China's biggest aluminum producer, Aluminum Corp of China Ltd (Chalco), has dropped its proposed $926 million takeover bid for Mongolia-focused Turquoise Hill's (formerly known as Ivanhoe Mines) stake in SouthGobi Resources after the Mongolian government voiced strong opposition to the transaction.

Although the proposed deal had the backing of SouthGobi's majority shareholder, Turquoise Hill had last month said that it may not get the approval of the Mongolian government that has become vary of increased Chinese investments in the country's natural resources.

Turquoise Hill, which owns a 58-per cent stake in SouthGobi, said in a statement today that there was "minimal prospect of obtaining the necessary regulatory approvals within an acceptable timeframe".

''Turquoise Hill announced the termination of the lock-up agreement entered into with Aluminum Corporation of China Limited ("Chalco") on April 1, 2012 pursuant to which Turquoise Hill agreed to tender its shares in SouthGobi Resources Ltd. into a proportional takeover offer to be made by Chalco for up to 60 per cent, but not less than 56 per cent, of the shares in SouthGobi,'' the company said in the statement.

''After careful consideration, both Turquoise Hill and Chalco have concluded that the proposed transaction has minimal prospect of obtaining the necessary regulatory approvals within an acceptable timeframe. As a result, Turquoise Hill and Chalco have agreed to terminate the lock-up agreement, including Chalco's obligation to make a proportional offer.''

In April, Chinese state-owned Chalco had offered to buy Mongolia-focused Turquoise Hill stake in SouthGobi Resources for C$925 million ($926 million), in order to diversify into other commodities like coal. (See: Chalco to buy Ivanhoe Mines' stake in SouthGobi Resources for $926 mn).

Under the deal, Chalco will buy Turquoise Hill's 57.6-per cent stake in SouthGobi for $928 million and acquire as much as 60 per cent of Turquoise Hill at C$8.48 a share, or around C$533-million.

Chalco had also agreed to buy the entire production of SouthGobi for two years.

SouthGobi Resources owns four coal projects in Mongolia, the producing Ovoot Tolgoi Mine; and three development projects, including the Soumber Deposit, Zag Suuj Deposit and the Ovoot Tolgoi Underground Deposit.

Canada and Hong Kong-listed SouthGobi Resources also holds mineral exploration licences in Mongolia.

The company's flagship coal mine, Ovoot Tolgoi, is located in southern Mongolia, approximately 40 km north of the Mongolia / China border, and nearly the entire production from Ovoot Tolgoi is sold to customers in China - the largest consumer of coal in the world.

Turquoise Hill, which is 51-per cent owned by Rio Tinto, said it would use the proceeds from the SouthGobi share sale to fund the continued development of its giant $6 billion Oyu Tolgoi copper and gold mine in Mongolia.

Chalco's parent, Chinalco is Rio Tinto's largest shareholder, with a 12.9 per cent stake.

Early this month, Chalco extended its offer for the second time and said that it requires more time to ''engage with the Mongolian government and review the terms and conditions of the transaction.''

Holding some of the world's largest reserves of gold, iron ore, copper, and coal, Mongolia has become a prime investment target for overseas mining companies, especially its Chinese neighbour.

Following Chalco's April proposal to buy stake in South Gobi, the Mongolian government passed a new foreign investment law in May that required parliamentary approval for deals in which overseas investors hold more than 49 per cent stake and for transactions worth more than $75 million in strategic sectors, including media, telecommunications, banking, and mining.

"We need a policy to stop all the mining licences ending up in Chinese hands," Tsolmon, a former deputy foreign minister, had said, "Otherwise we could wake up one morning and most of our land would be controlled by the Chinese."

Although 90 per cent of Mongolia's trade is with China, the former Soviet satellite state, landlocked between China and Russia, has always been vary of China exerting political dominance in the country through mining deals.

In 2002, China closed its borders with Mongolia when the Dalai Lama made an official visit to the country, and Beijing pressurised the Mongolian government to cut short the planned visit last year.