Chinalco Mining offers investors exposure to Peru
Up to HK$3.4 billion to be raised by mainland firm for a venture that offers rich resources but faces higher political and operational risks
The initial public offering of Chinalco Mining Corp International will give investors an opportunity to gain exposure to the highly prospective but also risky business of mining in Peru.
Metals mining investors are facing the dilemma of having to pay a premium for assets in more stable nations such as Canada and Australia, compared with "new frontier" nations Peru and Mongolia, where rich resources are less exploited but political and operational risks are higher.
The only mining asset of Chinalco Mining, the overseas non-aluminium and non-ferrous metals arm of aluminium giant Chinalco, is the Toromocho copper mine in Peru, about 140 kilometres from the capital Lima. It aims to raise HK$2.67 billion to HK$3.36 billion by selling shares at HK$1.52 to HK$1.91 each.
About US$2 billion has been spent on the mine's construction by September last year, with a further US$1.5 billion expected by the time it starts production in the fourth quarter of this year. Full production is expected by the third quarter next year.
Based on projections by independent mining consultant Behre Dolbear, the mine may see a net profit of US$367 million next year. This translates into earnings per share of 24.17 HK cents and implies a price-earnings ratio of 6.3 to 7.9 times.
China Merchants Securities analyst Li Xiang said the stock's asking price was reasonable given global copper miners were valued at about eight times forecast earnings for next year.
"A small discount to the valuation of producing mining projects is warranted given there are still uncertainties if Toromocho will come on stream on time and on budget," Li said.
He also noted the mine faced risks in resettling residents and potential logistics challenges.
According to Chinalco Mining's prospectus, 92 per cent of households in Morococha, near the mine, have agreed to be resettled in a new town that was completed last year. The firm is still talking to the remaining 8 per cent.
The town's government had ordered Chinalco Mining to stop the new town's construction, while the regional government had denied it a building permit.
After filing a constitutional claim and a judicial claim against the governments, the firm obtained a preliminary relief that allowed construction to go ahead.
The claims are pending. If a ruling against the firm is handed down, the resettlement, which Chinalco Mining aims to complete by March 31, may be halted or delayed.
The firm said the mine's operation would not affect the town until seven years after production started, giving it ample time to negotiate for an amicable outcome. The resettlement is estimated to cost US$260 million.
CLSA head of resources research Andrew Driscoll said the Toromocho mine's development would be straightforward given it is open-cut operation with a typical ore processing route. "Other than some typical teething issues, I don't foresee any major surprises," he said.
Five cornerstone investors - four mainland commodities traders and Chinalco's Australian business partner Rio Tinto - have pledged to buy 62 per cent of the shares on offer. The four traders also agreed to buy 60 per cent of Toromocho's output.
Driscoll said this meant lower liquidity of the shares after Chinalco Mining's listing and that they were more suitable for long-term investors.
According to industry consultancy CRU, global copper supply was in deficit last year because of delays in lifting output at new mines. A small surplus is expected for this year, before deficit returns next year. Surpluses are forecast for 2015 and 2016 as new mines come on stream.
China imported 55 per cent of its unrefined copper needs in 2011 to feed its smelters. Imports are forecast to rise sharply in the next few years since supply is expected to grow 3 per cent annually between last year and 2016, much lower than an average 14.3 per cent growth of its smelting volume. Chinese smelters are Toromocho's main customers.