Chinalco Mining’s Hong Kong IPO covered at launch

Chinalco Mining’s Hong Kong IPO covered at launch
Chinalco's only mining asset: the Toromocho copper-polymetallic deposit in Peru

Chinalco Mining Corporation International, a unit of state-owned Aluminum Corp of China and the owner of a greenfield copper deposit in Peru, kicked off the institutional roadshow yesterday for its Hong Kong initial public offering, which is targeting to raise between HK$2.68 billion and HK$3.37 billion ($346 million to $435 million). The stock is expected to start trading on January 31.

The company has secured five cornerstone investors, which will buy $240 million worth of shares, or up to 69.4% of the deal depending on the final price. It has also enlisted enough demand from anchor investors for the deal to be fully covered at launch, a source said yesterday.

The cornerstone investors are all commodity-related companies, namely Trafigura ($100 million); Tongling Nonferrous Metals ($50 million); Hongfan ($30 million); Louis Dreyfus ($30 million); and Rio Tinto ($30 million), the term sheet shows. They are subject to a six-month lock-up.

Chinalco Mining was initially aiming for an IPO of up to $1 billion in June of last year, but never launched the deal despite extensive pre-marketing activities. At the time, investors were facing volatile global financial markets due to worries about the deepening debt crisis in Europe and weaker growth in China.

Since then the company and its bookrunners have secured enough cornerstone and anchor investors to cover a smaller deal, while market conditions and investor confidence in China have also improved, explaining the company’s return to the market, a source said.

Chinalco Mining is offering 1.76 billion shares, or about 15% of the company, at a price between HK$1.52 and HK$1.91 each. Of the base deal, 10% is earmarked for Hong Kong retail investors, while the remaining 90% is targeted at institutional investors.

There is also a 15% greenshoe option, which could increase the deal size to $398 million to $500 million.

The indicative price range values the company at a 2014 price-to-earnings ratio of between 7.7 times and 9.6 times, the source said. Other Hong Kong-listed copper mining companies trade at an average 2014 P/E multiple of 8.8 times, the person added.

Chinalco Mining is the core platform for the Chinalco group’s non-aluminium, non-ferrous resources developments overseas. Its only mining asset at the moment is the Toromocho copper-polymetallic deposit in Peru.

The Toromocho project is the world’s second-largest pre-production copper project as measured by proved and probable copper ore reserves, according to the company’s draft prospectus. It is estimated to have the proved and probable JORC-compliant (Australian Joint Ore Reserves Committee) reserves of about 7.3 million tonnes of copper, 290,000 tonnes of molybdenum and 10,500 tonnes of silver.

Chinalco Mining expects to rely on the Toromocho project for substantially all of its revenue and cashflows for the foreseeable future, according to the draft prospectus. Production is expected to begin in the fourth quarter this year and reach full capacity in the third quarter of 2014.

The company has entered into binding off-take agreements at fixed price terms with four of the cornerstone investors, according to a press release issued yesterday. Under the agreements they will buy an aggregate of 60% of the Toromocho project’s annual production of copper concentrates for a period of five years from the start of production. Two of the agreements will be automatically extended for another five years after the initial period.

The company noted in the prospectus that its financial condition and results of operations may be materially and adversely affected if it fails to derive the expected economic benefits from the Toromocho project. The company did not have any revenues during the track record period (January 2009 to September 30, 2012), and there can be no assurance that it will generate sufficient cashflow from its operations in the future, it said.

Sources have said that Chinalco Mining benefits from good name recognition in the region. Sister company Chalco, for example, is the biggest alumina and primary aluminium producer in China and is already listed in Hong Kong.

The institutional bookbuilding is expected to close on January 23, and the pricing is expected the following day. The Hong Kong public offering starts today and will continue until January 23.

While companies, existing shareholders and bankers have been busy with follow-ons and block trades in recent weeks, the Hong Kong IPO market has been subdued and is expected to remain relatively quiet until after Chinese New Year in February.

However, Chinese property developer Golden Wheel Tiandi Holdings, which last week raised HK$756 million ($98 million) from the first IPO of size in Asia this year, had a bullish trading debut on Wednesday, which is an encouraging sign for other deals in the pipeline.

Golden Wheel ended its first day of trading at HK$2.04, or 21.4% above the IPO price of HK$1.68. It trimmed some of the gains yesterday, however, when it fell 0.5%. The Hang Seng Index closed almost unchanged yesterday.

BNP Paribas and Morgan Stanley are global coordinators for Chinalco Mining’s IPO. CCB International, CICC, HSBC, and Standard Chartered are joint bookrunners.

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