Minmetals completes convertible as investors bet on future growth

The deal accounts for one-fifth of the total market cap and prices with a conversion premium of 30%.

Minmetals Resources, which produces and trades aluminium and alumina as well as other non-ferrous metals, has raised HK$750 million ($96 million) from the sale of convertible bonds that will be used partly to fund future acquisitions.

While quite small in absolute terms, the deal accounted for a fifth of the total market capitalisation, which made it quite a chunky trade for the market to absorb. There is also a greenshoe option that could boost the size by another HK$250 million and bring it up to $128 million. However, thanks to reasonable pricing the sale was completed without any further ado by sole bookrunner JPMorgan, although both the yield and the conversion premium were fixed at the wide end of their respective marketing ranges.

According to market sources, the offer saw “very good demand” with 20 to 25 investors participating in the issue and the bonds traded up to about 100.2% to 100.5% in the aftermarket. Minmetals' share price was suspended on Friday while waiting for the stock exchange to clear the announcement.

One observer notes that the key attraction of the company lies in the fact that it is expected to continue growing as more assets are injected into it from its parent. The share price has also been moving up strongly together with China Aluminium Corp in the past few months and as investors sentiment remains positive on aluminium and alumina, further gains can be expected, analysts say.

“The stock is under-researched and also under-held by investors and the bond would have been a good opportunity to buy in if you like the sector,” says one observer not connected to the deal. Like other metals-related Mainland companies, Minmetals is also seen as a play on China's economic growth and continuing strong demand for commodities, he adds.

The zero-coupon bonds were price at par and have a five-year maturity but can be put back to the issuer after three years for a yield of 4.875%. The bonds were offered to investors in a range starting from 4.625%.

The conversion premium was fixed at 30% over Thursday’s (October 19) closing price of HK$2.25, which compared with a 30%-32% marketing range. This gives a conversion price of HK$2.925.

With no outstanding bonds, the credit spread was assumed at 200 basis points over Hibor. JPMorgan provided a modest amount of credit bid at that level and together with a significant marketing effort of the client’s equity story, this proved enough to entice the buyers.

The company will compensate investors for any dividend payouts in the future and the stock borrow cost was assumed at 25% since there is no lending available.

The bond floor was fixed at 95.3% and the implied volatility at 24.5%. This compares with a 100-day volatility of 39%, although this is a fairly academic measure since the absence of stock lending means investors cannot capture the movements in volatility. There is an issuer call after three years, subject to a 130% hurdle.

Minmetals' share price is up 20% so far this year, but has dropped 27.4% from its 2006 high of HK$3.10 on March 28.

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