China Sci-Tech raises $600 million from placement

Hong Kong-listed China Sci-Tech Holdings, an investment company recently turned copper miner, on Friday completed a HK$4.68 billion ($600 million) placement of new shares that increased its market capitalisation by about 3.5 times.

The money will be used to repay the short-term bridge loans taken to pay for the acquisition of two copper projects in Peru and Australia, which have been completed over the past month, and to fund the capital costs to develop one of the projects.

The large size of the fixed-price deal -- it also accounted for more than 280 days' worth of trading volume based on the average daily turnover in the past 30 days -- and the fact that the copper projects aren't yet operational obviously required a sizeable discount, especially in the current market environment, which remains quite shaky and has seen investors become increasingly choosy over the past couple of months.

Prices of base metals, including copper, zinc, aluminium and nickel have also dropped by 20% to 30% from their highs two months ago amid fears of a sharp slowdown in the global economy. According to media reports, the concerns have led to projects being put on hold, financing being squeezed and inventories not being replenished.

Indeed, the placement price was set at HK$0.20 per share, which represented a discount of 57.9% versus the midday closing price on Friday. This was also a 46.6% discount versus the last trading price on Tuesday last week, before the company announced the placement price and the fact that it had received commitments from a group of cornerstone and other investors to buy up to $570 million worth of the placement shares.

The Hong Kong market was closed for a public holiday on Wednesday and when the shares resumed trading on Thursday they gained 8% to HK$0.405 as investors responded to the strong support from the cornerstone investors. It then shot up another 17.3% in the morning session Friday before the shares were suspended for the launch of the placement. Both days saw heavy trading volumes of 220 million to 230 million shares, compared with the usual volume of 700,000 to 800,000 shares. Buying on the second day, in particular, was surprising since institutional investors would have a chance to buy the shares through the placement at HK$0.20, making a market price of more than HK$0.40 seem pretty unattractive. Or perhaps investors didn't believe there would be many shares left over for investors outside the cornerstone group.

In any case, the jump in the share price offered a decisive nod of approval for the company's change of business and suggests people are expecting the share price to continue to head higher.

The placement too was well received and when the order books closed after 3.5 hours, it had attracted close to 50 investors. A source said the deal was well enough covered to allow for the $370 million cornerstone tranche to be significantly scaled back. As of last night, there was no information about how much of the deal was sold through the Friday placement, but one source said it was enough to create "decent" liquidity in the stock.

Aside from the $370 million that was committed by the three cornerstone investors -- CCB International Asset Management, Chow Tai Fook and an investment company owned by the chairman and founder of Hong Kong-listed Yugang International and CC Land -- China Sci-Tech also reached an agreement to sell $100 million worth of shares to its chairman, Chiu Tao. As per the original agreement, the portion sold to Tao wasn't scaled back.

In addition, co-manager Kingston Securities agreed to fully underwrite $100 million worth of shares in case there weren't enough interested buyers.

"The backstop of $570 million gave people confidence that the deal would get done and the price was attractive enough to cover the medium-term risks and uncertainties related to the mining business," the source said with regard to the interest in the placement.

The buyers comprised both long-only funds, including some mining specialists, and hedge funds. Most of the demand came from Asia, supported by some interest from Europe and the US.

The deal was structured as two separate placements -- a $480 million deal related to the financing of the Peruvian assets and a $120 million deal related to the Australian assets. BOC International acted as a joint bookrunner for the larger of the two, while Deutsche Bank was a joint bookrunner for the $120 million portion. Morgan Stanley was involved as a bookrunner and global coordinator on both portions.

In practice, however, the two deals had the same terms and were offered to investors as one transaction. In all, the company sold 23.4 billion new shares, equal to 725% of the company's existing share capital and 87.9% of the enlarged share capital. There was an option to upsize by up to $100 million, but it wasn't exercised. As a result of the deal, the company's market capitalisation increased from $197 million to at least $685 million, based on the placement price.

Following its recent acquisitions, China Chi-Tech owns 100% of the Lady Annie project, a copper mine with processing facilities in Queensland, Australia, which is scheduled to restart operations by the end of this year. It also owns 70% of the Marcona copper project in coastal southern Peru through a joint venture with LS-Nikko Copper and Korean Resources Company. The latter has a resource base of more than 3 million tonnes of contained copper and reserves of more than 1 million tonne of contained copper and based on a completed feasibility study it is expected to produce 110,000 tonnes of copper cathodes and copper contained in concentrates per year starting from 2010.

The Lady Annie project has a capacity to produce some 30,000 tonnes of copper cathodes per year. The capital cost to restart production is estimated at $10 million to $20 million and cash operating costs are forecast to be around $1.20 per pound (lb) of copper. Reserves are sufficient for around five years of production and existing resources contain sufficient copper for several more years.

The Marcona project in Peru has an estimated capital cost to first production of $745 million, while cash operating costs are estimated at an average of $0.90/lb. The project has upside for further reserves in and around the existing ore-bodies (known as Mina Justa) and thus potential for expansion and a longer life than the approximate 10 years covered by existing reserves. The Peruvian government has given the Mina Justa project "National Interest" status.

To reflect its move into copper mining, China Sci-Tech is in the process of changing its name to CST Mining Group. Aside from the copper business, the company also owns a 9.9% stake in G-Resources, another Hong Kong-listed company which significantly changed its business last year. Essentially a shell company involved in trading of electronic goods and the provision of financial information through the internet and mobile phones, G-Resources acquired a greenfield gold and silver mining project in Indonesia. The asset was actually acquired by China Sci-Tech and then transferred to G-Resources through a series of options agreements. G-Resources and China Sci-Tech are also linked through overlaps between parts of their senior management.