Chalco to buy coal miner SouthGobi
Aluminium Corporation of China (Chalco), the world's third-largest producer of the lightweight industrial metal, has offered to buy up to 60 per cent of Mongolian coal-mining firm SouthGobi Resources for HK$7.2 billion, in its first mining investment in Mongolia.
The company yesterday announced it had made a conditional offer of C$8.48 or HK$65.97 in cash for each of SouthGobi's Canada- and Hong Kong-listed shares, for up to 181.86 million shares. This translates into a 28.9 per cent premium on the share's Hong Kong closing price on Friday. SouthGobi's 57.6 per cent majority shareholder Canada-based Ivanhoe Mines has agreed to tender all its shares to the offer.
Chalco also agreed to buy coal at market prices from SouthGobi for two years, and help SouthGobi procure electricity. SouthGobi's mine is near China's border with Mongolia.
Chalco has for a few years indicated its intention to diversify away from the low-profit and sometimes loss-making aluminium business due to industry overcapacity and rising electricity costs, although analysts are divided over whether it is overpaying for the stake. It has a joint venture iron-ore development project with Rio Tinto in Guinea, Africa.
'The offer price is 13 times its estimated earnings in 2013, while Mongolian Mining, [part of private conglomerate MCS Group], which has better connections with the Mongolian government, is fetching only 8.5 times 2013 earnings,' said a mining analyst who asked not to be named.
SouthGobi's faster planned output growth means both firms are trading at around 6.5 times their 2014 forecast earnings, although SouthGobi has higher execution risk on its output ramp-up, given it experienced water, power and logistics-capacity shortages, whereas Mongolian Mining had been able to cope with these challenges thanks to government help, he said.
'Ivanhoe has been trying to sell its SouthGobi stake for over a year, it previously approached several state-backed mainland coal miners like Shenhua Group and China National Coal,' he said.
'To help SouthGobi, Chalco will have to work on the Mongolian government, but even China's largest coal producer Shenhua hasn't been able to complete an investment deal in the Tavan Tolgoi coal project in Mongolia after 10 years of effort. I don't see how Chalco can do better.'
SouthGobi chief executive Alex Molyneux declined to comment on which firms Ivanhoe has approached, only saying it had gone though an informal sale process and talked to various potential buyers in China and North America.
UOB Kay Hian Securities analyst Helen Lau said the offer price was in line with her estimate of fair value for SouthGobi's shares, based on her calculation of the present value of future cash flows of its projects.
'The market has given a discount to the offer price today, because of the uncertainty on whether SouthGobi's existing management will leave after the one-year [integration and transition period] and the fact that the formal offer has not been launched,' she said.
Chalco shares fell 1.9 per cent to HK$3.67. SouthGobi surged 18.2 per cent to HK$60.5, 8.3 per cent below the offer price.
CLSA Securities head of resources research Andrew Driscoll said this reflected investors' concern about Chalco's high net debt-to-equity, which he predicted would rise to 156 per cent after the deal from 139 per cent last year. 'But as a large state firm, it should not have problems financing the deal,' he said.
Molyneux said although Chalco's main business was aluminium smelting in China, it last year signed a contract to buy coal from state-owned miner Erdenes Tavan Tolgoi, and that it has experience sourcing and moving coal in northern China.
The premium on SouthGobi shares that Chalco is offering holders, with its announcement it would pay HK$65.97 per share