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Oct. 29, 2009, 4:17 p.m. EDT

SouthGobi to mine CIC ties

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BEIJING -- SouthGobi Energy Resources Ltd., a unit of Ivanhoe Mines /zigman2/quotes/207656050/delayed CA:IVN +0.68% Ltd., 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 $500 million in the form of debentures in Canadian-listed SouthGobi, which mines coal in Mongolia as well as in East Kalimantan in Indonesia.

CIC can advise the Canadian company, and also help it with contacts in China, Mr. Molyneux said in an interview. "CIC can provide us advice on marketing, logistics, and procurement in China," he said.

But more important, he said, is the endorsement of SouthGobi's business model and credibility that comes with the CIC investment will allow the company 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.

SouthGobi's flagship coal mine in Ovoot Tolgoi in Mongolia started delivering coal to China in September 2008. A year later, "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," Mr. Molyneux said.

He expects demand for coal to soar in China's western provinces over the next five years as Beijing's stimulus policy boosts the development of less-industrialized regions.

For example, he said, Gansu province, the second-poorest in China with per-capita gross domestic product of just $1,700, will need around 59 million tons of coal to be imported from southern Mongolia by 2020 to drive economic growth, he said. The west is lacking in significant coal mines.

Mr. Molyneux was head of Asia metals and mining at Citigroup Inc. before he joined SouthGobi in April.

SouthGobi, which is planning an initial public offering in Hong Kong early next year, is targeting a variety of China's state-owned companies as potential customers. Among them are major power producers such as China Huaneng Group and China Guodian Corp., and steel makers such as Baogang Group and Shougang Group, Mr. Molyneux said.

SouthGobi will keep its listing on the TSX Venture Exchange in Toronto after it lists in Hong Kong, he said. He declined to elaborate.

The money it is raising from the CIC investment should help SouthGobi boost coal production at an existing mine to eight million tons a year by 2012 from 1.5 million tons now, as well as build its new Soumber deposit, Mr. Molyneux said.

It will also build coal-washing plants to upgrade the value of coal and a new railway linking railways being built by the Chinese government between Mongolia and China.

Mr. Molyneux said CIC emerged as a "very natural partner" of SouthGobi because, he said, it understands the growth prospect of the China market the best among a variety of institutional investors, including some sovereign-wealth funds and hedge funds he talked to.

"Very quickly we realized that [CIC has] 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," he said.

CIC, with $300 billion worth of assets, has been actively buying stakes in resource companies or assets overseas amid China's thirst for commodities to fuel its growth.

CIC also agreed to invest up to $700 million in Mongolia-focused Iron Mining International Ltd., people familiar with the situation said Wednesday.

Victoria Ruan

CA : Canada: Toronto
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