Sino Gold prices HK share offer at zero discount

The stock market correction and a high absolute price of HK$42.50 per share lead to muted demand from retail investors.
Sino Gold Mining has fixed the price of its follow-on offering in Hong Kong at a zero percent discount to its Australia-listed stock for a total deal size of HK$894.1 million ($115 million), sources said yesterday.

As indicated by the tight pricing, demand for what will be the only pure gold miner listed on the Hong Kong exchange was solid with very little price sensitivity in the book. However, the amount of orders received from retail investors wasnÆt on the same scale as for a typical Hong Kong initial public offering and no clawback was triggered.

Technically, the Morgan Stanley-led deal wasnÆt an IPO since the stock is already listed in Australia, but it did have many of the characteristics of one and will result in the company starting to trade in Hong Kong for the first time on March 16. Sino Gold will be the first Australian company with a secondary listing in Hong Kong and hopes that this will help reduce the valuation gap to other Mainland gold miners listed in this market.

The New South Wales-based miner has all its assets and operations in China and a 10-year track record of gold exploration in the country, which is the fourth largest gold producer in the world. South African mining giant Gold Fields took a 17.2% strategic stake in the company in November and will be a partner in the development of any large future oil finds by Sino Gold in China.

A key reason for lower-than-usual retail demand, according to one source, was the sharp sell-off in global equity markets during the roadshow, including a 777-point drop in the Hang Seng Index on the first day of the retail offering, which caused some nervousness about the near-term direction of the market.

Some retail investors were also said to have baulked at the high absolute price of the offering, which required them to pay HK$11,000 to subscribe for one board lot of 200 shares. Typically they have to come up with less than half that for board lots of 1,000 or even 2,000 shares and the idea of having to ôput up more money for less sharesö wasnÆt that popular with everyone, the source said.

In the end, the 10% retail tranche was about 5.6 times subscribed while the institutional portion of the deal was more than three times covered. Given that the company has a large shareholder base in Australia already and the bookrunner felt the deal was too small to offer it to US investors as well, the marketing was focused on Asia and Europe and people familiar with the roadshow said the conversion ratio from the one-on-one meetings in both these areas was high.

About 80% of the demand came from Asia with the remainder from European and off-shore US accounts. The book was said to include a good mixture of long-only funds, hedge funds and high net-worth individuals.

The deal comprised 21 million shares (13.1% of the existing share capital), which will be fully fungible with its Australia-listed shares. Of the total, 90% were new shares, while the remainder was sold by two of the companyÆs directors and the International Finance Corporation. There is a 15% greenshoe that could bring the Hong Kong freefloat to 15% and the total deal size to $132 million.

Since the offering was to be priced in relation to the companyÆs Australia-listed shares there was no indicative price range. However, the Hong Kong stock exchange requires there to be a maximum price û the price retail investors have to pay when they subscribe for shares - and this was set at HK$55, or 20% above the volume weighted average price in Australia for the five trading days to March 1. The retail portion of the offering was open between March 5 and 8.

The maximum price was deliberately set at a level that was unlikely to be reached so that the company wouldnÆt lose out if the share price was to soar during the road show. The expectation in the market was always that the offering would price between a zero and 10% discount to the existing shares, as is common practice for follow-on offerings through American or Global Depositary Receipts.

The final price was set at HK$42.50, which was equivalent to yesterdayÆs (March 8) closing price of A$7.00 per share. The total proceeds ended up slightly below the hoped for $120 million to $130 million, however, after the underlying shares in Sydney fell 2.9% from A$7.21 at the start of the roadshow last Thursday to yesterdayÆs close.

The decline has come as the spot gold price has fallen 4.5% from an eight-month high of $686.55 on February 27. Sino GoldÆs share price tends to follow the direction of gold quite closely given that it doesnÆt mine any other metals, and this means the stock can be quite volatile. However, it has risen more than 90% since the beginning of October last year and with the US dollar on the decline and a recent rebound in oil prices sparking renewed fears of inflation, most analysts are still positive on the gold price long-term.

Based on yesterdayÆs closing price, Sino Gold trades at about 17.8 times 2008 earnings, compared with 20.5 times for Zijin Mining and 22.6 times for Zhaojin Mining. Both Zijin and Zhaojin are also involved in the mining of other metals, including copper. The third gold play in Hong Kong, Lingbao Gold, is more of a processor with a smaller part of its revenues coming from actual mining and considered less relevant as a comparable.

The key growth driver going forward will be the start of commercial operations at the companyÆs Jinfeng mine in Guizhou province towards the end of March. The mine, which is 82% owned by Sino Gold and 18% by a local partner, will be the second largest gold mine in China with an annual production capacity of 180,000 ounces and estimated resources of 4 million ounces.

It is also currently doing exploration work at its White Mountain mine in the Jilin province, where it has found an initial gold resource of 846,000 ounces. Sino Gold owns 95% of this mine and currently expects to be able to bring it into production towards the end of 2008.

Aside from these two projects, the company has 9 other mines through joint ventures in which they hold between 60% and 95%.

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