SouthGobi Resources Ltd. announced that weak coal demand and uncertainty has forced the company to curtail production at one mine and stop mining at its flagship Mongolian coal mine.

Hong Kong-listed SouthGobi said it has already “curtailed” much of its coal mining at its Ovoot Tolgoi Mine about 25 miles from the China border, because of weak demand and a “lack of clarity” on whether its license to mine would be suspended by the Mongolian government after Chalco announced an offer to buy a controlling stake in it in April. The news of the planned suspension of its operations dragged SouthGobi shares down 8.4 percent, 44 percent below Chalco’s offer price of $65.97 Hong Kong dollars (US$8.50), and 19 percent below its level from the start of the year, The Wall Street Journal reported.

Soon after state-owned Chalco announced an offer to buy up to 60 percent of SouthGobi from Canada’s Ivanhoe Mines Ltd., the Mongolian government said in April that it was looking to suspend SouthGobi's mining license. The government then passed a law that limited future foreign ownership in strategic industries such as mining to 49 percent, unless the acquirer got parliamentary approval. Investors owned by governments, such as state-backed Chinese companies like Chalco, also will need special permission to buy into the sectors. SouthGobi is already 14 percent owned by Chinese sovereign wealth fund China Investment Corp.

SouthGobi Chief Executive Alexander Molyneux said that SouthGobi’s license to mine at Ovoot Tolgoi remained valid, but the company has no concrete timetable for resuming mining at the mine.

Mongolia’s foreign ownership legislation comes as the country gears up for elections, and reflects anxiety among ordinary Mongolians that foreigners would enjoy the spoils of the country’s hoard of coal, copper, gold and other natural resources.

SouthGobi’s failure to secure Chalco as a key shareholder would have a negative impact on its prospects, analysts said, as the Mongolia-focused miner needs financial support if it is to ramp up production at its Ovoot Tolgoi Mine, something Chalco can provide. For its part, Chalco has been moving to diversify beyond hard-hit aluminum into other areas, like coking coal, which can be used to make steel, so the failure of its bid for SouthGobi will hurt its moves to broaden its offerings. Aluminum prices has fallen sharply since the second half of 2011 because of weakening demand amid the global economic downturn.

SouthGobi said that its Mongolian unit could not get the country's environment ministry to revise an environmental impact assessment for a dry-coal-handling facility. Without that approval, SouthGobi won't be able to run the plant that washes coal and prepares it for transport to market.