Chinalco take-private: 'sweet' but scary

Chinalco Mining Corp’s planned take-private offers a solid return for shareholders and is near the finish line. But some investors are worried the deal could hit a roadblock.

Aluminium Corporation of China (Chalco), the largest aluminium producer in the country, announced at the end of last week that it wanted to privatise its Hong Kong-listed subsidiary Chinalco Mining Corporation (CMC).

Chalco offered investors HK$1.39 per share for the company, a premium of 32% over the last closing price. The stock started trading again on Monday — and volumes quickly spiked to 24 million shares, a whopping 30 times the three-month average trading volume.

The stock surged 24.76% on its return to trading on Monday, leaving 6.1% of upside on the table for investors who hold onto the stock and accept the deal. But some investors worry things might not be so simple.

“The deal looks sweet but we really don’t know if people would suddenly reject or vote it down for various different reasons,” said a fund manager based in Hong Kong. “We have seen too many of these event shocks recently.”

Some recent deals that have fallen by the wayside include Anhui Conch Cement’s acquisition of West China Cement, which failed to obtain approval by Chinese regulators; CMBC’s takeover of Quam, which was pulled after the two companies were unable to reach agreement on terms; and Cheung Kong Infrastructure’s buyout of Power Asset, which was terminated due to minority shareholders voting against it.

Chalco’s deal looks much more likely to get through. The parent company owns 84.63% of its subsidiary. But despite that overwhelming majority, the deal could still fail at the shareholder vote.

Block party

Chalco’s dominant position is even stronger than it looks at first. Besides the 84.63% of CMC that it already owns, related parties own 1.12%.  Some 6.31% of additional shareholders have already committed to vote in favour, as has Tongling Nonferrous Metals Group, which owns 1.87%.

This leaves only 6.07% of shares held by independent shareholders who have made their intentions clear. But since CMC is incorporated under the laws of Cayman Islands, that might be enough to block the deal.

One of the conditions is that no more than 10% of the company’s independent shareholders can vote against the deal.  This represents 1.43% of the total share outstanding, according to analysts.

Still, the deal appears to make real sense for Chalco. The company is privatising CMC partly because its subsidiary is facing financial pressure. But that is more of a problem because Chalco wants to ensure the continued, normal operation of its Toromocho Project, a copper mine in Peru.

CMC is facing multiple problems, partly down to inefficiencies in both its mining and processing operations and lower-than-expected returns on copper. But the more palpable problem is that CMC has been binging on debt. Its debt level is as high as $4.3 billion, compared to current assets of just over $1bilion.

By privatising CMC, Chalco will be able to exercise greater flexibility in reorganizing the capital structure and in increasing funding to the subsidiary. It also gives the company’s shareholders a reasonable exit of their investment, according to a joint announcement by Chalco and CMC.

CMC went public in 2013 with an IPO price of HK$1.75. But its shares performed poorly, falling to HK$0.62 in March before bouncing back to HK$10.5 last week, ahead of the announcement.

Morgan Stanley is the financial advisor for Chalco.



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