Mongolia treatment of the Chinese bid for coal producer SouthGobi shows that the state which birthed Mr Genghis Khan has lost none of its warlike spirit.

Politicians seem determined to spike an offer from China state owned Aluminum Corp of China which also involves mega-miner Rio Tinto and China sovereign wealth fund. A truce is possible but public investors look likely to lose out.

Chalco USD 925 million offer for a 60% stake in SouthGobi in April produced an unfriendly response a new investment law limiting foreign companies to 49% ownership of mines. More insidiously, Mongolia has dragged its feet over renewing some of SouthGobi licences scaring away customers and squashing production. SouthGobi shares now trade at less than half the value of Chalco April approach which stands until September.

Mongolia has picked some hefty targets. Rio Tinto indirectly holds a controlling stake in SouthGobi, through its controlling position in Toronto-listed Turquoise Hill. China Investment Corp also owns 13% of SouthGobi bought at around the level of Chinalco bid.

Mongolia protectionism looks short sighted but its opponents are unlikely to fight back too hard. Rio Tinto won’t want to jeopardize its 66% interest in world class Mongolian copper mine Oyu Tolgoi and many Chinese steel mills depend on Mongolian coking coal.

There is room for compromise. Mongolia needs capital and customers and China controls its main trade routes. That makes it risky to boot Chalco out entirely. The Chinese miner could turn a crisis into an opportunity, lower its offer price and settle for less than half of the company in return for some certainty of supply. It might also buy out some of CIC’s shares too to mitigate the fund’s losses. Without Chinese control, Mongolia’s nationalists should be happy to leave SouthGobi in relative peace.

Source - The Globeandmail

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