Real Gold prices IPO at top of range

Real Gold Mining, a gold miner based in Inner Mongolia, has priced its initial public offering at the top of the indicated range at HK$6.25 a share, raising HK$1.03 billion ($132 million) before its Hong Kong listing on February 23. This is the first IPO of size in Hong Kong since Renhe Holdings completed its listing in October last year.

Gold specialist and resources funds were present in the institutional order book, and there was a significant level of demand from North America - both from the US and Canada. A Chinese strategic investor also came on board.

Retail investors were extremely keen on the stock and the retail portion of the offer was 68 times covered, representing approximately HK$7 billion of total demand. This resulted in a clawback which increased the retail tranche to 40% of the base deal from the original 10%. Gold as a commodity has proven popular with retail investors in recent months with exchange-traded funds focusing on the metal doing particularly well. Retail investors saw Real Gold as another way of participating in the gold story.

In general, investors were taking advantage of the recent success of gold in a time of financial turmoil. The precious metal is currently trading at about $940 an ounce, from its low of $710 in mid-November.

Furthermore, Real Gold's main comparable, Zijin Mining Group, a China-based gold mining firm listed in Hong Kong, gained 3.7% over the course of last week. Zhaojin Mining Industry Company added 8.2% in the same period.

The low price of the Real Gold offering is another factor explaining its success. The deal went out with a valuation range between seven and 10 times its projected 2009 earnings; and although the final price puts it at the full 10 times, this is still much cheaper than Zijin which traded at around 16.5 times when Real Gold launched its IPO and is currently at around 18.5 times.

Asked whether the success of Real Gold is likely to encourage a string of other IPOs or whether it may have been a one-off, one source close to the deal was unsure: "Anything gold-related would be fine. But you still need to have an absolutely positive story in this environment."
 
The deal consisted of 165 million shares, or 25% of the company, which were offered at a range between HK$4.35 and HK$6.25. Primary shares constituted 63.2% of the offering, while the remaining 36.8% were secondary shares sold by the controlling shareholder. Citi and Macquarie arranged the IPO.

The company will use the proceeds to fund the acquisition of gold resources in areas such as Inner Mongolia and Xinjiang; expand its exploration activities; and to pay for development and processing plants at Nantaizi and Luotuochang.

The shares will start trading on the Hong Kong main board on February 23, when investors will be hoping that Real Gold lives up to its name.