May 18, 2010, 1:41 AM EDT

May 18 (Bloomberg) -- SouthGobi Resources Ltd., the coal miner backed by China’s sovereign wealth fund, halted plans to build a rail link between its pit in southern Mongolia and the Chinese border because of uncertainty over government policy.

The Canada-listed company will concentrate on upgrading a road link in the deserts to the border, Chief Executive Officer Alexander Molyneux said on a conference call with analysts and reporters today. The Mongolian government is reviewing the nation’s entire railways policy, Molyneux said. Coal from the mine is now trucked to the border.

Landlocked Mongolia is examining its railway policy as it seeks greater control over its assets. The nation, which shares a border with China and Russia, has some of the world’s largest untapped reserves of gold, copper and coal, and development of the resources has been hampered by poor transport infrastructure.

“Given the question marks over rail policy, we decided to suspend work on the rail link,” Molyneux said. SouthGobi had earmarked usd150 million to develop rail and road links near its Ovoot Tolgoi mine.

A railway was not “essential” as the mine is only 42 kilometers (26 miles) from the Chinese border and a road link would be cheaper, he said. The investment may also be premature because Mongolia is debating rail routes, the gauge of lines and the ownership of future links, said Molyneux.

Ovoot Tolgoi

SouthGobi started producing coal at the Ovoot Tolgoi pit last year and posted a first-quarter loss of usd168.3 million, according to a statement released by the Hong Kong stock exchange yesterday. This was largely caused by the conversion of a debenture by the China Investment Corp., which now through a subsidiary owns about 13 percent of SouthGobi’s shares, the company said.

The shares fell 13 percent yesterday in Hong Kong trading, the most since the company was given a secondary listing in the city on Jan. 29. The stock dropped as much as 9.1 percent today and was trading at HKusd82.75 at the lunchtime break. The company is also listed in Toronto.

“SouthGobi was high flyer in the second half of last year when it was announcing investment by China’s sovereign wealth fund, but since its IPO in Hong Kong in January there’s been a slide in the China market,” said Alisher Ali Djumanov, chief executive officer of Eurasia Capital Management in Beijing. “SouthGobi and China coal stocks have taken a beating.”

Production at Ovoot Tolgoi was affected in the first quarter by a reorganization of the pit to improve access to coal faces and trucks entering the site, said Molyneux.

The mine is now producing about 200,000 metric tons of coal a month and this may increase to 300,000 tons by the fourth quarter, he said.

‘Robust’ Profit

The miner will likely post a “robust” profit next year as production expands, Molyneux said in an interview April 14.

The company plans to produce about 14 million tons of unprocessed coal in 2013, compared with 1.3 million tons last year, Molyneux said last month.

SouthGobi is exploring for further coal reserves at the Soumber deposit in southern Mongolia, according to yesterday’s statement.

As many as six drills will carry out exploration work up to October and the company will later apply for a mining permit, Molyneux said today.

Permit Suspension

The government’s decision to suspend issuing new mining licenses until a review of the system is carried out was a “positive” step, Molyneux said.

Mongolia last month suspended the issuance of mining licenses and barred the practice of transferring permits. The Mongolian president had said that about 40 percent of permit holders were not actively developing mining assets and he wanted to ensure the country’s assets were properly used, said Molyneux.

Mongolia’s coal exports to China may climb to about 12 million tons this year from 8.5 million tons in 2009, he said April 14. Shipments may increase as much as 50 million tons in three to five years, according to Molyneux.

“We want to have about 25 percent of that market by then,” Molyneux said.