Chinese gold miner taps CB market for $133 million

The deal from China Precious Metal attracts good interest from outright investors following a non-deal roadshow earlier this month and is upsized by 33%.

Hong Kong-listed China Precious Metal Resources Holdings (CPM) has raised HK$1.03 billion ($133 million) from a convertible bond that attracted good interest mostly from outright investors.

Given that the deal was essentially unhedgeable – as there is no stock borrow and no asset swaps in the name – the marketing strategy focused primarily on the equity story and the company’s position as a pure gold play (it derives about 95% of its revenues from gold mining).

To drum home that story, the company did a non-deal roadshow earlier this month that was targeted mainly at outright investors in Europe. And the tactic appears to have worked as, according to a source, about 70% of the investors who met the management during that trip subscribed to the CB, which was launched and priced after the market closed yesterday.

About 70% of the deal was also covered at launch by a few anchor investors, which helped give the bookbuilding momentum early on. In the end, the deal was about two times covered by more than 30 investors, which allowed the bookrunners to exercise part of the $50 million upsize option and increase the deal size from the original $100 million.

While outrights dominated, the final line-up of buyers also included some hedge funds.

The CB has a five-year maturity but can be put back to the issuer after three years at par. It was marketed with a coupon and yield ranging from 6.25% to 7.25% and a conversion premium of 25% to 30% over yesterday’s close of HK$1.45.

The terms were all fixed at the investor-friendly end, resulting in a 7.25% coupon and yield and a 25% premium. That gave an initial conversion price of HK$1.81.

The bonds come with an issuer call after three years, subject to a hurdle of 130%, to speed up conversion if the share price performs.

The technical terms were of less significance, given that most people viewed the CB primarily as a way to buy the company’s stock in the future, but according to a source some investors did value the bonds at a credit spread of about 800 to 900 basis points over Hibor. Based on the final terms and a full adjustment for cash dividends, the bond floor worked out at about 94% and the implied volatility at about 17%, which compared to an historic volatility of 25% to 28%.

CPM was initially involved in oil trading, but in 2009 it acquired its first mining asset and sold the oil business. At present it has five operating gold mines in the Chinese provinces of Henan, Yunnan and Inner Mongolia and during the recent roadshow it described itself as the largest privately owned gold mining company in China – both in terms of resources and production levels.

In terms of resources, it is the fourth largest overall and it is also expecting to outpace all other gold miners in China when it comes to production growth in the period from 2011 to 2014 with a compound annual growth rate of more than 30%.

CPM is definitely less-known than its larger state-owned gold mining peers like Zijin Mining Group and Zhaojin Mining Industry, but neither of those are expected to issue either CBs or straight equity any time soon. So for investors who want to increase their exposure to gold, this deal was an interesting opportunity.

According to the company’s most recent investor presentation, available on its website, its resources amount to 7.5 million ounces of gold. In the first half of last year, it produced 51,000 ounces of gold, compared to 87,000 ounces in the full year of 2011.

One of its key advantages, according to the source, is that it has a low cash cost, at just $320 per ounce, and given that the spot gold price is currently trading between $1,650 and $1,660 per ounce that suggests it has very robust margins.

The company said it will use the CB proceeds partly to expand its mining operations and production facilities, partly to repay existing debt. Its aim is to increase its annual production to 200,000 ounces by 2014 and to pay “an attractive” maiden dividend to its shareholders in that same year.

In the first half of last year, CPM posted a net profit of HK$154.1 million, a 63% increase from HK$94.7 million in the same period 2011. In the full year 2011, the net profit amounted to HK$417.4 million.

The share price has recovered in full from a dip in July and August last year when it fell as low as HK$1.10, but even though it has risen 32% since then, it is virtually flat compared to 12 months ago.

Daiwa was the sole bookrunner for the CB. DBS and ICBC International were both involved in the earlier non-deal roadshow (together with Daiwa), but did not have a role on last night’s deal.

¬ Haymarket Media Limited. All rights reserved.
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