SouthGobi Resources (TSE:SGQ)(HKSE:1878) said today that its proposed sale of the Tsagaan Tolgoi thermal coal deposit to Australian Modun Resources (ASX:MOU) has been cancelled, with mutual agreement from both parties.
Tsagaan Tolgoi remains non-core to SouthGobi, and the company said it is evaluating other options. No other details of the termination were disclosed.
Under the terms of the proposed agreement, SouthGobi would have transfered the mining license and exploration license that covers the deposit in exchange for $30 million in cash and stock.
Tsagaan Tolgoi is in the Omnigovi Aimag, approximately 570 kilometres south of Mongolia's capital of Ulaanbaatar and 113 kilometres southeast of the provincial capital of Dalanzagad.
The project, which has measured plus indicated resources of 36.4 million tonnes of coal, is also located 415 metres to the northeast of the company's flagship Ovoot Tolgoi project.
Earlier this month, the Mongolia-focused coal miner posted a sharply lower second quarter profit as sales volume and revenue declined due to the curtailment of mining operations amid a controversial takeover bid for the mining company.
Operations at its Ovoot Tolgoi Mine in Mongolia were "entirely curtailed" at the end of the most recent quarter citing weak market conditions and regulatory issues.
Aluminum Corp of China Ltd., also known as Chalco, plans to buy a 57.6 per cent stake in SouthGobi from Ivanhoe Mines (TSE:IVN), which has triggered anxiety in Mongolia about Chinese ownership of a major resource producer, prompting the passing of a foreign investment law in Mongolia in May.
Mongolia has profited from selling coal, copper and other minerals to China's booming economy, but some in the sparsely populated North Asian nation are uneasy about possible economic domination by their giant neighbour.
Earlier this month, Chalco, the Chinese aluminum giant, said it will extend again its proportional takeover offer for up to 60 per cent of SouthGobi stock by another 30 days. The proposed deal valued at $926 million, or $8.48 per share, has the backing of Ivanhoe, which is SouthGobi’s largest shareholder.
The deal remains subject to all statutory and regulatory approvals, including Canadian and Chinese regulatory approvals, and Chalco shareholder approval.
Sales volume in the latest period declined, the company said in mid August, due to the "significant uncertainty" surrounding SouthGobi's business resulting from the proposed proportional takeover bid by Chalco, which resulted in the Mineral Resources Authority of Mongolia announcing a request to suspend exploration and mining activity on certain licenses. The decline was also due to various infrastructure constraints in Mongolia, and the softening of inland China coking coal markets toward the end of the second quarter.
For the three months that ended June 30, the Mongolian coal producer recorded a profit of $0.2 million, compared to a net profit of $67.3 million a year ago, and $3.1 million in the first quarter.
"Although no official notification has been received to date, SouthGobi continues to be impacted by the uncertainty over its licenses. Many government bodies and regulatory authorities in Mongolia are reluctant to provide approvals and permits," the company said in its statement in mid August.
Due to the uncertainty, the company anticipates its operations will remain fully curtailed in the third quarter and that production volumes, sales volumes and pricing for the full year cannot be estimated.
The Ovoot Tolgoi Mine is approximately 40km from China, which is approximately 190 kilometres closer than Tavan Tolgoi coal producers in Mongolia and 7,000 to 10,000 kilometres closer than Australian and North American coking coal producers.
SouthGobi shares closed down more than 2.4 per cent in Hong Kong.