Will Resourcehouse’s IPO hit a hard rock?

, , Australia, Corporate governance, Hong Kong

HONG KONG (Dow Jones Investment Banker)  – Having postponed a listing in Hong Kong three times (including in March this year), coal and iron ore behemoth Resourcehouse Limited has just delayed the start of the public offer for its multi-billion dollar IPO to May 30, from an initial date of May 26, with pricing now scheduled for June 3. It might be fourth time lucky for the listing this time around, but perhaps CEO Clive Palmer will need to wait – and try yet again.

The timing of the deal is less than ideal, with several recent, major offerings in Hong Kong and elsewhere trading below water, and commodity prices under pressure. The company is also still at an early stage of development, and the deal raises some governance issues.

Resourcehouse, which is controlled by Mr. Palmer, is attempting to sell 5.72 billion shares at HK$4.48 to HK$4.93 to raise up to US$3.6 billion (excluding an over-allotment option of about 15%), for 46.5% to up to 49.9% of the company. The offering is sponsored by Bank of China International, also acting as joint bookrunner alongside HSBC, Royal Bank of Scotland Group and UBS. China Railway Group Ltd. and Metallurgical Corp. of China Ltd. have agreed to pitch in as cornerstone investors for a combined US$400 million, with lock-ups of six and 12 months respectively.

Prof. Clive Palmer, CEO of Resourcehouse Limited

The company is principally focused on developing thermal coal and iron ore projects in Australia, but it has taken great care in its prospectus to paint itself as a China play, perhaps to justify a listing in Hong Kong. One of its aims is to develop large-scale resources projects with PRC companies. At the same time, Resourcehouse seeks financing from Chinese financial institutions, while China will obviously also be a major customer for its minerals.

So far, Resourcehouse, which is an early stage company with no commercial operations, has yet to post a profit. The business generated a loss of US$15.7 million in 2010 and it estimates in its prospectus a loss of not more than US$16.1 million in the year to 30 June 2011. Commissioning and first commercial production for its two major deposits, the China First Coal Project (in Queensland) and the China First Iron Ore Project (in Western Australia) are currently on schedule for the end of 2014 and mid-2014 respectively.

But the legal titles of the tenements and the contractual rights to mine the projects have been granted to Waratah Coal Pty Ltd. and Mineralogy Pty Ltd. respectively, two companies 100% beneficially owned by controlling shareholder Mr. Palmer, rather than to Resourcehouse itself.

There’s no denying the scale of these projects, with rights to mine up to 1.4 billion tons of raw coal and 10 billion tons of magnetite iron ore over a period of 25 years. Both projects combined have been allocated proceeds of US$3.1 billion for development under the IPO.

However, with recent major IPOs in Hong Kong and elsewhere, such as Glencore, Shanghai Pharmaceuticals and Renren trading just around or even below their offer price, investor fatigue is clearly starting to settle in.

In addition, Hong Kong continues to see a steady stream of billion-dollar plus offerings coming to market, such as from Samsonite, Prada S.p.A. and Chow Tai Fook Jewellery. These will arguably require less of a leap of faith on the part of investment committees – so it looks like Resourcehouse will need to be priced to go, if it is to make it successfully to closing.

The delay in launching the public offer would also seem to indicate that the deal might perhaps be running out of steam.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 25 May 2011 and is reproduced with permission].

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