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Sale pending for Mongolian coal miner

World Coal,

The Mongolian coal mining company, SouthGobi Resources Ltd, could be sold by the end of June, according to a filing by the Hong Kong-listed company.

 The term sheet has sections redacted, including the name of a third party that is “contemplating” purchase of all shares owned by Turquoise Hill Resources Ltd.

Vancouver-based Turquoise Hill holds 56% of SouthGobi and is itself 51% owned by mining giant Rio Tinto Group.

The potential sale of SouthGobi is a stress test for Mongolia, which saw a flight of investment following two years of nationalist-fuelled legislation and strained relations with key investors. Prime Minister Altankhuyag Norov last month began a 100-day economic acceleration campaign to jump-start the economy.

The filing explains the terms of a US$ 10 million revolving credit facility for short-term working capital requirements. SouthGobi last month said it was seeking additional financing to continue operations and pay interest due on a US$ 250 million debenture held by China Investment Corp., which owns more than 16% of the company.

In 2012, Chinese state-owned Aluminum Corp. of China Ltd., also known as Chalco, offered to buy SouthGobi for $926 million. That led to new legislation in Mongolia, the Strategic Entities Foreign Investment Law (SEFIL), which ultimately blocked the deal.

SEFIL had a chilling effect on the Mongolian economy, which expanded a world-beating 17.5% in 2011. The regulations, designed to curb investments from state-owned entities in China, helped push down foreign investment by 52% in 2013.

Weak coal prices and SEFIL combined to drive down the share price of SouthGobi from a peak of US$ 20 in January 2010 to the current price of US$ 0.64 on the Toronto Stock Exchange.

SouthGobi is planning to furlough approximately half of its 405 workers until mid-July, due to “management of financial resources and the demand for coal”, Chief Executive Officer Ross Tromans said in a phone interview.

Tromans declined to comment when reached by Bloomberg for a follow-up phone call and referred questions to Turquoise Hill.

The company produced 640,000 t of raw coal in Q1 2014 at its flagship Ovoot Tolgoi mine, located 40 km (25 miles) north of the Mongolian-Chinese border. Revenue reached US$ 5.1 million in Q1, according to operating results published on 12 May.

SouthGobi is embroiled in a lawsuit with the Mongolian government, as the nation’s anti-corruption body has investigated the company for tax evasion. The government says its owed US$ 50 million in unpaid taxes, which the company denies.

Three former employees, American Justin Kapla and Philippine nationals Hilarion Cajucom and Cristobal David, have been banned from leaving the country since mid-2012 as the tax investigation continues.

Edited from various sources by Sam Dodson

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