China Molybdenum targets $977 million from IPO

Eight cornerstone investors commit to a piece of the deal as the price range is set at a sizeable discount to comparable Hunan Nonferrous Metals.

China Molybdenum has set the price range for its initial public offering at a level that offers a significant discount to fellow specialty metals producer Hunan Nonferrous Metals, but could still see it raise well over $900 million if the greenshoe is exercised in full.

The company, known as China Moly, operates one of the largest pure molybdenum mines in the world, which is estimated to have 498,000 tonnes of molybdenum reserves and 506,000 tonnes of tungsten reserves. Both molybdenum and tungsten are used as alloys to harden steel and are in strong demand by China’s rapidly growing stainless steel industry in particular. This is particularly true as neither metal has any viable substitutes.

The company is offering 22.7% of its issued share capital at a price between HK$5 and HK$6.40 per share, according to sources. With a base deal size of 1.08 billion new shares, this puts the total offering at HK$5.4 billion to HK$6.9 billion ($694 million to $888 million). The greenshoe, which will be no more than 10% (compared with the usual 15%), could boost the total takings to $977 million.

This will make China Moly the third largest Hong Kong IPO so far this year after China Citic Bank and real estate developer Country Garden. Guangdong-based Country Garden will close its up to $1.7 billion offering tomorrow (April 11), while China Citic Bank is kicking off a dual H- and A-share offering of as much as $5.6 billion today.

Sources say the response among institutional investors to China Moly’s offering has been positive so far and the discounted price should ensure enough orders. About one-fifth of the base deal size, or 18% to 23% depending on the final price, has also been set aside for eight cornerstone investors and the quality of those names should help instil confidence among other investors too, the sources note.

Indeed, the list of cornerstones includes several of the Hong Kong tycoons and corporate investors who tend to support high-profile H-share IPOs, such as Li Ka-shing, Lee Shau Kee, New World Development and Chow Tai Fook chairman Cheng Yu-tung, China Life Insurance and Citic Pacific. Bank of East Asia chairman David Li, who hasn’t publicly bought into a Hong Kong IPO for a while, will also take a stake, as will the Government Investment Corporation of Singapore (GIC). Another unusual investor in this context is Citigroup Global Markets.

The eight investors will buy $20 million each and have committed to a 12-month lockup. Li Ka-shing will, however, split his allocation half and half between Hutchison Whampoa and Cheung Kong (Holdings).

The company kicked off the official roadshow in Singapore yesterday when Hong Kong- and European-based investors were still on Easter Holidays and the marketing will move to Hong Kong today.

Morgan Stanley and UBS are joint bookrunners for the offering.

The price range values China Moly at 10.9 to 13.9 times its 2007 earnings, which according to syndicate research is projected to grow 44% versus last year following 31% growth last year and 319% in 2005. These P/E multiples compares with about 17.8 times for tungsten producer Hunan Nonferrous (HNF), suggesting China Moly will come at a discount of at least 22% to its listed peer. At the bottom of the range the gap is as large as 39%.

The discount may have ended up being greater than initially intended as HNF has gained 11.5% since the start of pre-marketing of China Moly on March 26 and investor feedback was said to have focused on an absolute valuation of China Moly rather than as a specific discount to its listed peers. HNF has risen more than three times from its IPO price of HK$1.65 in March last year, including a 73% jump on its first trading day. It closed at HK$5.42 just before the holidays last Wednesday.

The price range also pitches the listing candidate at premium to Toronto-listed Blue Pearl, which trades at a 2007 P/E multiple of about 8.3 times. Blue Pearl is the only pure molybdenum producer that is publicly listed but with reserves accounting for only a quarter of China Moly’s, a mine life of less than 10 years versus an estimated 46 years for its Chinese competitor and higher cash costs, analysts feel a premium is deserved.

Hong Hong-listed base materials companies, including Jiangxi Copper and Aluminum of China, tend to trade at average forward P/Es of six to 10 times. However, base metals aren’t experiencing the same supply shortage as specialty metals and the irreplaceable nature of both molybdenum and tungsten in steel production suggest companies producing these two metals should trade at a premium to the former group, one observer notes.

The money raised from the IPO will be used partly to set up its own processing facilities to recover tungsten from the raw material left over after extracting the molybdenum. These facilities, which are already under construction and scheduled to be completed by early 2008, will boost the revenues generated by its tungsten reserves to 4%-5% in a couple of years from only 1% now, making the metal an important growth driver, analysts project.

The IPO proceeds will also help fund an increase of the ore output from its only mine as well as the processing capacity of various molybdenum products further down the value chain as the company strives to transform itself into more of an integrated molybdenum producer.

Prior to the listing, the company is 52% owned by the government of Luanchuan County and 48% by two individuals through an investment company called Cathay Fortune Corp.

The final pricing it expected to be determined after the US close on April 18 with the trading debut scheduled for April 26.

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