Minmetals cuts size of follow-on by almost 40%

The Chinese commodities trader, which is in the process of transforming into a diversified upstream metals group, is able to raise $500 million after relaunching the deal at a 13.4% discount.
<div class="ArticleImageCaption" style="text-align: left;">Minmetals' Beijing HQ</div>
<div class="ArticleImageCaption" style="text-align: left;">Minmetals' Beijing HQ</div>

After almost 24 hours in the market, Hong Kong-listed Minmetals Resources yesterday afternoon relaunched its follow-on offering at a significantly smaller size, in a move that sources said reflected a reduction in investor risk appetite.

The same sources said the deal, which had an initial target of $800 million with an upsize option of $200 million, saw good momentum when it first hit the market after the close of Hong Kong trading on Monday, but ran into a roadblock after Standard & Poor’s announced that it had revised its ratings outlook on the US to negative at around 9pm Hong Kong time. As US equity markets tumbled, investors were no longer that keen to invest in a Chinese commodities trader with ambitions of transforming into a leading, international, diversified upstream base metals group.

The intention all along was to keep the order books open throughout the trading day to give US investors, including a number of mining specialists, maximum time to consider the deal. However, with the Dow Jones index finishing the day 1.1% in the red after being down as much as 2% earlier in the session, Minmetals was unable to find enough momentum to carry the deal.

The stock remained suspended yesterday and at about 3.30pm the bookrunners relaunched the deal at a size of $500 million (HK$3.89 billion) — almost 40% less than the initial base deal — and with a fixed price of HK$5.10 per share. The new price translated into a discount of 13.4% versus the latest market price of HK$5.89, which was one of the widest discounts on an accelerated follow-on transaction so far this year.

It was also notably wider than the 4.9% to 11.7% discount that the company offered on Monday when the deal was marketed with a price range of HK$5.20 to HK$5.60.

The company had initially planned to sell between 1.114 billion and 1.2 billion new shares, but the relaunched deal was cut down to 762.612 million shares, or 25.7% of the existing issued share capital.

Having had almost the whole day to consider the situation, the bookrunners were obviously not going to relaunch the deal without making sure it would work and sources said the restructured offering was about 80% covered when it was announced. And the lower price seemingly whetted the appetite of some investors again, allowing the order books to be fully covered within an hour and “well covered” when they closed after two hours. Investors who had initially committed but stepped away when the markets started to crumble on Monday returned again, and some were also said to have increased their order sizes as the offering price came down.

In all, about 70 investors participated in the transaction, with the top orders coming from long-only investors.

While the timing of the deal was arguably unfortunate, this was a transaction that required a bit of work by investors. As mentioned, the company is in the process of widening its scope of business after acquiring the Australia-based Minerals and Metals Group (MMG) from its parent company last year. The $1.85 billion acquisition essentially constituted a backdoor listing of MMG and added the production of zinc, copper, lead, gold and silver to Minmetals’ existing trading business. The importance of the acquisition was underlined by the fact that MMG chief executive Andrew Michelmore became CEO of Minmetals Resources following the deal.

As a result, yesterday’s follow-on transaction was viewed by some observers as a re-IPO of the enlarged company. Indeed, the banks involved in the follow-on have arranged two non-deal roadshows with the management to explain the company’s new business focus and strategy — one in early December last year and one in late March/early April. That marketing, together with the fact that the fundraising was well-flagged, meant the bookrunners didn’t feel the need to do a fully marketed transaction.

That said, there is a lot of uncertainty surrounding Minmetals at the moment after the company announced earlier this month that it intends to make a C$6.3 billion ($6.5 billion) cash offering for Equinox Minerals, a mining company that is listed in Toronto and Sydney and which has a large-scale copper mine in Zambia and a copper and gold mine in Saudi Arabia that is under development.

However, Equinox has rejected Minmetals’ unsolicited approach, calling its intended takeover offer at C$7 per share inadequate and “clearly optimistic”. The management has also suggested that the offer, which translates into a 23% premium to the last close before the announcement, is primarily designed to thwart Equinox’s own C$4.7 billion bid for Lundin Mining, which was tabled in February.

That last part is hard to argue against since Minmetals has clearly stated that its offer is conditional upon the termination of Equinox’s bid for Lundin Mining. However, to say that this is the primary purpose of the offer, is a bit strong and clearly disregards Minmetals’ new strategy of building a portfolio of upstream mining assets.

The money raised from the follow-on has nothing to do with the Equinox offer, but rather will be used to pay back part of a loan provided by its parent company in connection with the acquisition of MMG, and to fund exploration and development initiatives of MMG’s assets, including the Dugald River zinc project.

However, with the Equinox bid still hanging in the balance, investors don’t know exactly what they are buying — it could be the future owner of copper and gold assets in Zambia and Saudi Arabia, or it could be a company with no such assets. Needless to say, the valuation of a company in that position is not all that straightforward and one could question whether this was indeed the right time to bring the company to market.

Minmetals’ share price fell 8.5% last week amid the uncertainty and dropped another 5.5% on Monday before the stock was suspended following the lunchtime break to launch the follow-on transaction. However, even with that sharp drop, the share price is substantially above the HK$3 dollar level where it traded in August last year before the stock underwent a rerating to take into account its new focus.

Minmetals Resources is a subsidiary of China Minmetals Non-ferrous (CMN), a division of China Minmetals Corporation, which is one of the largest state-owned enterprises in China. Minmetals Resources is 75% owned by its parent, while the balance is held by minority shareholders. It is one of the largest importers and suppliers of alumina in China.

Macquarie and Morgan Stanley acted as global coordinators for the follow-on offering and were also joint bookrunners together with BOC International, Citi, Credit Suisse and Deutsche Bank.

Deutsche Bank is also the lead adviser to Minmetals with regard to the Equinox offer, while Macquarie is joint adviser.

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