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As May 19th, 2015 approached, China Investment Corp. was faced with a scenario that every pension or sovereign wealth fund dreads: whether to allow one of its key investments to live or die.
SouthGobi Resources Ltd. has become a sad story in Canada’s mining sector. The Vancouver-based company, which operates in Mongolia, is almost entirely out of cash. Its operations are deep in the red. Its CEO recently resigned. And a Mongolian court this year fined the company US$18.2 million in a very dubious tax-fraud case.
SouthGobi had a US$7.9 million interest payment coming due to China Investment Corp. (CIC) on the 19th that it was in no position to pay. State-owned CIC had two options, neither very attractive: call the loan and potentially force SouthGobi into creditor protection, or defer the payment and let the company stagger along for another couple of months trying to seek rescue funding. Not surprisingly, CIC chose the latter.
The mess at SouthGobi is just the latest misfortune among several significant bad calls CIC ended up making in its investments in Canada. Since beginning to stake major capital here six years ago, the corporation’s short experience in Canada is a story of lousy timing, costly miscalculations, and an investment strategy too vulnerable to the allure of speculative ventures talked up by sophisticated stock promoters — and not enough on conservative plays better able to withstand volatile commodity markets.
The Chinese sovereign wealth fund’s involvement with SouthGobi dates back to 2009, when it committed a whopping US$500 million to the company. That same year, it invested $1.7 billion in Teck Resources Ltd. Those deals, which were done shortly after the global financial crisis, when many companies were seeking capital, were the first signs that CIC was interested in Canadian resource companies.
And as it turns out, they were only the start of its Canadian buying binge.
“They liked the stability of the investment climate, they definitely were looking for more resource exposure, clearly that was a mandate, and the CIC energy (investment) group had just been formed,” said Phil Hodge, CEO of oil junior Pine Cliff Energy Ltd., who in previous jobs travelled extensively to China and made connections with Chinese investment industry representatives.
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