MMC and Winsway IPOs raise a combined $1.1 billion

Mongolian Mining prices its offering at the mid-point for a total deal size of $650 million, after Winsway raised $472 million from its Hong Kong IPO at the end of last week.

Mongolian Mining Corp has raised HK$5.05 billion ($650 million) after pricing its Hong Kong initial public offering at the mid-point of the range and will become the first Mongolian-owned company to trade on the Hong Kong stock exchange when it debuts on October 13.

It is also the largest initial public offering in Hong Kong since Agricultural Bank of China’s record-breaking dual-listing in July, although that won’t last long since AIA Group kicked off the institutional marketing for its IPO yesterday, which is targeting as much as $14.9 billion from the base deal alone (see separate story on our website today).

While MMC was a bit slower than some other deals to gain momentum, investors did warm to the coal miner after meeting with the management and getting a better grasp of the company and its expansion plans. In the end, more than 100 institutional investors bought into the transaction.

Two hurdles that the management had to overcome were the poor performance of SouthGobi Energy Resources since its listing in Hong Kong in January and the fact that Winsway Coking Coal was in the market at the virtually the same time, arguing that MMC, contrary to the company’s own claims, will continue to need its services for at least part of the coal it is producing for some time yet.

The first concern was allayed quickly as institutional investors recognised the fact that SouthGobi, a Canadian company with coal mining operations in Mongolia, is still at the developing stage, making the execution of its production plans less certain. MMC also has much firmer feasibility studies to back up its expansion. That said, many retail investors have lost money on SouthGobi, which is currently trading 40% below its listing price after struggling to meet the projections it laid out at the time of the Hong Kong share offer.

Winsway is a logistics provider focusing on the coking coal industry in Mongolia. It provides transportation of coal by rail and truck to the buyers (steel mills in China), helps facilitate the border crossing into China and provides washing and blending services. It is closely linked to MMC since the latter has, until now, been selling a large portion of its coal through Winsway as it does not currently have its own washing facilities. This is about to change, however, as MMC is in the process of constructing a washing plant, which is scheduled to come on stream by March next year and, during the early part of their respective roadshows, the two companies were facing off in a verbal battle about how this will impact their respective businesses. Investors tried to take advantage of this by playing them against each other to achieve a more attractive price, but in the end, it seems the questions posed in both directions may actually have made investors more comfortable to invest.

Investors also seem to have come to the conclusion that both businesses have a future and will continue to benefit from the growing demand for steel -- and hence coal -- in China, as Winsway too attracted decent demand. The latter fixed the price of its IPO at the end of last week, raising a total of HK$3.66 billion ($472 million). According to sources, the demand from retail and private banking investors was particularly strong and the Hong Kong public offer was just over 40 times covered, resulting in a partial clawback that increased the size of the retail tranche to 30% from 10% originally.

The fact that Winsway is owned by a Chinese entrepreneur may have made retail and high-net-worth investors more comfortable to invest, and the support from high-profile pre-IPO investors like Hopu, a China-focused private equity fund run by former Goldman Sachs investment bankers Fang Fenglei and Richard Ong, and China Minmetals, a state-owned Chinese trader and producer of metals and minerals, likely also played a role. Winsway also came at a cheaper valuation than MMC, which obviously didn’t hurt.

MMC is controlled by the MCS Group, a Mongolian conglomerate that is the largest tax payer in the country and a market leader in numerous businesses.

MMC’s retail tranche was about 10 times covered, according to sources, which means there was no clawback and 90% of the deal was allocated to institutional investors. The majority of the demand came from long-only funds, but there was also good interest from private banks, and hedge funds, both short-term trading-type hedge funds and more long-term buyers. Geographically, most of the demand was generated out of Asia and the deal was already covered once the roadshow reached Europe, but according to sources, there was also strong demand out of Europe. The institutional tranche was five to eight times covered.

The coal miner, which is planning to ramp-up of its production capacity to 15 million tonnes by 2015 from 3.8 million tonnes this year, sold 719.4 million shares, of which 83% were new. The base deal accounted for 20% of the enlarged share capital, but there is also a 15% greenshoe which could boost the total proceeds to as much as $748 million.

The price was fixed at HK$7.02 after the shares were marketed in a range between HK$6.48 and HK$7.56. The entire price range was lifted by about 3% just before the start of the Hong Kong public offering in response to the good demand and to allow the company to reach a particular fundraising target even if the greenshoe isn’t exercised. The final price values the company at 12.6 times its projected earnings for 2011, which compares with an average price-to-earnings multiple of 12.9 for the Chinese coal miners.

The deal was arranged by Citi and J.P. Morgan.

Winsway sold 25% of its share capital in the form of 990 million new shares. The deal also features a 15% greenshoe that is made up entirely of secondary paper and could boost the total deal size to $542 million if fully exercised. The price was fixed at HK$3.70 after being offered in a range between HK$3.25 and HK$4.50. The final price equals a 2011 P/E ratio of 9.1 times.

Winsway is scheduled to start trading a couple of days earlier than MMC, on October 11. Deutsche Bank, Goldman Sachs and Bank of America Merrill Lynch were joint bookrunners.

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