--Chinese interest in Mongolia mining assets have fallen...

--Chinese interest in Mongolia mining assets have fallen "dramatically" since Ulaanbaatar restrictions on foreign ownership, senior banker says

--Chinese companies should move away from direct investments in Mongolian mining and opt for using offshore vehicles, banker says

--Mongolia government may relax portions of the law restricting foreign ownership of national resources after June 28 parliamentary elections


By Chuin-Wei Yap


BEIJING--China's interest in bidding for Mongolia's mining assets has waned sharply in the past two months after the government slapped restrictions on foreign ownership of its resources, but Mongolia may relax portions of its new law after national elections next week, a senior banker that advises the government said.

In an interview, Masa Igata, chief executive of Frontier Securities, which advises the Mongolian government on the mining sector, said it would be better for Chinese investors to move away from directly investing in Mongolian resources companies that are high profile and politically sensitive, and opt for using offshore vehicles.

"It might be a good idea [for Chinese companies] to acquire assets through foreign offshore entities based in Singapore, Hong Kong or even Toronto or through Mongolia-listed companies and inject the assets. It is always easier for Mongolia to accept this sort of investment rather than directly from Chinese investors." Mr. Igata said.

"The mineral minister (in Mongolia) is very concerned that more than half of the mining licenses have already been bought by China."

In mid-May, the Mongolian government moved to restrict foreign ownership of "strategic industries" including mining, banking and telecommunications to 49% for deals worth more than $75 million, unless the parliament offers special permission. The law passed following a bid by Aluminum Corp. of China Ltd. (ACH), or Chalco, for 56%-60% of Mongolian coal producer SouthGobi Resources Ltd. (1878.HK). Chalco is China's biggest aluminum producer and a leading state vehicle for cross-border mining sector acquisitions, while Hong Kong-listed SouthGobi is one of Mongolia's largest coal producers.

The proposed SouthGobi deal itself is a clear example of China's desire to have as much direct ownership and control of mining resources as much as possible. Chalco is already the biggest shareholder in Anglo-Australian miner Rio Tinto Plc. (RIO) which owns majority stakes in Ivanhoe Mines Ltd. (IVN.T) that controls SouthGobi.

China is deficient in key commodities including copper and coking coal and relies heavily on imports for its needs.

Mongolia reacted to the bid by Chalco for SouthGobi by suspending some of SouthGobi's mining licenses in April. The deal by Chalco is now stuck in limbo, awaiting Mongolian government approval.

Still, Mr. Igata said Mongolia can't afford to alienate China, the biggest customer for its coal, copper and gold.

The Mongolian government has already recognized this dilemma and the government is likely to tweak its foreign-ownership law after parliamentary elections on June 28, he said.

"What they say before the election, and what they do after, should be different," Mr. Igata said. While the law on foreign ownership of Mongolia's resources won't be dissolved, "in small items of the law, it may be implemented differently to soothe foreign investor demand," he said, without giving more specific details.

Mr. Igata also said Ulaanbaatar will have to "think about how they compete with other mineral-rich countries" in coming years as demand for commodities wanes under global macroeconomic weakness.

Commodity prices have fallen sharply in May. Copper prices on the London Metal Exchange have declined 12.5% since early May. Benchmark thermal coal prices fell to their lowest level Wednesday since October 2010.


Write to Chuin-Wei Yap at [email protected]


(END) Dow Jones Newswires

June 21, 2012 03:22 ET (07:22 GMT)