Aluminum Corporation of China (Chalco) announced yesterday that it plans to acquire between 56% and 60% of SouthGobi Resources, a Canadian company with coal mining operations in Mongolia’s South Gobi region and listings in Toronto and Hong Kong. The two companies have also signed a cooperation agreement, which will take effect once the acquisition is completed.
A tender offer will be made to all SouthGobi shareholders, but SouthGobi’s majority owner, Canadian mineral exploration and development company Ivanhoe Mines, has also agreed to tender its entire 57.6% stake as part of the offer to help Chalco reach its acquisition target. Depending on the level of take-up by other SouthGobi shareholders, Ivanhoe said in a separate statement on Sunday that it could receive up to C$889 million ($898 million) from the sale of all of its shares in the coal miner.
If more than 60% of SouthGobi’s shares are tendered, Chalco will accept the shares on a proportional basis, it said. The offer will be made by way of a takeover-bid circular under British Columbia law.
Chalco, which is the largest producer of alumina, primary aluminium and aluminium fabrication products in China, will pay C$8.48 (equivalent to about HK$65.97) per SouthGobi common share. At the time of the announcement, Chalco said it did not own any common shares in SouthGobi, either directly or indirectly.
Based on the offer price, 60% of SouthGobi’s outstanding share capital of 181.9 million shares is valued at C$925.28 million ($926 million). Chalco plans to fund the deal from internal funds, external financing via bank borrowings, or a combination of both.
A 57.6% stake would amount to $912 million, which will make this the fifth-largest announced outbound M&A deal by a Chinese company so far this year, according to Dealogic.
The offer price represents a 28% premium over SouthGobi’s C$6.62 closing price on the Toronto stock exchange on Friday, and a 32% premium over the volume-weighted average price (VWAP) of C$6.41 during the past 10 trading days, according to the statements.
In Hong Kong trading yesterday, SouthGobi’s share price jumped 18.2% to HK$60.50, while Chalco, which is also listed in Shanghai and New York, was down 1.9%.
SouthGobi obtained a dual-listing in Hong Kong in January 2010, but the stock has struggled to perform. In the first four months after listing the share price fell 40%, and while it topped the IPO price briefly about a year ago, yesterday’s close puts it 52% below the IPO price of HK$126.04. So, even if the tender is at a premium to the current price, it offers little consolation for investors who came in at the time of the Hong Kong listing – if any of them are still hanging on to their shares.
SouthGobi is a coal production and development company with coal assets strategically located near the border with China – the world’s largest consumer of coal. Its flagship coal mine, Ovoot Tolgoi, is selling coal to customers in China, but the company also plans to supply a wide range of coal products to markets in Asia, SouthGobi said in a separate statement flagging Chalco’s partial take-over bid.
Chalco’s move is in line with its corporate strategy, which is to “expand its business scope to other resources, [including] coal to achieve full integration of coal and aluminium operations”. The company said in the statement that it believes it has the necessary expertise to strengthen SouthGobi’s operations since its businesses are, to a great extent, dependent on China.
“If the offer is successful, the company intends to operate Ovoot Tolgoi to maximise value for its shareholders, including all the current business plans provided that are economically justifiable,” Chalco said. For instance, it added that it plans to assist in providing electricity from China and in securing rail transport capacity to address SouthGobi’s logistics issues.
“… [Chalco] will be a long term investor with a strong commitment to investing in the coal sector, and intends to position SouthGobi as the platform to pursue its growth ambitions in the coal sector,” Chalco said.
It added that it intends to retain almost all of the SouthGobi management team in their current roles.
Under the cooperation agreement, SouthGobi will have the right to offer up to 100% of its saleable coal to Chalco, and Chalco will have the obligation to purchase the coal at market prices for a period of 24 months. Chalco will also assist SouthGobi in procuring electricity for its Mongolian businesses, either through a direct connection to the grid power, or through the development of a conveniently located power plant, and will provide support for its coal-haul highway project.
An improvement in SouthGobi’s earnings is likely an encouraging factor for a capital tie-up. For the year ending December 31, 2011, SouthGobi posted a pre-tax profit of about $57 million, compared to a pre-tax loss of about $118.9 million in 2010, according to Chalco’s statement.
The miner booked about $57.7 million in net income attributable to equity holders in 2011. That contrasts with net comprehensive loss attributable to equity holders of about $88.4 million the previous year.
According to the current timetable, the offer is expected to open on or before July 5 and will remain open for at least 35 days. BNP Paribas is a financial advisor to Chalco.
