Iron ore miner pursues listing ahead of production start

China Tian Yuan Mining seeks to raise up to $457 million amid an increasingly difficult market environment.

China Tian Yuan Mining yesterday kicked off the institutional bookbuild for a Hong Kong initial public offering that could raise between HK$2.46 billion and HK$3.54 billion ($317 million to $457 million). The money will be used primarily to increase its mining and processing capacity following the start of commercial production at its first mine in July.

The deal, which is arranged by Citi as the sole bookrunner, comes at a time when investors are becoming increasingly wary about the robustness of the economic recovery in China after the government raised the reserve requirement for its major banks over the weekend. Hong Kong's Hang Seng Index has fallen in 10 of the past 13 trading sessions and there are also signs that the confidence in IPOs is fading. On Friday, New Century Shipbuilding, a privately owned Chinese shipbuilder looking to list in Singapore, essentially halved the size of its IPO due to the volatile market environment, and yesterday China's largest tire maker, Giti Tire, decided not to start the roadshow for its $400 million to $500 million IPO as scheduled, for the same reason.

Tian Yuan is also experiencing some headwinds in its own sector with its closest comparable, China Vanadium Titano-Magnetite Mining, having fallen almost 24% in the past three weeks. Acknowledging this, Tian Yuan has set a price range which, at the bottom of the range, still pitches it at a sizeable discount to China Vanadium even after its massive drop, and sources said the response on the first day was quite good with a number of decent orders. Most of them came either at strike or had price limits above the bottom of the range, suggesting that investors agree with the company's own assessment that the low end of the price range is too cheap.

That said, in this kind of environment, the key is to make investors stop and take notice of a deal in the first place, which they are more likely to do if they see potential for immediate upside gains. And given the current volatility it is difficult to predict where the market - and the comps - will be trading towards the end of the bookbuilding.

As one banker put it: "What is attractive today, may not be attractive tomorrow."

Tian Yuan is offering 600 million new shares, or 30% of the company at a price between HK$4.10 and HK$5.90. This values the company at 7 to 10 times its projected earnings in 2011, which compares with a 2011 price-to-earnings multiple of about 10.1 for China Vanadium.

As usual, 10% of the deal has been earmarked for retail investors, although this can be increased to up to 50% in case of strong demand. There is also a 15% greenshoe that could increase the total proceeds to as much as $525 million. All the shares in the shoe are secondary and will be sold by the chairman, who is also the founder of the company.

Tian Yuan is the largest privately-owned iron ore miner in China's Hebei province based on reserves and while it won't start generating revenues for another couple of months, the company is in a strong position to grow and churn out good profits in the years ahead, according to analysts. They cite China's continuing demand for iron ore, the company's location right in the middle of China's steel heartland -- Hebei produced 24% of China's raw steel in 2009 -- and its plans for a rapid production capacity ramp-up. Tian Yuan has 289 million tonnes of reserves with an iron grade of 20.4% and while the production will be relatively modest at 384,000 tonnes this year, syndicate analysts expect that to increase to 2.668 million tonnes by 2012. The company aims to boost its annual mining and processing capacity of 10.5 million tonnes and achieve an iron concentrate capacity of 2.69 million by the end of 2011 following a three-phased expansion plan for its Yangjiazhuang mine.

Both Hebei and China as a whole had a shortfall of iron ore last year, which resulted in China importing a net 628 million tonnes of ore. Hebei was the largest iron ore importing province in the country.

As an additional business, the company also plans to start commercial production of a mineral called gabbro-diabase, which occurs naturally in its mine and is known for its hardness and abrasion-resistant qualities. It is commonly used to make high-end countertops, flooring and other decorative materials and the company believes the development of this mineral will increase the cost-efficiency of its operations and increase the value that it can exploit from the Yangjizhuang mine. The company has also acquired two additional exploration rights in the Hebei province.

Tian Yuan hasn't signed up any cornerstone investors on account that the deal might have ended up being too small for other institutional investors, if the clawback was also exercised in full. However, in the current environment one or two cornerstones may have been able to ensure sufficient support and momentum to carry the deal across the finishing line. According to sources, the bookrunners may choose to enlist a few anchor investors instead.

Also, the company already has the support of three external investors who bought $60 million worth of bonds exchangeable into Tian Yuan shares earlier this year. The three investors - private equity firm Oaktree, investment company Long Tree and the asset management arm of Chinese coking coal producer Hidili - will be able to exchange into shares six months after the listing. However, this exercise won't be dilutive for the existing shareholders since the bonds will convert into existing shares provided by the parent company.

The deal will stay open until May 14, with the final price set to be determined after the US close on that day. The trading debut is scheduled for May 25.

¬ Haymarket Media Limited. All rights reserved.
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