Chinese aluminum giant Chalco stepped up its diversification on Monday, agreeing to pay $926-million for a controlling stake in Mongolian coal miner SouthGobi Resources in a deal with mining billionaire Robert Friedland's Ivanhoe Mines .
The deal marks the first foray into coal by state-run Aluminium Corp. of China Ltd., known as Chalco, , which is facing a bleak outlook in aluminum, and will give it access to a large coal producer in neighbouring Mongolia.
Ivanhoe said a sell-down would free up capital that could be invested in the $6-billion Oyu Tolgoi mine in Mongolia, one of the world's largest copper and gold projects.
Analysts said the deal had the potential to boost Chalco's earnings, but cautioned that the Chinese aluminum producer was moving into a new industry in a different country.
"This is a very surprising acquisition, and should be positive to Chalco's share prices as earnings growth in the company's aluminum business is limited and diversifying into coal is a good move," Robin Tsui, an analyst at BOCI Research said.
Helen Lau, senior analyst at UOB Kay Hian Research, said in a note that it was questionable if Chalco could manage coal mining on its own in a foreign country amid political and regulatory uncertainty.
Under the deal, Chalco plans to buy up to a 60-per-cent stake in SouthGobi for $8.48 per share, a 28-per-cent premium to its Friday close. The Hong Kong price of the offer was HK$65.97.
Ivanhoe, which owns 57.6 per cent of SouthGobi, said it could get $889-million for selling its entire stake or $533-million for selling 60 per cent of its stake, depending on how much stock is tendered by other shareholders.
SouthGobi shares jumped as much as 20 per cent in Hong Kong and were trading at HK$59.70 at 0700 GMT. Chalco fell 2.4 per cent.
Chinese miners have been scouring the globe for raw materials to feed rapid industrial growth at home. The offer also comes as China plans to slow annual growth in coal output to about 2 per cent from around 10 per cent over the next four years to conserve resources and protect the environment Chalco is offering to buy all of SouthGobi's coal for up to 24 months and assist with power supply. The deposit is located just 45 km (28 miles) from the Chinese border, where a dedicated coal hauling rail line is already in operation.
Canadian and Hong Kong-listed SouthGobi owns four coal projects in Mongolia, three development projects and a mineral exploration licence.
It produced 4.02 million tonnes of coal in 2011, up 58 per cent from 2010 and has a target of 12 million tonnes a year.
Chalco, China's biggest aluminum maker, has been battling lower metal prices and higher costs and has warned of losses in the first quarter of 2012 after reporting a bigger-than-expected loss in the fourth quarter of last year.
The company signed an agreement in 2010 with Rio Tinto to develop an iron ore project in Guinea. It said it would fund the SouthGobi buy with internal funds and bank loans.
"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," said BOCI Research's Robin Tsui.
Ivanhoe, which is 51-per-cent owned by Rio Tinto, said the deal would free up capital to deploy in Oyu Tolgoi, which it is co-developing with Rio.
Analysts said the SouthGobi stake sale could also remove a large asset that would be unwanted by Rio Tinto as it pursues greater ownership of Oyu Tolgoi, possibly via an acquisition of Ivanhoe.
Chalco's parent Chinalco is the largest shareholder in Rio Tinto, one of the world's most diversified mining houses, with a 12.9-per-cent stake Ivanhoe's other assets include stakes in Ivanhoe Australia and Altynalmas Gold, a private company developing the Kyzyl gold project in Kazakhstan.
Ivanhoe Australia, owned 59 per cent by Ivanhoe Mines, has mandated UBS to evaluate proposals from potential strategic partners for it Cloncurry project portfolio.
Chalco has appointed BNP Paribas as its adviser.