Australia-based greenfield coal and iron ore miner Resourcehouse, which has been on the road marketing its $3.3 billion to $3.6 billion initial public offering since May 17, has postponed the launch of the retail tranche for a few days as it “requires additional time for certain commercial arrangement" [sic], the company said in an announcement filed with the Hong Kong stock exchange last night.
The miner, which is seeking to capitalise on the growing demand for resources in China in particular, was initially due to start accepting subscriptions from the retail public today, which would have allowed it to price the deal after the US market closes next Tuesday and list in Hong Kong on June 9.
Since Resourcehouse has made three earlier attempts to list in Hong Kong, but each time failed to launch a roadshow due to difficult market conditions and insufficient demand, the delay immediately raised questions regarding the institutional response to the deal this time around. However, according to sources, it is caused by a change in one of the off-take agreements related to the company’s coal mine, which will require a portion of the prospectus to be revised before launch.
The delay will only be a couple of days with the 10% retail offering now scheduled to open next Monday, they said. The pricing of the deal will take place post the US close next Thursday (June 2) and the trading debut will be moved back one day to June 10. While the company made no mention of the new timetable in last night’s announcement, the fact that the press conference was rescheduled from yesterday to this coming Sunday, does suggest that the launch of the retail tranche is now planned for next Monday (a press briefing it typically held the day before the public offering kicks off).
The sources said that Vitol, an independent energy trading company that had agreed to buy 20 million tonnes of thermal coal per year for 20 years from Resourcehouse once its coal mine comes on stream in 2014, will be replaced by Noble Resource. They provided no further details about the new agreement or why Vitol had pulled out, and it wasn’t immediately clear whether Noble Resource, which is a unit of Hong Kong-based Noble Group, has committed to acquire the same amount of coal. If it has, the change of the off-take agreement should be quite neutral for the IPO.
However, the turbulence surrounding Resourcehouse’s attempts to list in Hong Kong, which dates back two to three years and includes several changes of bookrunners, and the fact that it has chosen to come to market at a time of high volatility and uncertainty in the commodities markets, means it didn’t really need another delay that could cause institutional investors to reassess their potential investments.
That said, the company does look in significantly better shape now than it did when it tried to list in December 2009. It has firmed up the contracts related to the construction of its coal mine and the related infrastructure, signed off-take agreements with two separate buyers for a combined 40 million tonnes of coal per year of that is equal to its full production capacity, and secured a loan from the Export-Import bank of China that will cover 70% of the total project cost for the coal mine. On top of that, the current owner of the mines, Australian entrepreneur Clive Palmer, has agreed to sell up to 49.9% of the company to public investors, compared to no more than 25% a couple of years ago, which means the $8.1 billion coal project will be fully-funded following the IPO, while at the same time, the company’s valuations will be less stretched.
The percentage of the company offered through the IPO has increased from about 40% when the bookrunners were doing investor education in March, and certain oil and gas assets off Papua New Guinea have been removed from the company. Since these assets were still at an early stage and not part of the core metals business analysts attached virtually no value to them, which meant they mainly confused the story. Otherwise, most of the construction and off-take agreements were already in place in March. The company was due to kick off the formal roadshow shortly after the earthquake struck in Japan, but chose not to go ahead when global equity markets took a tumble.
The company hasn’t signed any agreements either for the construction or the debt financing of its $2.7 billion iron ore project, although, according to the current time table, both should happen this year. According to the preliminary prospectus, it doesn’t plan to sign any off-take agreements for this mine, however, as its intention is to sell its iron ore products on the spot market.
What makes Resourcehouse stand out compared to other mining companies in Australia is not its focus on China as a buyer of its products — a lot of companies do that — but the fact that it is developing its mines together with Chinese companies and obtaining the bulk of its funding from a state-owned Chinese bank. Its coal mine will be constructed by Metallurgical Corporation of China (MMC), while a unit of China Railway Group will build a railway for the transporting of the coal away from the mine. It may also sign an agreement with China Communications Construction Corp for the construction of a deep water port facility, it said in the preliminary prospectus.
The second company with which it has signed an off-take agreement is China Power International Holding, which is owned by one of China’s top five state-owned power generating groups.
“One thing that is very clear is that the company has the support of China Inc,” remarked one source. “The assets may be located in Australia, but this is a China story.”
That support comes across for the IPO as well, with MMC and China Railway Group having agreed to participate in the deal as cornerstones with an investment of $200 million each.
And even if the economic growth in China is poised to slow somewhat in the next decade, nobody really doubts that the country will continue to crave large amounts of power and steel to support its continued development. And that should ensure plenty of demand for thermal coal to fuel China’s power plants and iron ore to feed its steel furnaces.
When the company launched the roadshow last Tuesday, some sources said one reason the company decided to go ahead despite the volatility in commodity prices was that the many false starts meant it was difficult to get institutional investors to do any work on the company until they knew it would definitely launch. However, the investor lunch in Hong Kong was attended by some 350 investors, which suggests there is a lot of interest in the company.
That said, a key challenge for Resourcehouse, and Clive Palmer himself, is to convince investors that it will be able to execute its development plan on time — both mines are scheduled to start operations in 2014 — and within budget. Another will be to get Asian investors to look at a company that is primarily valued on a discounted cash flow basis — a valuation metric they are not that familiar with since most companies listed in Hong Kong or Singapore are valued on a price-to-earnings basis.
Resourcehouse is offering approximately 5.7 billion new shares at a price between HK$4.48 and HK$4.93 each, which indicates a deal size ranging from HK$25.6 billion to HK$28.2 billion ($3.3 billion to $3.6 billion). If successful, it will be the largest IPO in Hong Kong so far this year, exceeding the $2 billion listing of Shanghai Pharmaceutical earlier this month. It will also be larger than Prada’s planned IPO of about $2.5 billion that is expected to be launched on June 6.
The base deal will account for about 46.5% of the enlarged share capital, but the deal size could increase to 49.9% if the 15% greenshoe is exercised in full. The rest of the company will remain in the hands of Palmer, who needs to keep his stake above 50% as per Australian regulations stating that mining assets cannot be majority owned by foreign investors.
The price range values Resourcehouse at an average discount of about 36% to 40% versus the pre-money DCF valuation, according to sources. The valuations do vary quite a bit from analyst to analyst, given that there are a lot of assumptions that go into a DCF valuation model, but the bookrunner valuations are said to be based on quite conservative price estimates for coal and iron ore.
Investors will now have to decide whether the discount is big enough to compensate for three years of execution and market risks attached to this deal.
The bookrunners this time around are BOC International, HSBC, Royal Bank of Scotland and UBS. BOCI has been working with the since the middle of last year, when it was mandated together with Credit Suisse and J.P. Morgan to replace Citi, Macquarie and UBS who were on the deal in December 2009. Credit Suisse chose to step down ahead of the investor education in March, while J.P. Morgan has fallen off the ticket in the past couple of months. Since then, HSBC and RBS have also been brought on board, while UBS has returned to the line-up after being off the deal for close to a year.
