IRC to relaunch IPO this week after cutting the size

IRC Limited, the iron mining unit of London-listed gold miner Petropavlovsk that is being spun off for a separate listing in Hong Kong, has failed to attract sufficient interest to go ahead with its original offering.

According to sources, the company has decided to reduce the size of the deal by taking out the secondary shares and cutting the offer price to HK$1.80 per share -- 18.2% below the bottom of the original offering range, which ran from HK$2.20 to HK$3.00. This will reduce the size of the initial public offering to a fixed amount of approximately HK$1.93 billion ($248 million), from an earlier target of $376 million to $512 million.

The new terms are expected to be approved by the Hong Kong stock exchange today or tomorrow after which the deal will be reopened to investors. Hong Kong retail investors will have three days to subscribe to the downsized offering, while the institutional book has already been largely reconfirmed, the sources say. The trading debut is expected to be rescheduled for next Tuesday (October 19).

Various sources stressed that the deal was fully covered, including a subscription ratio of 1.2 times for the 10% retail offering, although the type of investors that had signed up to buy shares and the sentiment among investors in general was such that it was expected that the share price would likely fall once the stock started trading. As the company is keen for its shares to trade well and clearly wants to avoid a repeat of the share price collapse that Russian aluminium producer United Company Rusal saw immediately after its Hong Kong listing in January, it decided to adjust the terms and the deal structure to achieve a better outcome.

The comparison with Rusal is a natural one to draw as IRC’s mining assets are in Russia, although the company is not Russian. It also has a highly regarded and experienced international management team and its UK parent company has been delivering sizeable returns to investors ever since it became a listed company.

However, this clearly wasn’t enough. Sources say the sheer number of IPOs for investors to choose from at the moment may have made them reluctant to dig their teeth into an iron ore mining company that is still in the early stages of development. True, the company isn’t a greenfield operation. Its first mine has been in operation since earlier this year and it has already secured most of the funding for the first phase of its second mine, but compared with a Chinese consumer retail-focused company, it is significantly more complex to value and it is also unlikely to soar 40% to 50% on its first day, as did children’s clothing designer Boshiwa in its trading debut a couple of weeks ago. Consequently, many investors chose to focus their resources on other deals.

In addition, there was talk in the market that, even at the bottom end, the price range didn’t offer a large enough discount to compensate for the perceived risks.

And since the company only really needed about $240 million to cover its immediate capital needs, it decided to reduce the offering price to make it more attractive. By removing the secondary portion of the offering, it will also be able to place the shares with a core group of investors who have done the work and understand the company and the growth potential, noted one source.

And since the company only really needed about $240 million to cover its immediate capital needs, it decided to reduce the offering price to make it more attractive. By removing the secondary portion of the offering, it will also be able to place the shares with a core group of investors who have done the work and understand the company and the growth potential, noted one source.

At the revised terms the institutional tranche is said to be well oversubscribed, which means investors won’t be allocated in full. This should be positive for the aftermarket trading. The investors that have reconfirmed that they will buy at the reduced price include the two cornerstone investors -- private equity fund General Enterprise Management Services (International), or Gems, which is run by Hong Kong-based businessman Simon Murray; and CEF, which is a 50-50 joint venture between Cheung Kong (Holdings), the property developer and holding company controlled by Hong Kong tycoon Li Ka-shing, and the Canadian Imperial Bank of Commerce.

These two parties initially made a combined pre-IPO investment of $60 million into the company. However, in response to a Hong Kong stock exchange dislike for pre-IPO investments that take place at a discounted price very close to the listing date, IRC will buy back those shares and the pair will come in as cornerstone investors in the IPO instead. Their combined investment will be the same $60 million as before, although they will now invest at the same price as everyone else. Based on the revised IPO price, they will hold a combined 9.8% stake in the company at the time of listing.

In a brief statement published on the London Stock Exchange website on Friday, a day after the deal was scheduled to price, IRC said that the Hong Kong retail offer was oversubscribed and that “the total demand from investors exceeded IRC's minimum requirements for the shares to be issued by it, but did not meet the company's highest expectations.” Hence it will alter the terms and publish a supplemental prospectus, which will result in a “short delay” in the timetable. 

Under the revised terms the company will sell approximately 1.07 billion new shares, which is the same number of new shares that it was always intending to sell. The earlier offering totaled 1.325 billion shares, of which 255 million, or 19.2%, were secondary. The new deal size will account for 31.5% of the enlarged share capital and Petropavlovsk will hold 65% post the IPO.

Bank of America Merrill Lynch is the sole global coordinator and sponsor of the IPO and also a joint bookrunner together with BOC International and UBS. UK-based financial services company Liberum Capital and Russian investment bank Troika are acting as joint lead managers.