Kinetic Mines and Energy, which is developing a thermal coal mine in China’s Inner Mongolia region, has raised HK$1.17 billion ($150 million) from its Hong Kong initial public offering. This makes it the third-biggest deal in the city so far this year after Sunshine Oilsands and Xiwang Special Steel, which raised $580 million and $171 million respectively.
However, the price was fixed at the bottom of the range and retail investors showed very little interest in the deal, leaving the 10% retail tranche severely undersubscribed. In fact, the demand was only enough to allocate 2.5% of the overall offering to Hong Kong retail investors, while the remaining 97.5% went to institutional accounts, according to a source.
Retail investors in Hong Kong tend to be cautious about mining and energy companies that are still at a greenfield stage or that are only producing at low capacity. Aside from the fact that they lack a track record, such companies tend to be valued at multiples of their reserves or resources, which involve a lot of assumptions and can be quite difficult to understand, while Hong Kong retail investors are used to more straight-forward price-to-earnings valuations. Sunshine Oilsands, a Canadian company that plans to start producing oil from oil sands leases in Alberta, Canada, in 2013, was also shunned by retail investors, who took up only 2.3% of the total deal.
On top of this, Sunshine Oilsands and Xiwang Special Steel are both still trading below their IPO prices, which doesn’t exactly encourage investors to put money into the next newcomer. On Friday, Sunshine Oilsands closed at HK$4.74, or 2.5% below its IPO price of HK$4.86, while Xiwang Steel ended at HK$2.29, nearly 14% below its offering price of HK$2.65.
However, sentiment is warming in the global financial markets, helped by the improved prospect for the US economy. The Hang Seng Index is now up about 16% this year and appears to be on its way to erase the 20% drop that it logged in 2011.
According to the source, much of the demand for Kinetic’s offering came from investors that were already familiar with the company, as well as from some specialist-type investors. They were almost entirely Asia based.
As reported earlier, Sany Heavy Equipment International participated as a cornerstone investor, buying $30 million worth of shares, which at the final price accounted for 20% of the base deal. Sany has said that the deal represented a good opportunity to invest its unused cash and to strengthen the strategic relationship between the two companies.
Kinetic sold 930 million new shares, or 11% of its post-offering share capital, at a price of HK$1.26 per share. The shares were marketed in a range between HK$1.26 and HK$1.51.
The deal has a greenshoe option of up to 15% that may increase the total deal size to as much as $170 million. Kinetic has got a waiver from the Hong Kong stock exchange requirement to sell at least 25% of its share capital because it already has a substantial number of minority shareholders who will count towards the free-float.
The final price of HK$1.26 valued Kinetic at an estimated enterprise value-to-reserves ratio of 7.8 times pre-shoe, according to the source. That puts it at a discount to China Shenhua Energy, which trades at an estimated EV-to-reserves multiple of 9.2 times and SouthGobi Energy Resources, which trades at 11.2 times. Hidili Industry International Development is quoted at 2.3 times.
In another metric, the price valued Kinetic at an estimated EV-to-resources ratio of 3.5 times. That places it at a slight discount to China Shenhua Energy, which trades at an estimated multiple of 3.6 times, while it is more expensive than Hidili and SouthGobi, which are both quoted at 2.2 times, according to the source.
Kinetic was incorporated in July 2010 and is in the process of constructing and developing an underground mine in Erdos City in Inner Mongolia under the name of the Dafanpu coal mine. The company began trial production at the mine in January, and expects to start commercial production during the first half of this year, according to a prospectus filed with the Hong Kong stock exchange. It expects to start generating revenue from its mining operations by the end of 2012.
Based on the company’s current development plan, it aims to achieve a production volume of 2.4 million run-of-mine tonnes of coal during 2012, and 5 million tonnes in 2013.
The IPO proceeds will be used mainly to develop the Dafanpu mine and related facilities, to repay part of a short-term bank loan, and to find new acquisition targets and acquire coal reserves. The latter will help to reduce the risks related to the fact that the company currently has only one mining site.
In addition to its thermal coal mine, Kinetic has mining processing, transportation and storage capabilities and it is aiming to become a leading private-sector integrated coal provider in China.