In terms of new Hong Kong listings, 2010 will end on much the same note as it opened – with an international resources company starting to trade here. In January, Russian aluminium giant UC Rusal became the first non-Asian company to go public in Hong Kong and on Wednesday it will be followed by Brazil’s Vale, the largest iron ore producer and second largest diversified mining company in the world. In between the two, only one other non-Asian company has listed in Hong Kong – French cosmetics and skincare company L’Occitane, making this a trend still very much in its infancy.
A key difference between Vale and Rusal/L’Occitane is that the former will list through introduction, meaning it will not sell any new shares. It will also be the first company to list through Hong Kong depositary receipts (HDRs), although that in itself will not make any difference either to the company or to investors. The company, which also produces nickel, manganese ore, ferroalloys, copper, coal, fertiliser nutrients, cobalt, platinum metals and other products, will have the same disclosure requirements as it would if it had it listed its common shares and the HDR holders will receive dividends and get to vote on corporate actions same as the company’s other shareholders. What the HDRs do offer is the added convenience of being able to buy a Brazilian company through a Hong Kong dollar-denominated instrument from the same account as investors buy any other Hong Kong-listed shares.
The key reasons for Vale to list in Hong Kong are to raise its profile in Asia and to broaden its shareholder base, chief financial officer Guilherme Cavalcanti said at a press conference in Hong Kong yesterday. By listing in the Asian time zone, Vale’s shares will also be available for trading almost around the clock, or 18.5-19.5 hours depending on whether the US is on daylight savings time or not. In addition to its primary listing in Sao Paolo, the company can also be traded in the form of American depositary shares on the New York Stock Exchange and on NYSE Euronext in Paris.
And, especially in New York, this is a highly liquid stock. In fact, it is the most traded ADR on the NYSE with a daily turnover of approximately $800 million. With a market capitalisation of $175.8 billion as of last Friday, it is similar in size to HSBC and will be one of the largest companies to trade on the Hong Kong stock exchange. Of course, size by itself doesn’t automatically translate into liquid trading and, given that the company is issuing no new shares, the trading volume in Hong Kong is expected to be quite modest at the beginning.
To help support the trading and provide liquidity, Vale’s listing sponsor in Hong Kong, J.P. Morgan, will act as a bridging dealer for the first two months, ensuring that there is enough stock to buy in Hong Kong to meet the demand. It will do that by buying Vale ADRs in New York and making them available to investors in Hong Kong. This will also help stabilise Vale’s share price between the two markets.
There will be a small pool of HDRs available when Vale starts trading on Wednesday, although since the settlement is on a T+2 basis, this is more for convenience than necessity. The number of HDRs available on the first day will be announced on Tuesday, at which time the company will also reveal whether any existing shareholders have chosen to transfer their Vale holdings to the Hong Kong exchange. At yesterday’s press conference, J.P. Morgan’s David Lau, said a maximum of 259.2 million of Vale’s common shares and 393.5 million of its class-A preferred shares have been approved for trading in Hong Kong to start with, accounting for 7.2% and 5.5% of the outstanding share capital respectively. These portions can be increased in line with demand.
Most of the class-A preferred shares, which have restricted voting rights on certain matters, but on the other hand pay a minimum preferred dividend every year, are primarily held by the government and aren’t particularly heavily traded. Each HDR will account for either one common share or one class A preferred share.
The company appears confident that the trading activity in its HDRs backed by common shares will increase gradually, however. Sources say the company has met with a lot of interest from Asian investors during a six-day roadshow to Hong Kong, Singapore and Tokyo over the past week, and Cavalcanti stressed that Vale’s businesses already have large exposure to Asia and China, which should attract investors, including the Hong Kong retail public.
The company’s investor relations director, Roberto Castello Branco, added that the company’s commitment to Asia is for the long term. “Our links to Asia are strong and we are already known here so we believe that trading volumes [in our HDRs] will gradually grow over time. We don’t judge the success by how much volume there is in six months. We are patient,” Catello Branco said.
In 2009, some 57% of its revenues came from Asia, including 37.6% from China, which is its single largest market. The company is also a large buyer of machinery, mining and power generation equipment, and ships from China, and it has made substantial investments in China, setting up several joint ventures with mainland partners focusing on coal, iron ore and nickel.
It is also planning to continue to invest in Asia, although the disclosed numbers aren’t broken down by region. In 2011 it plans capital expenditures of $24 billion, of which $17.5 billion will be used to finance new projects, while $4.5 billion will go towards maintenance of existing operations and $2 billion towards research and development. This is a significant increase from about $12.9 billion this year.
Vale has 18 large projects coming on stream between 2010 and 2012 adding to the more than 60 mining sites and projects that it operated around the world as of June this year. About 44% of those sites and projects were iron ore mines.
Cavalcanti also stressed the fact that the company has the largest as well as the best quality iron ore reserves among the world’s mining companies, and the largest nickel reserves, as a drew for investors. On top of that, Vale has provide shareholder returns of 29% in the past five years.
One way to kick-start the accumulation of investors trading its HDRs in Hong Kong would be to sell new HDRs though an initial offering, but because the company isn’t in the need of money – it distributed about $2 billion of dividends early this year and has spent money buying back its own shares this year -- it will not do so in the near-term. “We have no plans to issue new shares at the moment, but it is always possible in the future,” Cavalcanti said.
