CAA faces hard sell for listing as ore prices slip
Malaysian-focused iron ore miner is seeking to raise US$88.9m, but with a depressed market, analysts say the shares will need attractive pricing
CAA Resources, an iron ore miner in Malaysia controlled by mainland businessman Li Yang, aims to raise up to US$88.9 million through an international share offer and Hong Kong market listing this month.
It would not be an easy task to the offering's joint book-runners and lead managers China Everbright Securities and BOC International to sell its shares amid depressed market conditions, unless the selling price was attractive, analysts said.
"Capital-raising in the mining sector is very challenging, particularly for iron ore," said CLSA head of resources research Andrew Driscoll. "The market has concerns about significant seaborne supply growth over the coming years, which will displace high-cost mainland suppliers and result in lower prices in the mid to long term."
This means producers, both in China and overseas, will be seeing thinner profit margins than before, given slower demand growth from China, the world's largest iron ore market.
The mainland's steel output grew 4.8 per cent last year, compared with an average 16.5 per cent between 2002 and 2011. Analysts expect growth until 2020 to be less than 5 per cent as the economy reduces its reliance on investment in favour of consumption for growth.
CAA was founded in 2007 by Li Yang's father Li Dongming, who was active in coal mining investment in Sichuan province. He was invited by a Malaysian mining investment firm to explore opportunities there in 2007, according to CAA's preliminary listing prospectus.
Li Yang, 26, joined CAA in 2009 after he finished a business degree in Eastern New Mexico University in the United States.
In August 2010, Li Dongming transferred all his holdings in CAA to Li Yang, who became its chairman and chief executive. He is assisted by his aunt Li Xiaolan, an executive director.
CAA's mainstay project is the Ibam mine, 150km inland from the port of Kuantan on the east coast of peninsular Malaysia. It produced 580,000 tonnes of processed and marketable iron ore last year. The firm plans to invest US$62.4 million to boost its annual output capacity to 3.18 million tonnes by the end of 2015, subject to government approval.
The mine is estimated to have 105 million tonnes of reserves at the end of last year, with an average iron content of 44.8 per cent, a report by Sydney-based independent technical adviser Geos Mining says.
The ore content is higher than the mainland's average 30 per cent, but is lower than the 56 per cent to 62 per cent iron content of ore found in the Hamersley region of Western Australia state.
Unlike most of the ore exported from Australia that can be shipped directly after simple crushing and screening, CAA's product contains impurities and needs to be upgraded through a beneficiation process.
CAA's mining cost was US$24.50 a tonne last year, cash operating cost was US$53.70 and shipping cost was US$16.30, totalling US$94.50 a tonne. Iron ore landing at mainland ports with the benchmark 62 per cent iron content is trading at US$111 a tonne. CLSA expects prices to average US$128 this year, before falling to US$95 next year and US$75 in 2015, as supply growth is projected to exceed demand growth.
Rising seaborne supply means market prices will increasingly be set by high-cost seaborne ore producers, instead of high-cost mainland producers currently as the latter are forced to shut operation, Driscoll said.
CAA posted a net profit of US$10.4 million last year, up from US$2.4 million in 2011. It plans to pay out 50 to 60 per cent of its distributable profit as dividend, the prospectus says.
It plans to sell 375 million of new shares at HK$1.30 to HK$1.60 each. If demand exceeds supply, it may sell an additional 56.25 million shares, increasing the top fund-rasing amount to US$89 million from US$77 million.
Asset managers Venus Investment Fund and Broad Resources Investment, and Geneva-based privately held commodities trader Mercuria Energy have together agreed to buy US$26 million of CAA shares. Venus has agreed not to sell its shares for 12 months and the other two investors have pledged to hold theirs for at least six months.