China’s state-run aluminium giant Chalco (2600.HK) has stepped up its pursuit of Mongolian coal, announcing a second deal this month despite signs that Mongolia’s government is seeking to derail an earlier deal.
Resource-rich Mongolia has become an attractive target for Chalco or the Aluminium Corp of China Ltd which has long sought to diversify away from aluminium.
But while Mongolia has opened its doors to foreign investors over the past decade and has willingly sold coal to China, Chinese companies have found it hard to access Mongolia’s vast copper and coal mines directly due to Mongolia’s historic mistrust of its giant neighbor.
Chalco said it would pay $308 million for a stake of almost 30 percent in Winsway Coking Coal Holdings Ltd (1733.HK), a big buyer of Mongolian coking coal and a deal that would complement its proposed purchase of a majority stake in SouthGobi Resources Ltd (SGQ.TO) (1878.HK), which owns four coal projects in Mongolia.
Last week the Mongolian government suspended some of SouthGobi’s mining and exploration licenses, a move that many interpreted as an attempt to scupper Chalco’s plan to buy 57.6 percent of SouthGobi for $926 million.
“Mongolians see this as creeping Chinese State domination of its economy which is not welcome. Mongolians treasure their economic and political independence and will do whatever is necessary to protect it,” a senior executive in Mongolia said.
He declined to be identified due to the sensitivity of the issue.
Chalco has had previous business dealings with Mongolia, however, having secured an agreement to purchase coal with the Mongolian government-owned Erdenes Tavan Tolgoi project.
China’s top aluminium maker is paying HK$2.12 per share for Winsway, a 13 percent premium to Winsway’s close on Monday.
U.S. coal miner Peabody Energy (BTU.N), which has a 5.1 percent stake in Winsway, declined to comment on whether it has any concerns about Chalco’s purchase of a holding in Winsway.
Winsway shares have climbed 26 percent in the past four weeks, outperforming a flat broader market.
The rally comes after its stock fell in January on fraud allegations from a mysterious research firm called Jonestown Research. Winsway refuted the allegations, calling the report flawed and full of errors.
Winsway has also teamed up with Japanese trading house Marubeni (8002.T), buying Canadian coal miner Grand Cache for about $991 million.
Winsway Coking Coal bonds due in 2016 surged on news that Chalco’s stake buy and stoked hopes of a rating upgrade. The bonds surged to a high of 95 from the overnight levels of 79/80 following the announcement. The bonds ran into some profit taking from private banking accounts taking it down to 93.75/94.75.
Chalco has flagged losses in the first quarter of 2012 after reporting a bigger-than-expected loss in the fourth quarter of last year due to lower metal prices and higher costs.