Valuation, market mood favour Real Gold

PUBLISHED : Tuesday, 10 February, 2009, 12:00am
UPDATED : Tuesday, 10 February, 2009, 12:00am

relatively low valuation and improved market sentiment likely to help gold producer Real Gold Mining to draw investors for its up to HK$1.03 billion Hong Kong initial public offering today, market watchers said.

The listing candidate, which owns three operating gold mines in Inner Mongolia, together with its controlling shareholder, are selling 165 million shares of which 36.8 per cent are old shares for between HK$4.35 and HK$6.25 each. That represents a price-earnings ratio for this year of seven to 10, based on the average of the bookrunners' estimates.The retail portion will open for subscriptions today.

The deal, a major in Hong Kong since October, is being arranged by Citigroup and Macquarie. The benchmark Hang Seng Index has climbed 25 per cent since dropping to a four-year low in October.

'As other Hong Kong-listed mainland gold producers are trading at about 18 times earnings, lower valuation of Real Gold will give the stock upside room after listing,' said Castor Pang Wai-sun, a strategist at Sun Hung Kai Financial.

Another advantage was that it was a pure gold producer with all ores coming from its own mines, Mr Pang said. That would give it a higher margin and it could benefit the most from rising gold prices.

However, the large portion of existing shares in the deal would give investors a bad impression and restrict the stock's potential gains after listing, he added.

The price of gold has surged 23 per cent in the past three months as investors seek a haven asset amid the global financial turmoil. Gold was at about US$895 an ounce in late London trade yesterday.

Last week, investment bank Goldman Sachs raised its -month gold price forecast to US$1,000 an ounce from US$700 and the -month target to US$950 from US$785, given the instability of the global financial market and rising sovereign default risk.

While Macquarie said in a report that its average gold price forecast of US$830 an ounce this year and US$963 next year 'appears conservative, and certainly in the short to medium term the balance of risks to our forecast is firmly to the upside'.

'I think Real Gold offers a reasonable price when you compare it with Sino Gold Mining or global peers. I believe long funds should be interested,' said a fund manager.

Real Gold chief executive Qiu Haicheng yesterday said the company's international roashow was wellreceived and a listed peer also placed substantial order for the company's shares, without giving details.

He said the company was on its way to deliver high growth in the coming years following three years of consecutive losses between 2005 and 2007 as its three mines in Inner Mongolia had become fully operational.

In the first months of last year, Real Gold reported net profit of 66.14 million yuan (HK$74.88 million), compared with a loss of 3.83 million yuan a year earlier.

The company expects net profit for the full year will not be less than 100.5 million yuan.

Bookrunner Citigroup expects Real Gold to report a 290 per cent rise in net profit to 379.7 million yuan this year, driven by the completion of concentrators that could help boost output capacity, sales and lower cost of production.

Mr Qiu also said the company's gold resources w expected to grow as the company only explored a small area covered under its existing exploration permits at its three mines.

The company also had options to buy two gold mines in Xinjiang, he added.

According to Behre Dolbear, an independent mining consultant, the three Inner Mongolia mines had total reserves and resources of 2.9 million ounces and 3.9 million ounces, respectively, as of November.

Real Gold said about 23 per cent of the proceeds it raised from the offering would be used for exploration activities and another 36 per cent to fund capital expenditures, mainly on ore processing plants.

It is expected that the company's total daily ore-processing capacity will increase to 2,580 tonnes by the end of the year from 1,790 tonnes last year.

Total ore throughput is expected to reach 780,000 tonnes a year by the end of 2010 from 210,000 tonnes last year.

However, Kenny Tang Sing-hing, head of research at Redford Asset Management, said that as a private enterprise, it would be more difficult for Real Gold to acquire new gold mines than for state-owned companies such as Zijin Mining Group and Zhaojin Mining Industry.

In a response to criticism that the deal consists of a large portion of existing shares owned by controlling shareholder Lead Honest, Cui Jie, the company's chief financial officer, said the proceeds raised by the controlling shareholder would be used to repay a pre-offering investment by two strategic investors including Credit Suisse.

He said the controlling shareholder had promised not to sell more shares for three years after the listing.

What the analysts say

Castor Pang Wai-sun, strategist, Sun Hung Kai Financial

Pros: Gold prices are expected to continue to rise. Real Gold's lower valuation will also give the stock upside room

Cons: The large portion of old shares in the deal will give investors a bad impression and restrict the stock's potential gains after listing

Kenny Tang Sing-hing, head of research, Redford Asset Management

Pros: Since its three gold mines will start production soon, the company's earnings are expected to surge in the next one to two years

Cons: As a private firm, it is not easy for Real Gold to buy new gold mines in the future, which will restrict its expansion

Kingston Lin King-kam, associate director, Prudential Securities

Pros: A low valuation compared with other listed rivals is its advantage

Cons: The market already has a few gold stocks with some big names. So investors may not be interested in buying new stocks such as Real Gold, which lacks a track record