the Chinese border. The company sells the coal at the mine site, and it goes across the border in large trucks.
“CIC will be able to provide us with a better relationship network that can probably help us improve our business over time in terms of who we’re selling to, where we’re selling, [and] how we move our coal on the Chinese network,” Mr. Molyneux said.
CIC, a US$200-billion investment fund, was set up in 2007. It is run by Lou Jiwei, a former vice president of finance in the Chinese government.
The fund invests China’s foreign reserves in a wide variety of different sectors, but commodities are a key focus. As a state-owned entity, CIC has a deep understanding of the Chinese economy and what resources are needed to keep it growing over the next couple of decades.
“They really understand the long-term dynamics of the commodity markets, and they’re prepared to take long-term bets on commodity players as a result,” Mr. Molyneux said.
Coal is used in both steelmaking and power generation, and securing it is one of China’s big priorities. Given that SouthGobi produces high-quality coal and is right on the country’s doorstep, experts said that CIC’s interest in the company is a natural.
With another US$500-million in its pocket, SouthGobi will accelerate plans to expand production at Ovoot Tolgoi from 1.5 million tonnes a year to eight million, and build a mine at its nearby Soumber deposit. The company also wants to develop a rail link between Ovoot Tolgoi and the Mongolia-China border that could eliminate some congestion at the oft-closed border crossing.
SouthGobi was created in 2007, when Ivanhoe sold its coal assets to subsidiary Asia Gold Corp. and renamed it SouthGobi Energy Resources. Ivanhoe kept an 80% stake in SouthGobi while focusing on its Oyu Tolgoi copper-gold project. It signed an investment agreement with the government to develop Oyu Tolgoi earlier this month.
Peter Koven, Financial Post