Hunan Nonferrous raises $172 million from placement

The offering is priced at a tight 2.95% discount to the market and will help fund more acquisitions.
Hunan Nonferrous Metals was back in the market last night for its first follow-on capital raising exercise since the listing in March 2006 and, according to sources, the offering drew a quality group of investors, including some that had been holding the stock ever since it went public.

The integrated nonferrous metals producer, which sits on 15% of the worldÆs tungsten reserves and is also a leading producer of zinc, antimony and lead as well as compounds, alloys and value-added products derived from them, raised a total of HK$1.34 billion ($172 million) from the deal.

In accordance with Chinese regulations, however, 9.1% of the issue consisted of secondary shares offered by the National Social Security Fund, meaning the amount of fresh capital going to the company was a slightly smaller $156.3 million before expenses. BOC International and Morgan Stanley were joint bookrunners for the offering. These two also arranged last yearÆs roadshow but it wasn't a foregone conclusion that they would be mandated to underwrite the placement because at least one other bank is known to have been bidding for the role.

The shares, which represented 20% of the existing H-share capital, were offered at an already tight discount range of 2.95% to 3.35% and priced at the tight end of that, reflecting solid investor interest both in the stock and in the resources sector in general. Selling prices for the companyÆs three primary metals û tungsten, zinc and lead û are remaining well underpinned partly because of the strong demand from industrial and manufacturing companies in China.

A non-deal roadshow a couple of months ago where management got a chance to meet with investors who were not already shareholders had prepared the market for the share sale and when the deal was launched just after 6pm Hong Kong time the orders flowed in very quickly. When the books closed two hours later, the deal was about 2.5 times covered with no price sensitivity, according to a source.

ôItÆs an H-share, itÆs a resources company and itÆs a company that people have made money on so far,ö one observer says with regard to the level of demand. ôIt is definitely benefiting from the overall market sentiment, but people are also very comfortable with the chairman and his ability to deliver on his plans.ö

The orders came primarily from Asia and Europe, but a couple of US accounts also participated.

HNF offered 247.38 million new H-shares and the NSSF a further 24.738 million, resulting in a total deal size of 272.118 million shares. The price was fixed at HK$4.93, which was equal to the top of an indicated range of HK$4.91 to HK$4.93.

The share price has had a strong run over the past three weeks with a gain of 18% since June 12, but in general has been highly volatile this year. It has reached highs around HK$5.80 twice with deep drops to the HK$4.30 level either side and in between those peaks. Yesterday it finished at HK$5.08.

The company said the money raised will be used for acquisitions and general working capital and while no specific takeover targets were identified, this is also likely to have whetted investorsÆ appetite. HNF has acquired several new assets since it went public, which has helped its share price to triple from the IPO price of HK$1.65 and the management has earlier said it is looking for acquisition opportunities both in China and abroad. Analysts believe this will also include the takeover of more assets from its state-owned parent.

ôChina has been very aggressive in securing resources abroad and it is widely believed that a company like Hunan Nonferrous probably has the backing of the state for its acquisition strategy,ö the observer notes.

Earlier this year, the company bought a 98.3% stake in a company called Hengyang Yuanjing, which is primarily engaged in mining exploitation, flotation and sales of tungsten concentrates and its bi-products such as copper, bismuth and molybdenum. The acquisition is expected to increase HNFÆs tungsten reserves by 40%, or 300,000 tonnes, which should translate into an additional annual production of 1,500 tonnes of tungsten concentrates, according to an analyst.

Including the completion last year of a technology renovation at the Shizhuyuan mine, the management estimates that its production volume of tungsten concentrates and oxidized molybdenum will increase by more than 50% this year compared with 2006.

HNF is also focusing on becoming more self-sufficient with regard to the supply of concentrates and raw materials with the aim of eventually having a fully vertically integrated production chain. The company uses the tungsten it produces to make cemented carbide, or hard metals, which are then made into various products, including drilling and stone cutting tools for the mining and geological industries.
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