Real Gold IPO to raise up to $132 million

The Inner Mongolian gold mining company is set to be the first Hong Kong listing of size since October last year.

Real Gold Mining, a gold mining company based in Inner Mongolia, intends to raise between HK$717 million and HK$1.03 billion ($92 million and $132 million) via an initial public offering that will commence today. If successful, this will be the first IPO of size to happen in Hong Kong since October 2008.

The price range has been set at HK$4.35 to HK$6.25 a share. The offering represents 25% of the company in the form of 165 million shares, of which 63.2% are primary shares and the remaining 36.8% are secondary. A 15% greenshoe could add another 24 million shares into the deal, which could bump the total proceeds to $152 million.

The offering is comprised of a 90% tranche for institutional investors while the remaining 10% will be allocated to Hong Kong's retail investors.

Secondary shares are on offer because the controlling shareholder entered into an exchangeable bond with two private equity investors. Under the terms of that bond, the shareholder must convert 50% of the bond at the time of IPO and repay the two investors. The deal has been structured so that the secondary shares equal half the value of the bond plus the interest. The controlling shareholder is not selling anymore than he needs to and has agreed to a three-year lock up.

The company has a 97.14% shareholding in three gold mines located in Inner Mongolia's Chifeng Municipality. As at the end of November last year, the mines had reserves of approximately  2.9 million ozs of gold. Two of the mines, on the Shirengou-Nantaizi Mining Complex, have enough gold to last for 14 years and two months, based on the company's anticipated production level in 2011; while the reserves in the Luotuochang will last for another 24 years and nine months.

The new funds will also allow the company to purchase more gold resources in Inner Mongolia and Xinjiang, expand the company's exploration activities, as well as pay for expenditure on mine development and processing plants in the Nantaizi and Luotuochang mines.

The price range values Real Gold at seven to 10 times 2009 predicted earnings. This puts Real Gold at a serious discount to the company that most investors are comparing it to, Zijin Mining Group, another Chinese company that primarily mines gold. Zijin Mining iscurrently valued at 16.5 times 2009 expected earnings, which means that Real Gold is coming at between a 57% and 39% discount. A discount could be necessary considering the timetable: pricing is expected to happen on February 13, with a debut scheduled for February 23. And with volatility still high, investors will be wary of exposure to a market that could veer wildly up or down in the period between pricing and the start of trading.

But Zijin's recent performance could be heartening: on January 30, the stock was up 7.75%. Last night, the stock closed at HK$4.14 a share, significantly below its 52-week high of HK$10.66 last February, but the price has picked up somewhat from its low of HK$1.42 at the end of October. The gradual rise has been attributed to gold, as a commodity, coming into its element as a safe haven investment in a time of crisis. The increase in the price of gold itself, which currently stands at about $900 an ounce, is a key selling point that the IPO backers will be highlighting to potential investors.

What makes Real Gold noteworthy is that it is entering uncharted waters. Ever since markets went haywire in September, there has only been one IPO of size, the listing of Chinese underground mall developer Renhe, which failed to attract interest from international investors. What little IPO activity there has been this year has been for small amounts. In January, Strong Pharmaceutical Holdings pulled off a $32 million listing and China Singyes Solar Technologies Holdings managed to raise $8 million.

Real Gold's joint bookrunners Citi and Macquarie will be hoping that if this listing works out, it could help to unblock a pipeline of companies waiting to go to market.

¬ Haymarket Media Limited. All rights reserved.
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