Chalco Agrees to Buy SouthGobi Stake to Gain Coal Mines (1)

(BN) Chalco Agrees to Buy SouthGobi Stake to Gain Coal Mines (1)

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Chalco Agrees to Buy SouthGobi Stake to Gain Coal Mines (1)
2012-04-02 11:05:28.628 GMT

(Updates with comment from SouthGobi CEO in eighth
paragraph.)

By Michelle Yun
April 2 (Bloomberg) -- Aluminum Corp. of China Ltd., the nation's biggest producer of the metal, agreed to buy Ivanhoe Mines Ltd.'s stake in SouthGobi Resources Ltd. to gain control of Mongolian coal production as it expands into other commodities and diversifies revenue.
Ivanhoe will tender its 57.6 percent stake in SouthGobi into Chalco's C$925 million ($928 million) offer to buy as much as 60 percent of the company at C$8.48 a share, 28 percent more than its close in Toronto on March 30, according to a statement today from Chalco, as the Chinese company is known. Should shareholders tender more than 60 percent of the stock, the amount sold by Ivanhoe may be reduced, according to a statement from Ivanhoe.
Control of SouthGobi will give Chalco coal sales from the Ovoot Tolgoi mine to bolster revenue as aluminum prices decline.
Ivanhoe, founded by billionaire Robert Friedland, said in February it was encouraged by progress of talks as it sought to sell some assets to finance the Oyu Tolgoi copper and gold project.
"It marks the most significant step by a long way for Chalco in terms of executing this diversification strategy it's been talking about for a number of years," said Andrew Driscoll, Hong Kong-based head of resources research at CLSA Asia-Pacific Markets.
The aluminum producer has also agreed to purchase as much as 100 percent of SouthGobi's production for as many as two years, Chalco said. Its shares fell 1.9 percent to HK$3.67 at the close in Hong Kong. SouthGobi surged 18.2 percent to close at HK$60.50.

Offer Premium

Chalco's offer is priced at 36 percent more than SouthGobi's weighted average price over the past 20 days, compared with a 21 percent premium for similar-sized completed basic materials deals over the past five years, according to data compiled by Bloomberg.
Chalco will use its own cash, bank loans or a combination of both for the purchase, it said. It will retain nine of SouthGobi's senior staff, including Chief Executive Officer Alexander Molyneux for 12 months from their employment termination under consultant agreements to facilitate transition, Chalco said.
"It's almost certainly going to happen as long as the regulatory approvals happen and go forward," Molyneux said on Bloomberg Television's "On the Move Asia" program today after the announcement. "You might say there's a lot more synergy having a Chinese state-owned enterprise as a major shareholder as opposed to having a very well-known exploration resource development company."
The acquisition is Chalco's biggest since it agreed to pay
$1.35 billion for a stake in Rio Tinto Group's Simandou iron ore project in Guine in July 2010. The offer is expected to open on or before July 5 and shareholders will have not less than 35 days to accept the offer, according to Chalco's statement.
SouthGobi was among the assets that Ivanhoe's advisers had contacted potential investors about last year after receiving unsolicited expressions of interest, Ivanhoe said in September.
"Depending upon the uptake of the offer by other SouthGobi shareholders, Ivanhoe could receive up to approximately C$889 million from the sale of all of its shares in SouthGobi,"
Ivanhoe said in its statement today. "A sale of 60 percent of its current holding would realize proceeds of approximately
C$533 million."

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--Editors: Andrew Hobbs, Peter Langan

To contact the reporters on this story:
Michelle Yun at +852-2977-4643 or
Myun11@bloomberg.net