SouthGobi: To Expand Exports To Western China With CIC Help
29 October 2009
BEIJING - SouthGobi Energy Resources Ltd. (SGQRF), a unit of Ivanhoe Mines Ltd. (IVN), is aiming to be a major coal supplier to western China with the help of China's sovereign wealth fund, SouthGobi Chief Executive Officer Alexander Molyneux said Thursday.
China Investment Corp. over the weekend agreed to invest US$500 million in the form of debentures in Canadian-listed SouthGobi, which mines coal in Mongolia's South Gobi region as well as in East Kalimantan in Indonesia.
CIC can not only advise the Canadian company, but also help with its profile and contacts in China, Molyneux told Dow Jones Newswires in an exclusive interview.
"CIC can provide us advice on marketing, logistics, and procurement in China. But that's not the core of it," he said, adding that what's more important is the endorsement of SouthGobi's business model and creditability the CIC investment gives, allowing the Canadian company to have greater access to potential customers in China.
If it exercises the debenture fully following a planned listing by SouthGobi in Hong Kong, CIC would have a 22% stake in SouthGobi, whose flagship coal mine in Ovoot Tolgoi in Mongolia sells coal to customers in China. SouthGobi started delivering coal from its Ovoot Tolgoi Mine to China in September last year.
"We've been operating for just 12 months but we already represent 18% of the coal trade from Mongolia to China. The CIC money will help us soon become a major supplier for China's Western provinces", he said.
Molyneux also said he expects China's western provinces to see demand for coal soar over the next five years as Beijing's stimulus policy boosts the development of China's less industrialized regions.
For example, he said, Gansu province, the second poorest province in China with per capita gross domestic product of just US$1,700, will need around 59 million tons of coal to be imported from southern Mongolia by 2020 for driving its economic growth, he said. Like most of the west, Gansu doesn't have any significant coal mines.
Molyneux was head of Asia metals and mining at Citigroup Inc. before he joined SouthGobi in April.
SouthGobi, which is looking to raise around US$250 million from an initial public offering in Hong Kong early next year, according to people familiar with the deal, is targeting a variety of China's state-owned companies as potential customers.
Among those are major power producers such as China Huaneng Group and China Guodian Corp., and steel makers such as Baogang Group and Shougang Group, he said.
SouthGobi is keeping its listing on the TSX Venture Exchange in Toronto after it lists in Hong Kong, but Molyneux declined to elaborate.
Through the funds it's raising from the sale of the debenture to CIC, SouthGobi should be able to boost coal production at an existing mine to 8 million tons a year by 2012 from 1.5 million tons now, as well as build its new Soumber deposit, Molyneux said.
It will also use part of the CIC funds to build coal washing plants to upgrade the value of coal. It also plans to build a new railway, linking another two being built by the Chinese government for around US$2.1 billion between Mongolia and China. The two railways will be ready for use next year, Molyneux said.
SouthGobi is looking into forming a joint venture with another Mongolian miner to build the new railway in the next four years, Molyneux said. He declined to specify who that miner is.
"Very quickly we realized that they (the CIC) have a really good understanding of the resources sector, the dynamics of China's coal market, and what it's like to operate in emerging countries", Molyneux said.
CIC, with US$300 billion worth of assets, has been actively buying stakes in resource companies or assets overseas as China's thirst for commodities to fuel its growth continues.
CIC agreed to invest up to $700 million in Mongolia-focused Iron Mining International Ltd., people familiar with the situation said Wednesday. In September, CIC invested US$1.9 billion in Indonesia's largest thermal-coal producer, PT Bumi Resources. Before that, it made a US$1.5 billion investment in Canadian miner Teck Resources Ltd.
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