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Why Chalco's Failed Bid Is Good for SouthGobi

State-controlled Chinese Aluminum giant Chalco's decision to drop its bid for SouthGobi Resources could actually push the Mongolia-focused coal producer's share price higher, according to one commodities expert.

A front-end bucket loader moves coals into a coal hauling truck in an open pit coal mine in Chifeng of Inner Mongolia Autonomous Region, China.
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A front-end bucket loader moves coals into a coal hauling truck in an open pit coal mine in Chifeng of Inner Mongolia Autonomous Region, China.

Speaking to CNBC's "Cash Flow" on Tuesday, Warren Gilman, Chairman and CEO of research firm CEF Holdings said Chalco's decision to drop its $926 million bid for SouthGobi in the face of political opposition, will actually be positive for the company as it will allow the miner to operate freely without any pressure from authorities.

"SouthGobi was in the ironic situation where it was being severely penalized by Mongolian overseers (government) as a result of the Chalco bid," Gilman said, adding that the company's share price dropped because of the political problems with the bid. "Now that the bid has been removed hopefully we'll see a return to operation of the Ovoot Tolgoi mine and SouthGobi's (share) price will actually recover."

SouthGobi's Hong Kong and Toronto-listed shares have fallen about 60 percent since Chalco offered to buy a stake in the miner in April.

The Mongolian government suspended SouthGobi's mining license in June following Chalco's bid and SouthGobi said activity at its flagship Ovoot Tolgoi mine had been "fully curtailed" since June 30.

Chalco walked away from its decision to buy an up to 60 percent stake in SouthGobi from Toronto-listed Turquoise Hill Resources, formerly Ivanhoe Mines, on Monday citing difficulties gaining regulatory approval.

"We're a bit surprised at how this has all evolved. It's a bit illogical to deter a Chinese investor who is anxious to develop a key resource in Mongolia from pursuing that investment. Seems a bit at odds with what is good for the country," Gilman said.

Mongolia has an abundance of natural resources including large deposits of coal, copper and gold. It needs foreign investors to help it mine some of that wealth, but Gilman says the country's decision to push through new foreign investment laws will keep many investors away.

The new rules seek to impose a 49 percent cap on foreign ownership in strategic sectors including the booming mining sector.

Disclosure: CEF Holdings is a shareholder in SouthGobi Resources

By CNBC’s Roshan Vaswani

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