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It did take a while, but yesterday copper miner China Nonferrous Mining Corp (CNMC) finally priced its initial public offering slightly above the bottom of the range to raise HK$1.91 billion ($247 million). The pricing came as the Hong Kong stock market eked out a modest gain for the first time in four days, but neither of these two developments changes the fact that the appetite for IPOs is close to rock bottom.
Indeed, five weeks after it started pre-marketing, Chinalco Mining yesterday decided to push back its Hong Kong IPO, probably until after summer, due to the weak market conditions. Once it returns, the deal will likely also be significantly smaller than the earlier plans to raise about $1 billion, sources said.
CNMC had delayed the launch of its retail offering for several weeks while trying to drum up additional demand to get the deal across the line and the offering was essentially covered when it finally went ahead last Wednesday. According to sources, the deal didn’t attract much incremental demand during the final three-and-a-half days and even though the bookrunners didn’t scale back the orders much, there wasn’t enough demand to allocate the full greenshoe.
One source said that the greenshoe will account for just under 5% of the base offering, or about one-third of the normal 15%. In addition to reducing the amount of proceeds the company can raise, this means that the bookrunners have less room to stabilise the stock if it falls in the first few days after the debut. But given that most of the shares were placed with cornerstones and anchor investors, perhaps that won’t be an issue. The bigger concern for IPOs that are placed with just a small group of pre-arranged investors — commonly referred to as club deals — is that they will be very illiquid.
CNMC’s institutional order book was said to contain only about 20 names, including three cornerstones and the anchor investors. Most of the investors were corporate or strategic in nature, although one source said there was some minor interest from high-net-worth individuals. The buyers were almost exclusively from China.
Hong Kong retail investors showed little interest in the deal and the 10% retail tranche was only 4.9% covered. This means that 99.5% of the deal was allocated to institutional accounts, while only about 0.5% went to retail.
Retail investors have shunned most of the IPOs in Hong Kong this year, so the fact that they stayed away from this one wasn’t a huge surprise. However, there have been some recent signs that things were about to change. On Huadian Fuxin Energy’s $319 million IPO, which closed a week ago and also relied heavily on cornerstones and anchors, retail investors subscribed to about 94% of the shares set aside for them, committing some $32 million. And on the IPO of restaurant chain Xiao Nan Guo, which closed yesterday, the 10% retail tranche was actually oversubscribed. Admittedly, that deal was a lot smaller at just $66 million and it also came at a fixed price, which meant retail investors knew exactly how much they would be paying, but they still committed at least $7 million to the deal compared to just $1.5 million that they were prepared to invest in CNMC. In that respect the retail interest for CNMC was disappointing.
It wasn’t a surprise though. While CNMC is part of state-owned China Nonferrous Mining Corp Group, all of its operations are in Zambia and it will be the first company to list African mining assets on the Hong Kong stock exchange. That meant investors had to get their head around a number of issues that they aren’t familiar with, including a different type of political and regulatory risk, and given the challenging market environment and the recent drop in commodity prices (including copper), they likely decided they’d rather wait and see what happens to the stock once it is listed.
In the prospectus, CNMC noted that “the newly elected president of Zambia has in the past campaigned to restrict foreign ownership in mines, tighten currency control, limit numbers of foreign workers, and increase tax rates and/or introduce new tax. Although [he] has publically expressed the government’s intention to maintain the long-term political and economic relationship between Zambia and the PRC, and in particular, our investments and operations in Zambia, there is no assurance that the new government will not implement more restrictive policies in the future.”
On the other hand, CNMC is a well-established and profitable business, which should make it a less risky investment than a start-up that still has to begin mining, such as Chinalco Mining.
CNMC produced 39.3 kilotonnes of contained copper in concentrate last year, as well as 150.9 kilotonnes of blister copper, 7 kilotonnes of copper cathode and 328.8 kilotonnes of sulphuric acid. This made it the biggest Chinese enterprise in terms of overseas copper production.
The company sold 25.1% of its enlarged share capital in the form of 870 million new shares. They were marketed at a price between HK$2.10 and HK$2.80 each and the final price was fixed at HK$2.20, which translates into a 2012 price-to-earnings ratio of about 6.2 times based on the joint bookrunner consensus.
The shares were marketed at a 2012 P/E ranging from 5.9 times to 7.9 times.
The IPO price puts it at a discount to Hong Kong-listed Jiangxi Copper, which is viewed as a key comparable and which is currently trading at about 6.9 times. Jiangxi Copper has been somewhat volatile since CNMC started the institutional bookbuilding on May 14 and at one point was down 6.8%. It then recovered to above HK$18 before falling again. Yesterday it closed at HK$16.58, which is less than 1% below where it was when CNMC launched. The Hang Seng Index has fallen 3.8% during the same period and the H-share index has lost 5.9%.
After failing to gain much traction with investors, CNMC postponed the launch of its retail tranche, which was initially planned for May 25. This effectively removed the deadline for the institutional bookbuilding, allowing the company to continue to approach investors. On May 30 the IPO was officially put on hold as the company wanted to give a couple of potentially big Chinese investors more time to look at the transaction. One source said at the time that the deal may be resumed in a few weeks if the bookrunners could secure more orders, although give the tough markets and poor sentiment for IPOs others were sceptical that the deal could be salvaged.
But it did go ahead and the company is now set to start trading in Hong Kong on Friday.
Before the retail subscription opened last Wednesday, a source said that the bookrunners had secured two additional cornerstone investors that would buy a combined $15 million worth of shares. However, that turned out not to be the case and the cornerstone tranche remained unchanged at $70 million, which at the final price accounted for 28.3% of the total deal size. The two additional investors still participated in the deal as anchor investors, although it is not known if still ended up investing $15 million. Many investors prefer to come in as anchors rather than cornerstones since it means they don’t have to commit to a lock-up and their identity isn’t disclosed, giving them more flexibility after the debut. However, for the purpose of getting the deal covered, anchors and cornerstones are equally valuable.
The three cornerstones were Cosco Venus, an investment arm of state-owned China Ocean Shipping Co, which bought approximately $30 million worth of shares; CRCC China-Africa Construction, a subsidiary of Hong Kong-listed China Railway Construction Corp, which invested $10 million; and a Hong Kong-based investment company named Wise Pine Investment that bought another $30 million worth of the shares. The trio will be locked up for six months.
CICC, J.P. Morgan and UBS were joint bookrunners for the IPO.
Chinalco Mining
Meanwhile, Chinalco Mining, which is a unit of state-owned Aluminum Corp of China, is now only expected to raise somewhere between $250 million and $350 million — well below the $1 billion that it had initially hoped for, sources said yesterday.
The company, which owns a copper deposit in Central Peru, has been testing investor interest since late May and although there hasn’t been a formal announcement with regard to the timetable, sources have earlier said that the listing was targeted to take place by the end of this month. However, the challenging market conditions and the fact that the company was running into the end-of-June deadline for when it had to get the deal done without having to update its financials led to the decision to postpone.
The company and the syndicate banks will be monitoring market conditions in the coming months before deciding on a launch, one source said.
BNP Paribas and Morgan Stanley are global coordinators and joint bookrunners for Chinalco Mining’s IPO, as well as joint sponsors together with CICC and Standard Chartered. CCB International and HSBC join the four sponsors as bookrunners.
