The company ranks second among listed Chinese gold miners with regard to output and reserves and is seen as a pure play on the gold price. Thanks to a growing belief that US interest rates have peaked, most analysts currently expect gold to average $675 to $700 per troy ounce in 2007. The price has bounced from its recent trough near $570 about six weeks ago and is now trading at around $622 per ounce, although it is still well off its all-time high of $732 that was hit in May.
Aside from its size, Zhaojin Mining also has an edge over its mainland peers because of a greater focus on mining. The company derived 85% of its revenues from gold mining in 2005, compared with 60% to 70% for Zijin Mining, which is also listed in Hong Kong. Based in Shandong Province, which accounted for 25% of ChinaÆs gold output in 2005, Zhaojin Mining is also a purer play on gold with 93% of revenues coming for gold mining or smelting, while an increasing portion of Zijin MiningÆs revenues are derived from copper production. Last year, only 81% of ZijinÆs top-line income came from gold.
Zhaojin Mining is looking to use the proceeds from the IPO to acquire more gold mines that will emphasize the mining portion of its business even further. It is also targeting more exploration rights in the Zhaoyuan district where it is based and is increasing exploration activities in the areas that are covered by its 12 mining permits and 31 exploration permits.
The company produced 211 kilo ounces of mined gold in 2005 and 417 koz of smelter output. It has proven and probable reserves of four mega ounces.
However, this also makes it more vulnerable if the gold price was to turn downward again, especially since hedging activities are prohibited in China. ôAny decline in the gold price could adversely affect earnings,ö the research report noted. The same report estimated that a 1% change in the price of gold would affect ZhaojinÆs 2007 profit by 1.9%.
Zhaojin Mining is looking to sell 25% of its enlarged share capital, or 172.8 million new H-shares, with the usual 90-10 split between institutional and retail investors. The price range has been set at HK$9.80 to HK$12.68 per share for a total deal size of $217 million to $281 million. With the 15% greenshoe, total proceeds from the Cazenove- and UBS-led deal could increase to $323 million.
The indicated price will value the gold miner at 16.7 to 21.6 times its estimated 2007 earnings, according to a source. This is higher than Lingbao Gold, which is smaller and also derives about 80% of its revenues from lower-margin smelting operations, but below Zijin Mining, which trades at a 2007 PE multiple of about 24 times. Zijin has larger reserves and lower operating costs than Zhaojin, but its shrinking revenue contribution from gold suggests the valuation gap will narrow in the future. Lingbao trades at about 15 times next yearÆs earnings.
The company has set aside about 15% to 20% of the offer for four strategic investors. Their final contribution has yet to be determined, but they will each invest between $10 million and $12 million, the source said. The four are Great Eagle Holdings, Sing Tao News Corp. Chairman Charles Ho, the Global Investment House of Kuwait and South Africa-based Standard Bank, which is an active commodities trader.
Given the smallish deal size, the company would likely not have needed any strategic investors at all, but having signed them up for a guaranteed allocation (in return for a six-month lock-up) means the bookrunners will be able to borrow their shares for the greenshoe. As with other H share offers, it can be difficult to obtain such shares from the majority shareholders, which are often restricted from selling more stock.
The positive outlook for gold prices will translate into a net profit growth for Zhaojin Mining of 74% in 2006 and 53% in 2007, according to syndicate research forecasts. It had a net profit of Rmb159.7 million ($20 million) in 2005.
The company operates five mines and one smelter and sells all the gold it produces in the domestic market as China doesnÆt allow the export of domestically produced gold.
According to the research report, ZhaojinÆs capital expenditures are expected to have peaked in 2005 when it invested Rmb644 million ($82 million). For 2006-2007, the analysts forecast capex to stop at about Rmb200 million, which the company should be able to cover through its operating cash flow.
So far, however, the company has run up significant borrowings to pay for its expansion, resulting in a net debt-to-equity ratio of 92% at the end of 2005, compared with just 8% for Zijin and 57% for Lingbao. Investors are also likely to question the risk that the companyÆs current permits may not be renewed. The company will have to apply for new permits soon as most of its exploration permits expire in 2008 and most of its mining permits in 2009.
Zhaojin, which aims to fix the price on December 1 and start trading on December 8, is coming to market at a busy time. Also starting their formal road show for a Hong Kong listing today (November 20) is Kingboard Laminates and China Communication Services, while China Communications Construction, China National Coal and Jinjiang International Hotels Development are all kicking off their pre-marketing activities in earnest. Together those five companies are looking to raise about $4.1 billion.
Kingboard Laminates, which is a spinoff from Kingboard Chemicals, is hoping to raise about $400 million by selling 25% of its capital with the help of Goldman Sachs. Goldman is also joint bookrunner together with CICC on China Communication ServicesÆ $200 million IPO. CCS is the engineering and technical services unit of Hong Kong-listed China TelecomÆs Mainland parent.
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