Iron ore miner IRC seeks $512 million from Hong Kong listing

IRC Limited yesterday joined the long list of companies hoping to list on the Hong Kong stock exchange in the next few weeks as it kicked off formal marketing to institutional investors. The company focuses on iron ore mining in the far east of Russia, near the Chinese border, and is being spun off from Petropavlovsk, which is already listed on the London Stock Exchange.

The separate listing is partly a way to differentiate the iron mining unit from its gold mining parent, previously known as Peter Hambro Mining, and to achieve a better valuation for these assets. Also, the gold mining operations are cashflow positive and the company doesn’t want this to be used for the funding of the iron ore projects.

Petropavlovsk, which also operates in Russia, will still own more than 50% of the company post listing.

IRC is seeking to raise between HK$2.92 billion and HK$3.98 billion ($376 million and $512 million) by selling 1.325 billion shares. Some 80.8% of the shares are new, while the remaining 19.2% are secondary shares. The deal could increase to as much as $589 million if the 15% overallotment option is exercised in full.

The shares are offered in a range between HK$2.20 and HK$3 per share.

The company currently has one mine in operation, Kuranakh, which it has developed from a greenfield site and which produces about 900,000 tonnes of iron ore and about 290,000 tonnes of titanium oxide per year. This mine generates steady revenues which will help support the development of its other two mines. The first phase of the K&S mine, which is expected to cost $400 million, is already fully funded through a $60 million pre-IPO investment and a loan that was signed in July, and will see it produce about 3.2 million tonnes or iron ore per year when it comes on stream in 2013.

The fact that it has proven its ability to construct a mine and has solved the challenge of obtaining funding for a second one should be appealing to investors who are generally wary about the execution of grand plans. In addition, IRC has also obtained relatively cheap funding, since the loan, which covers 85% of the construction cost, is provided by a Chinese bank -- Industrial and Commercial Bank of China. The trade off for IRC is that it has committed to use a Chinese contractor for the construction of the K&S mine.

The money raised in the IPO will go towards the funding of the second phase which will see the production capacity at K&S increase to 10 million tonnes per year.

Aside from the cheap funding costs, the company’s other key advantages are the close proximity of its mines to the Chinese border and the existence of railway lines to two border crossings. This means lower transportation costs, particularly versus the iron ore producers in Australia and Brazil, which are currently the biggest suppliers of iron ore to the Chinese steel mills. The company also has a highly experienced management team and a good relationship with the Russian government, which is supportive of its development plans for the Amur and EAO regions where its mines are located.

The pre-IPO investors should also instil some confidence among investors. First there is private equity fund General Enterprise Management Services (International), or Gems, which is run by Simon Murray, a well-known Hong Kong-based businessman with a background with Jardine Matheson, Hutchison Whampoa and Deutsche Bank to name but a few of his career moves. The second investor is CEF, which is a 50-50 joint venture between Cheung Kong (Holdings), the property developer and holding company controlled by Hong Kong tycoon Li Ka-shing, and the Canadian Imperial Bank of Commerce.

In response to a Hong Kong stock exchange dislike for pre-IPO investments that take place at a discounted price very close to the listing, IRC will buy back the shares that Gems and CEF bought earlier and instead the pair will come in as cornerstone investors in the IPO. Their combined investment will be the same $60 million as before, although they will now invest at the same price as everyone else. The cornerstones and the company will all be subject to a six-month lock-up.

The final price is due to be fixed on October 6 and the trading debut is scheduled for October 14.

Bank of America Merrill Lynch is the sole global coordinator and sponsor and also a joint bookrunner together with BOC International and UBS. UK-based financial services company Liberum Capital and Russian investment bank Troika are acting as joint lead managers.