China Moly prices $943 million IPO at the top

As the bookrunners had already flagged that there was solid interest by increasing the upper end of the price range by 6.3% three days into the roadshow, it came as no surprise that China Molybdenum’s IPO was priced at top end.

The price was fixed at HK$6.80 for a total deal size of HK$7.3 billion ($943 million), which makes China Moly the third largest Hong Kong IPO so far this year after China Citic Bank and real estate developer Country Garden.

Country Garden raised $1.7 billion, while China Citic Bank could raise as much as $3.7 billion from the H-share portion of its dual-listing. The bank is due to fix the price today (April 20) for a combined A- and H-share IPO of up to $5.4 billion.

The institutional portion of China Moly’s IPO attracted more than 700 individual orders and ended up more than 200 times covered, according to sources. The book included specialist funds looking at the specialty metals sector as well as all the usual China funds and private banking interest, they say.

The institutional subscription ratio is based on the $311.5 million worth of shares that are left for institutional investors after adjusting for the cornerstone tranche and the fact that retail investors will get half the total deal size.

The retail tranche was boosted to 50% from 10% after the Hong Kong public asked for almost 400 times the number of shares originally set side for them, tying up close to HK$294 billion ($37 billion) between them. That would put China Moly on par with Bank of China in terms of retail popularit, but slightly behind Country Garden, which attracted about $42 billion of retail demand.

While metals and mining may seem like the odd one out among traditional retail favourites such as banks and property developers, investors are warming more and more to commodities-related investments, and while it may have a tough name, China Moly’s story was pretty easy to understand, one observer argues.

The company operates one of the largest pure molybdenum mines in the world with molybdenum as well as tungsten reserves. It produces primarily molybdenum which is a specialty metal used to harden steel and which is in huge demand within China’s rapidly growing stainless steel industry. However, part of the IPO proceeds will go towards setting up its own tungsten recovery facilities, allowing this metal to become a key growth driver in coming years – all according to syndicate research.

The bookbuilding also coincided with something of a re-rating of specialty metals stocks, which was partly prompted by higher metals prices, and partly perhaps by China Moly’s pending listing which helped attract focus to the sector. During the roadshow UBS raised its global forecast for molybdenum prices by 13% for 2007 and 10% for 2008 following higher prices in the first quarter – a move which caught a lot of attention since it was one of the bookrunners for the IPO together with Morgan Stanley.

Toronto-listed Blue Pearl Mining, which is the only pure molybdenum player that is publicly listed, has seen its share price gain 33% since the beginning of April and the stock is up a massive 89% since early March. This has lifted its valuation to a 2007 P/E multiple of about 11.5 times from 8.7 times at the start of this month.

One notable exception to this trend was Hong Kong-listed Hunan Nonferrous, which produces tungsten and is considered the closest comparable to China Moly. After the company reported what one observer referred to as “less than stellar earnings” the stock has been on a declining trend, falling 18% from the start of China Moly’s road show a close of HK$4.78 yesterday. As a result HNF’s valuation has dropped from a 2007 P/E of about 17.8 times to 14.6 times.

After raising the upper end of the price range, China Moly was valued at up to 14.8 times its 2007 earnings, and as HNF came down the initial gap between the two tightened from a discount of 22% to a slight premium at the time of pricing. Still, one source close to the offers said once momentum started building in the book, investors stopped focusing on relative valuations.

The company offered 22.7% of its issued share capital, or 1.08 billion new H shares, at a price between HK$5 and HK$6.80 per share. There is a 10% greenshoe which could boost the total takings to $1.04 billion.

Eight cornerstone investors, including Hong Kong tycoons such as Li Ka-shing and Lee Shau Kee and the Government Investment Corporation of Singapore (GIC), bought a combined $160 million worth of stock, or about 17% of the deal before the greenshoe.

China Moly’s shares are due to start trading on April 26.