Kinetic Mines and Energy yesterday kicked off both the institutional bookbuilding and the retail portion of its Hong Kong initial public offering that aims to raise between HK$1.17 billion and HK$1.40 billion ($151 million to $180 million).
Sany Heavy Equipment International has committed to support the deal as a cornerstone investor and will invest $30 million. This will account for about 17% to 20% of the base deal, depending on the final price. Sany said in a statement yesterday that its participation represents a good opportunity to invest its unutilised cash and to strengthen the strategic relationship between the two companies.
Kinetic, which has a thermal coal mine in the Chinese region of Inner Mongolia, is offering 930 million new shares, or 11% of its post-offering share capital, at a price ranging from HK$1.26 to HK$1.51 per share. Of the total, 90% is targeted at institutional investors, while the remaining 10% is earmarked for Hong Kong retail investors.
The deal comes with a greenshoe option of up to 15% that may increase the total deal size to as much as $208 million. Kinetic has got a waiver from the Hong Kong stock exchange requirement to sell at least 25% of the share capital because it already has a substantial number of minority shareholders who will count towards the free-float.
The price range values Kinetic at an enterprise value-to-reserves ratio of 7.8 times to 9.1 times pre-shoe, and at an EV-to-resources ratio of 3.5 times to 4.1 times, a source said.
Among its major comparables, China Shenhua Energy trades at an EV-to-reserves multiple of 9.2 times, SouthGobi Energy Resources, which is headquartered in Canada but operates coal mines in Mongolia, trades at 11.2 times and Hidili Industry International Development is quoted at 2.3 times. On an EV-to-resources basis, Shenhua Energy trades at a multiple of 3.6 times, while Hidili and SouthGobi are both quoted at 2.2 times, according to the source. Other comps include China Coal Energy and Mongolian Mining.
Based on the feedback from the investor education, the potential buyers of the IPO are expected to come primarily from Asia and to be centred around a combination of specialist funds and investors who are already familiar with the company and the management team, a source said.
Kinetic was incorporated in July 2010 and is in the process of constructing and developing an underground mine in Erdos City in Inner Mongolia, under the name of the Dafanpu coal mine. The company began trial production at the mine in January, and expects to start commercial production in the first half of this year, according to a prospectus filed with the Hong Kong stock exchange yesterday. It expects to begin generating revenue from its mining operations by the end of 2012.
Based on the company’s current development plan, it aims to achieve a production volume of 2.4 million run-of-mine (ROM) tonnes of coal in 2012 and 5.0 million ROM tonnes of coal in 2013, according to the prospectus.
The IPO proceeds will be used mainly to develop the Dafanpu mine and related facilities, to repay part of a short-term bank loan, and to fund new acquisition targets and coal reserves. The latter will help to reduce the risks related to the fact that the company currently has only one mining site.
Another concern is that Kinetic's short operating history makes it difficult for investors to evaluate its business and growth.
In addition to its thermal coal mine, Kinetic has mining processing, transportation and storage capabilities and it is aiming to become a leading private-sector integrated coal provider in China. But it still has to prove that it can deliver on those goals.
Kinetic’s offering comes after another international resources-related company, Canada’s Sunshine Oilsands, in February raised $580 million through Hong Kong’s biggest IPO so far this year. Most other Hong Kong listings this year have been small, in fact only one other deal has been bigger than $100 million. This could be about to chance, however, as stock markets that booked steep losses last year, including Hong Kong, are on the mend, encouraged by recent signs of improvement in the US economy. Hong Kong’s Hang Seng Index is currently up about 16% this year after dropping about 20% in 2011. This should encourage more companies to go ahead and launch their planned IPOs.
The final price is expected to be fixed on March 16 and the listing is scheduled for March 23. The relatively tight schedule is due to the fact that the bankers have done quite a lot of work ahead of time, and feel they know where most of the demand will come from, another source said last week.
HSBC is the sole sponsor and global coordinator as well as a joint bookrunner together with UBS.
