Chinalco Mining’s much-vaunted recent stock market debut failed to live up to expectations and so dampened hopes for a broader recovery in the ailing Hong Kong IPO market. The biggest IPO to come out of Hong Kong this year fell at the first hurdle, losing 11.4% on the first day of trading. The share price closed at HK$1.64, 6.29% below the issue price of HK$1.75.
BNP Paribas and Morgan Stanley were joint global coordinators on the IPO. HSBC, Standard Chartered, CCB International and CISS were bookrunners.
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| Chinalco Mining is the Peruvian copper-mining unit of Chinalco, the state backed aluminium producer in China, and controls the Toromocho project in central Peru, one of the world’s largest pre-production copper mining projects |
Chinalco Mining is the Peruvian copper-mining unit of Chinalco, the state backed aluminium producer in China, and controls the Toromocho project in central Peru, one of the world’s largest pre-production copper mining projects. The company abandoned plans to float last May because of volatility in the market driven by the eurozone debt crisis, the US fiscal cliff and China’s slowing economy. Initial interest in the HK$3.1 billion ($400 million) share offering was encouraging and the issue was more than 25 times oversubscribed. Five cornerstone investors, including Rio Tinto, Chinalco Mining’s Australian partner, took up 62% of the shares between them. Boosted by this initial interest, shares were priced slightly higher than the indicative price range of HK$1.52 to HK$1.91.
While the cornerstone investors are legally bound to retain their shares for at least six months following the IPO, retail investors were turned off by Chinalco Mining’s poor recent financial performance. According to its prospectus, the company posted a $13.2 million loss in the first 12 months of 2012 and a loss of $8.5 million the year before. Chinalco Mining’s copper-mining projects are unlikely to make any profit until 2014, with work scheduled to start in the fourth quarter of this year.
"Retail investors are more interested in tangible profits, while cornerstone investors can see the potential long-term benefits of the Chinalco IPO," says Edward Au, partner, national public offering group, at Deloitte China. "I think retail investors probably rode on the back of the strong uptake from cornerstone investors of Chinalco, and hoped for a first-day gain. When this didn’t happen, it triggered a sell-off and the value dropped. For retail investors, it was more important to reinvest and make some quick money, but Chinalco was not that sort of IPO."
Retail investor sentiment was further undercut by an announcement by the China Iron and Steel Association that profit in China’s main steel mills slumped 98% the day before Chinalco Mining’s offering.
IPOs like that issued by Chinalco are special cases, quite different to other companies precisely because resource companies often need to list during the development and exploration phase of their business for funding. "Long-term investors understand this process and realize that it might be a while before they see a return on their investment. But a lot of retail investors in Hong Kong are not in it for the long term – they want quick returns," says another consultant based in China.
Following the takeover of the London Metal Exchange by the Hong Kong Exchange holding company, analysts expect that there will be more commodity- and resource-oriented companies listing in Hong Kong. As a result, retail investors will become a lot more educated about the dynamics of commodity companies.
Based on Chinalco’s prospectus, the company outlook over the next year looks positive. "This is what drew cornerstone investors in. But there is some speculation whether they will meet their deadline for copper production in the fourth quarter of this year," says the consultant.
Chinalco completed the IPO at the end of January in order to raise much-needed funding and to avoid the hidden costs of listing later.
"If you look more closely at Chinalco’s prospectus, you can see that the company will need to make around $362 million in repayments over the next 12 months," says Au. "But the company is shy of current assets by about $120 million. Technically, the company is under financial stress." The prospectus clearly states that 30% of the money raised will be used to pay back some of the company’s debt.
Although cornerstone investors have a legally binding agreement with Chinalco to buy 60% of all copper concentrate production, Chinalco needs to be a listed company for cornerstone investors to stick to their commitment. Based on the disclosure in the prospectus, if the company had not been listed at the time of the first shipment, the cornerstone investors would have the option to renegotiate the terms, or even terminate their agreements.
And listing later could have proved tricky: "If Chinalco listed later, its prospectus would have come later and would have had to include a lot more information for the upcoming financial year which would have been expensive and time consuming," says Au.
The Hong Kong equity market had a dire 2012, sliding from its top position in the IPO league tables to fourth place behind New York, Nasdaq and Tokyo. But despite the recent setback, between 70 and 80 companies will list in Hong Kong in 2013, raising between HK$100 billion and HK$150 billion, indicating at the top of this range an increase of 67% on 2012 volumes, according to Deloitte.