China Molybdenum plans US$600m share offering

Metal producer will use listing proceeds to expand capacity

China Molybdenum, the largest mainland producer of the metal by annual ore mining capacity, hopes to sell shares at 11 to 15 times this year's earnings in a US$600 million initial public offering, sources said.

The proposed valuation is on par with its listed peer, Hunan Nonferrous Metals Corp, the mainland's largest zinc and tungsten producer, which is trading at 16 to 17 times earnings for this year.

'The offering is attractive due to the unique position of the firm in the mainland's molybdenum sector,' said a hedge fund manager who attended a pre-marketing briefing on Tuesday hosted by UBS, one of the arrangers of the China Molybdenum offering.

The investment bank has joined Morgan Stanley and China International Capital Corp to lead the share sale.

'The Chinese government has limited production of tungsten since 2005 and that caused excessive demand for that metal, driving up its price exponentially,' the fund manager said.

China Molybdenum, which is based in Chengguan, Henan province, owns deposits that hold 260,000 tonnes of molybdenum, which is used in hardening steel. The company is also eyeing strategic expansion in tungsten production from an upgrade of its existing capacity to recover the metal over the next two years.

'The sponsors told us at the meeting that the company will use most of its IPO proceeds to expand its tungsten production capacity to cater to demand,' the fund manager said.

A source said the company would use as much as HK$2 billion for the capacity expansion.

Tungsten is a strategic and rare resource widely used in industries such as machinery, metallurgy, vehicles, national defense and aviation.

Prior to the global share offering, which will take place on Wednesday next week, seven cornerstone investors, including Hong Kong-listed Citic Pacific and GIC, a Singapore government investment arm, have each anchored shares worth US$20 million, securing almost one-third of the shares available in the institutional tranche, according to a source.

'It is unfair to other institutional investors as most of the shares were allocated to some renowned investors amid the hot response,' said a fund manager at another investment firm.

Even so, the proposed valuation 'is not expensive as its reported huge reserves could help it attract a higher valuation'.

The international bookbuilding will close on April 20, and the retail portion will end a day earlier.

China Molybdenum's net profit rose 31 per cent last year to 1.5 billion yuan compared with 1.16 billion yuan a year earlier on robust molybdenum and tungsten prices as well as increased production ore grade, according to a pre-IPO report obtained by fund managers earlier.

Net income is expected to increase 53 per cent to 2.3 billion yuan this year on a larger profit margin and higher unit average selling price, the report showed.

Hard facts

Molybdenum is a transition metal, silvery white in colour, fairly soft with one of the highest melting points of all pure elements

1 Used to strengthen alloys and hightemperature steels

2 Used in oil pipelines, aircraft and missile parts, and in filaments

3 Used as a catalyst in the petroleum industry for removing organic sulphurs

4 Used to form the anode in x-ray tubes, particularly in mammography applications

5 Used in conductive layers in thin-film transistors