MMG plans rights issue for debt repayment

The mining company is seeking $520 million from existing shareholders before a chunky portion of its debt matures in June next year.
MMG's Las Bambas copper project in Cotabambas, Peru
MMG's Las Bambas copper project in Cotabambas, Peru

Sino-Australian mining company MMG is tapping shareholders for cash with a HK$4 billion ($520 million) rights issue to meet short-term debt obligations while it waits for its biggest acquisition to deliver profits.

Funds raised will go to help the miner, which reported losses of $1.1 billion in the first half of this financial year, meet some $824.6 million of debt due in June next year. MMG needs cash in the short term as its big-money investment in Peru's Las Bambas copper mine is only beginning to generate returns.

MMG, the Hong Kong-listed subsidiary of state-owned miner China Minmetals Corporation, said on Wednesday it would issue between between 2.64 billion and 2.69 billion rights shares at HK$1.5 each. Shareholders will be eligible for one share for every two they own, implying a 33% dilution for those who choose not to subscribe.

The offer price represents a 26.8% discount to MMG’s Tuesday close of HK$2.05 and a 19.6% to the theoretical ex-rights price of HK$1.87.

Year-to-date MMG shares have risen 39% and they are now trading at the highest level this year. 

Melbourne-headquartered MMG is also listed on the Australian Securities Exchange in the form of Chess Depository Instruments (CDI). For every twos CDIs they own, holders will be eligible to subscribe to a new CDI, which is equivalent to 10 MMG shares, at A$2.541 each.

China Minmetals, which owns 73.69% of MMG, has agreed to subscribe to half the rights shares it is eligible for.

The transaction is the second largest rights offering in Asia ex-Japan this year behind China Resources Beer’s $1.2 billion deal announced in July.

Debt repayment

MMG’s rights issue comes as it prepares for $842.6 million of short term debt, comprising $825.7 million in bank borrowings and $16.9 million in convertible redeemable preference shares, to mature in June next year. 

As of the end of June, MMG has cash and cash equivalents of $215.9 million. Since its cash and proceeds from the rights issue will not be sufficient for the repayment, it would need to find a further $100 million to fully repay the debt.

The actual amount might be higher since all of the borrowings are denominated in US and Hong Kong dollars. Such debt is expected to become more costly in the future as the US enters into a rate hike cycle.

A source familiar with the situation said MMG is expected to record positive cash flows for the 2017 financial year, since it had started commercial production at the Las Bambas project in July.

MMG bought Las Bambas, its biggest operation, from Glencore Xstrata for $5.85 billion in 2014. Las Bambas, located in southern Peru, is one of the world’s largest copper mines and has an estimated copper ore reserve of 6.9 million tons and copper mineral resources of 10.5 million tonnes.

MMG will need to repay another $163.5 million of debt by the end of June 2018, while a much larger portion of the borrowings will have to be repaid within five years. It has $4.2 billion of debt due in 2021 and another $5.3 billion of long-term debt further down the road.

Under the deal timetable, shareholders will need to own MMG shares by the end of November 11 to be eligible for the rights issue. Subscription for rights shares end on December 7 and they become tradable on December 16.

Macquarie is the underwriter of the rights issue and Fosun Hani Securities is a sub-underwriter.

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