BREAKINGVIEWS-Chinese gold mining IPO is a dubious prospect

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Refiles to change dateline to Australia.)

By Clara Ferreira-Marques

AUSTRALIA, Feb 13 (Reuters Breakingviews) – Shandong Gold Mining <600547.SS> makes for a dubious IPO prospect. An initial public offering in Hong Kong will help pay off a $1 billion purchase in Argentina, enabling the state-owned company to do more deals. But high-quality mines are costly and the sector’s track record in mergers and acquisitions is abysmal. Buyers will need to believe Shandong Gold is unusually good at sifting for bargains. The firm, already listed in Shanghai and valued at $9.2 billion, is one of a handful of large, publicly traded Chinese gold miners. Last year, it bought half of the Veladero mine in Argentina from Canada’s Barrick Gold , and agreed to explore joining forces at the huge, stalled Pascua-Lama project nearby.

The Hong Kong debut coincides with a likely pickup in gold dealmaking, as global production falls. China will be at the forefront: domestic appetite is growing and Beijing wants to build central-bank reserves. Despite being the world’s largest producer, China doesn’t dig up enough. Shandong Gold seems keen to take the M&A lead. Over the past 18 months, it has looked at a Glencore operation in Kazakhstan and, according to reports, the private equity-owned Martabe mine in Indonesia.

History is not encouraging. Shandong Gold bought a majority stake in Australia’s Focus Minerals in 2012, close to the gold price peak, only to see the costly operations suspended months later. Western rivals, to be fair, were hardly more disciplined. And the Barrick deal brings its own concerns. Recent figures show Veladero is the most expensive mine in the Canadian group’s stable, with costs per ounce, based on a standard industry measure, almost double those of its cheapest mine. Veladero has also been an environmental headache, suffering three spills of cyanide in 18 months. Shandong Gold might perhaps benefit from Pascua-Lama but the fate of this project is unpredictable. In any case, none of this will come cheaply. The IPO valuation is unlikely to be too far off from the Shanghai shares. Eikon shows these trade at more than 32 times forward earnings, while Barrick trades on less than 18 times. Buyers will need to believe Shandong Gold has suddenly become much better at finding hidden nuggets of value. On Twitter https://twitter.com/claramarquesrtr

CONTEXT NEWS

  • Shanghai-listed Shandong Gold Mining filed a listing application to the Hong Kong Stock Exchange on Jan. 22.
  • According to a Jan. 23 IFR report, the state-owned gold producer aims to raise about $1 billion. It will sell up to 15 percent of its enlarged share capital, before any so-called greenshoe option, which allows the deal’s underwriters to sell more stock.

  • In April, Shandong Gold agreed to buy half of Barrick Gold’s Veladero mine in Argentina. In its prospectus, Shandong Gold said the final price was $990 million. The duo also agreed to jointly explore developing the nearby Pascua-Lama deposit. In January, environmental regulators ordered Barrick to close the Chilean side of the stalled project. Barrick is studying a scaled-back development.

  • Shandong Gold had planned to fund the Barrick deal using a private placement. It later cancelled the share sale and instead said it would borrow up to $1.3 billion from the offshore units of two Chinese state-owned banks. The prospectus says listing proceeds will repay most of the loans.

  • CCB International, China Securities International and ICBC International are joint sponsors.

  • For previous columns by the author, Reuters customers can click on [MARQUES/]

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  • Shandong Gold prospectus http://www.hkexnews.hk/APP/SEHK/2018/2018011901/Documents/SEHK201801220017.PDF

China’s Shandong Gold in $960 mln deal for half of Barrick’s Veladero mine [nL3N1HE26T] Small remains beautiful for gold mining acquisitions [nL2N1PI1R2] Gold companies take a shine to China’s Silk Road [nL4N1M5089]

(Editing by Quentin Webb and Katrina Hamlin)
((clara.ferreira-marques@thomsonreuters.com; Reuters Messaging:
clara.ferreira-marques.thomsonreuters.com@reuters.net))

Keywords: SHANDONG GOLD MINING IPO/BREAKINGVIEWS

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