By the time nickel prices reached their lows in mid-August, they had more than halved from a record high of $54,050 per tonne three months earlier.
But when Xinjiang Xinxin Mining Industry kicked off the institutional roadshow for its up to $500 million initial public offering yesterday, it did so against an entirely different backdrop. Nickel prices, as quoted on the London Metals Exchange, have bottomed out and started to head higher - gaining no less than 28.5% in the past five weeks to $31,975 per tonne last Friday. The rise has been driven by demand from stainless steel mills after a wave of inventory cut-backs. The stainless steel industry accounts for about 67% of global nickel demand.
Renewed pressure on the US dollar on the back of the subprime lending crisis has also made commodities priced in dollars relatively more attractive and last weekÆs rate cut by the Federal Reserve, which was also seen to reduce the likelihood of the US economy slipping into a recession, further reinforced this trend.
At the same time, the Hong Kong stockmarket continues to rally amid hopes of a sizeable inflow of Chinese cash, providing a positive backdrop for any new companies seeking to come to market. Yesterday, the Hang Seng Index surged 2.7% to a record 26,551 points, bringing its total gains since the low on August 17 to more than 7,100 points or 37%.
China-linked companies have been at the forefront of this rally and among the metals producers China Molybedenum has added 43.8% in the same period, Aluminum Corp of China (Chalco) is up 97.6%, and Hunan Non-Ferrous Metals has risen 106.6%. These gains have allowed for a higher valuation of Xinjiang Xinxin as well, and the size of its IPO has swelled from the $350 million that was talked about just a few weeks ago.
ôThe timing does seem rather good,ö one observer says with reference to Xinjiang XinxinÆs IPO. Investors are still asking questions about the companyÆs ability to weather the volatility in nickel prices, but most of them agree that the strong demand for stainless steel in China will support an upward trend in selling prices in the long term, he adds.
It is worth noting that the recent downturn in nickel prices came after an exceptional rally from less than $15,000 per tonne at the end of 2005 and many analysts were arguing that the commodity was overheating.
Investors who met with Xinjiang XinxinÆs management during the first day of the roadshow were told that as a low-cost producer with high margins (45%-53%) and a healthy return on equity (28%), the company is less affected by a potential decline in nickel prices than some of its international peers.
Aside from 164,000 tonnes of nickel reserves and another 83,500 tonnes of resources, the company also sits on 258,000 tonnes of copper reserves and another 161,000 tonnes of copper resources. It has one operating mine, which includes a concentrator and a smelter, as well as one refining plant.
The company, which is ultimately controlled by the state-owned Asset Supervision and Administration Commission of the Xinjiang Uygur Autonomous Region, is selling 28.3% of its enlarged share capital in the form of 600 million new H-shares. The price range has been set at HK$4.80 to HK$6.50 per share, which will allow the company to raise between HK$2.88 billion ($369 million) and HK$3.9 billion ($500 million).
If the 15% greenshoe is also exercised in full, the total proceeds may increase to as much as $575 million. BOC International is the sole bookrunner for the offering.
The price range translates into about 12.3 to 16.8 times its projected 2007 earnings and while this may be higher than the valuations initially considered, it represents a significant discount to the other Hong Kong-listed producers of non-ferrous metals. According to Bloomberg data, Chalco is currently quoted at 21.5 times its 2007 earnings, while Hunan Non-Ferrous and China Moly both trade at around 35.5 times.
Neither of these are nickel producers, however, and therefore arenÆt directly comparable. But China MolyÆs similar characteristics in terms of it being a single-mine operator and the fact that molybdenum too is used primarily for the production of stainless steel makes it a pretty good reference. Both companies are also self-sufficient and both have high margins.
However, Xinjiang Xinxin is much smaller than China Moly and Hunan Non-Ferrous, a tungsten producer, both in terms of its reserves and resources and with regard to turnover and profits. One reason for this is that the latter two have been busy acquiring other companies and mining rights since they listed. While this suggests that Xinjiang Xinxin should trade at a discount now, sources note that it too is likely to grow through acquisitions and further asset injections from its parent company.
ôThe more money it gets, the more of a consolidator it will become," one source says, noting that the Xinjiang Uygur Autonomous Region shares a border with several Central Asian states which are resources rich and offer plenty of acquisition opportunities.
The listing candidate also has a right of first refusal to acquire a 34% stake in the Ashele copper mine from its controlling shareholder as well as an option to buy its 50% stake in Hami Hexin nickel and copper mine.
However, some observers note that there are no guarantees that these acquisitions will happen and that makes it rather difficult to value the company.
Xinjiang Xinxin is planning to use up to 63% of its net proceeds - about HK$2.04 billion ($260 million) at the midpoint of the price range û to acquire mining rights in mines with sizeable proven reserves. Another 19% will go towards exploration and the expansion of its mining, procession and refining capacity.
As a result of an ongoing expansion project, the company will increase its daily mining capacity to 3.400 tonnes in 2009 from 1,000 tonnes today and its ore processing capacity to 3,000 tonne per day from 1,000. Its smelting and refining capacity will also be significantly increased over the next couple of years although it is expected that the utilisation rate in this part of the business will drop to about 77% from over 100% today, resulting in volume increases of about 45% and close to 200% for smelting and refining respectively (versus 2006).
An investor who attended the roadshow say syndicate analysts project that the capacity expansion will result in net profit increasing at a compound annual growth rate of about 40% in 2006-2009. The company itself is estimating it made a net profit of at least Rmb466 million ($61.5 million) in the six months to June 30, which would already exceed the Rmb444 million it made in all of 2006.
To help boost the interest in the deal, the company has signed up six cornerstone investors who will buy a combined HK$628 million ($80 million) worth of shares and have agreed to a one-year lock-up. They include some of the usual suspects such as China Life Insurance, Fidelity Insurance, Li Ka Shing Foundation and New World Development, and well as transport and logistics company Sinotrans and Grahamstowe Investments, which is controlled by Leslie Lee Alexander û the owner of the Houston Rockets basketball team.
Alexander also participated as a cornerstone investor in the IPO for sportswear manufacturer Anta Sports Products in July. That stock is currently trading 55% above the IPO price.
Xinjiang XinxinÆs offering has the standard structure with 10% of the shares set aside for retail investors and the rest (minus the cornerstone tranche) being marketed to institutions. There is a standard clawback mechanism that could increase the retail portion of the deal to a maximum 50% in case of strong demand.
The retail offering will open on Thursday (September 27) and the books will close on October 3. The trading debut is scheduled for October 12.
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