Oct 25, 2012

Chinese miner looks at Myanmar

Small Chinese companies as well as big state enterprises are casting their eyes on neighbouring Myanmar as it opens its economy to foreign investment. Among them is China Polymetallic Mining (CPM), a Hong-Kong-listed mining group, based in the minerals-rich province of Yunnan which lies along China’s border with Myanmar.

Company officials claim CPM is well placed to profit from developing Myanmar’s mining riches. But, with far bigger Chinese and international resource companies looking at Myanmar, CPM will have to be quick if it is to get ahead of the game.

“Yunnan is close to Myanmar, which has similar mining formations to Yunnan. Also our employees share their culture and living style with people in Myanmar… So we think it’s relatively easy for us to take our operational model into those countries. We have looked at projects to consider doing investments but we have not done due diligence on any,” says Li Tao, chief financial officer.

Crucially, CPM says it has the backing of the Yunnan provincial government both for its expansion in the province, for which it has a mandate to take over and consolidate smaller mining companies, and for its overseas ambitions. Li says, “The government fully supports us to go into south east Asia for investments.”

Chairman Ran Xiaochuan says: “We have a very strong portfolio of assets. By leveraging our title as a consolidator granted by Yunnan province I think there’s no doubt we will be a very good mining company in five years’ time. Our production in the next five years will be three times our current capacity and our assets will be doubled.”

Ran, together with other managers, controls 33 per cent of the company, which was founded in 2009 and floated on the Hong Kong Stock Exchange in December 2012, raising HK$834m net.

Launched at a time of global market turmoil, the shares tanked on their debut and have still not regained the offer price.

But the company has focused on its business and concentrated on consolidating its ownership of six mining sites in Yunnan and developing production. CPM says it has established a track record of buying good assets at low prices “for significant value creation” and of implementing investments to schedule.

The Shizishan mine is due to reach full capacity at the year-end; so is Dakuangshan. The plans for the other mines foresee Menghu achieving full output in early 2013, Lushan in late 2013, Liziping in mid-2014, and Dazhupeng later in 2014.

Lushan is a tungsten-tin mine project. All the other sites are lead-zinc silver sites, with Shizishan having by far the largest reserves of 9.3m tonnes. Ran says: “We are the largest private pure mining company in Yunnan.”

With a large silver content in the ore at Shizishan, the revenues from silver alone more than cover the full costs of the mining. This ensures that the company will make money from its lead and zinc production regardless of swings to base metal prices.

In the first half of 2012, CPM had adjusted earnings before interest, tax, depreciation and amortisation (ebitda) of Rmb82.4m on revenues of Rmb157.3m, compared to ebitda of Rmb32.1m on revenues of Rmb70.2m in the whole of 2011.

Given the company’s expansion plans this is only the beginning. But for investors there are, of course, considerable risks buying into a small mining enterprise in a remote corner of China, however good the mineral resources. As the IPO prospectus said, these include everything from volatility in metals prices to natural disasters and changes in Chinese regulations. Also, with 33 per cent in the hands of Ran and other executives, minority investors cannot be sure their interests will be given sufficient priority.

CPM has moved to reassure shareholders by recruiting international executives as independent board members, including Edward Charlton, a senior Citigroup advisor.

Like other Chinese IPOs last December, the stock plunged on the first day of trading – from HK$2.20 to HK$1.61.

Under pressure from the decline in base metal prices, the shares hit a low of HK$1.14 in late September before the company announced a share buy-back programme that helped the stock recover to trade at HK$1.48 recently.

The company says it has now bought 1.7m shares, or about 86 per cent of the issued capital. Nina Zhan, investor relations director, said: “We will continue to execute the program while we believe the company remains significantly undervalued in our view and that this is in the best interest of our shareholders.”

CPM says that Citigroup, the US bank which sponsored the IPO, has a target share price of HK$3.10 and Renaissance Capital, a joint bookrunner for the offer, is aiming for HK$4.40.

Given the slow down in the world economy, these are ambitious numbers. But investment in small mining companies is generally for the brave.

Source: Financial Times