Mongolia-focused coal miner SouthGobi Resources Ltd (SGQ.TO) (1878.HK) said on Tuesday that it expects China's state-controlled Chalco (2600.HK) to drop its $926 million takeover bid in the face of opposition from the Mongolian government.

The proposed deal has the backing of SouthGobi's majority shareholder, Turquoise Hill Resources Ltd (TRQ.TO), formerly known as Ivanhoe Mines Ltd, but it faced opposition almost immediately within Mongolia, which is becoming wary about the growing Chinese presence in its mining sector.

"I personally believe Chalco is not continuing to work on the deal," SouthGobi Chief Executive Alex Molyneux told Reuters.

"The evidence I have before me seems highly unlikely that the bid is going to go forward," Molyneux said by telephone, citing Mongolia's recent efforts to block the deal. "It's 100 percent clear that Mongolia has made the deal impossible."

Aluminum Corp of China Ltd (601600.SS), or Chalco, this month said it had decided to extend its offer for up to 60 percent of the common shares of Toronto and Hong Kong-listed SouthGobi Resources for the second time as it needs more time to "engage with the Mongolian government and review the terms and conditions of the transaction".

The company in April had announced the C$8.48-per-share bid for a controlling interest in SouthGobi, which owns large coal projects in Mongolia close to China, which has a huge appetite for energy and minerals to feed its giant economy.

Chalco has until September 4 to formalize its bid.

Mongolia, a former Soviet satellite landlocked between China and Russia, passed a controversial law in May aimed at capping foreign ownership in "strategic" industries like mining.

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The law stipulates that foreign investors are allowed to own a maximum of 49 percent of companies involved in the mining, finance, media and telecommunications sectors before being subject to scrutiny by a government panel. The rule only applies to deals valued at above $75 million, or ones involving state-owned companies like Chalco.

But recent changes in Mongolia politics have raised hopes for a friendlier investment climate. Norov Altanhuyag of the Democratic Party was confirmed as prime minister last week. The Democratic Party, broadly in favor of the free market, is expected to comprise 75 percent of the new cabinet.

SouthGobi's shares, which last traded at C$3.7 in Toronto, have wilted. Its Hong Kong-listed shares were down nearly 4 percent.

SouthGobi had had no formal contact from Chalco for more than a month, another sign that the deal will not happen, Molyneux said.

Chalco board secretary Liu Qiang, asked by Reuters whether Chalco was still pursuing a takeover, said she had no comment.

SouthGobi said late on Monday its second-quarter profit plunged on lower output after Mongolia suspended its mining license following Chalco's bid.

Operations at its flagship Ovoot Tolgoi mine in the south of the country had been "fully curtailed" since June 30 and were not expected to resume in the third quarter, SouthGobi said.

The company's second quarter net income attributable to equity holders fell to $237,000 from $67.3 million a year earlier.

"They (Mongolian government) have done everything in their power to roadblock the deal by the Chinese state company," Molyneux said, adding that profits were also hurt by weakening demand for coking coal in China.

Chalco is the largest aluminum producer in China. It has been investing in coal, iron ore and electricity projects as the profit margin for its core aluminum business shrinks.

It said on Monday that it would buy a 35.3 percent stake in China's Ningxia Electric Power Group Co for 2.02 billion yuan ($319 million).

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