Eurasia Capital produced a research note on SouthGobi Energy Resources, the company which in our view has successfully become the “New Star in Mongolia”. You can access the report on www.eurasiac.com
Alisher Ali Djumanov, CEO of Eurasia Capital gave interview with Bloomberg in which he discussed investment opportunities in Mongolia, sovereign wealth funds as well as SouthGobi, Ivahnoe Mines and Rusal in Bloomberg program “Commodities IPOs in Hong Kong”. The video of this interview is available at www.eurasiac.com.
SouthGobi to raise up to US$500mn from HK listing and global share offering. SouthGobi Energy Resources (SGQ) announced on 21 January 2010 that it has priced its share offering on the Hong Kong Stock Exchange (HKEx) at C$17 or HK$ 126.04 per share, the top end of the indicative price range. The shares have been significantly oversubscribed on the back of strong investor demand. 27mn shares are set to be sold to investors, with 90% of shares to be listed on HKEx and remaining to be sold in Canada. If the over-allotment option of 4mn additional shares is excised, the Company will be able to raise up to C$527mn or US$500m in gross proceeds. The shares will start trading on HKEx on 29 January 2010.
CIC and Temasek are cornerstone investors. As the only Mongolian coal producer listed outside Mongolia, SGQ attracted strong interest from Asian institutional investors. Chine Investment Corp and Temasek, two prominent sovereign wealth funds, have subscribed for US$50mn worth shares each as cornerstone investors, sending a powerful signal to institutional and retail investors alike. CIC endorsement is particularly important given its ability to support SGQ in penetrating the Chinese coal market.
SouthGobi to amass up to US$1 billion in four months! Impressive capital raising of up to a whopping US$1 billion (US$500mn from CIC in October 2009 and up to US$500mn from this global offering) within mere four months makes SGQ the best capitalized resource company in Mongolia. This financing will allow the company to ramp up significantly its coal production, build value-added coal processing, develop transport infrastructure and heavily invest into exploration in Mongolia. Thanks to its earlier-mover advantage over its competitors in Mongolia, SGQ is expected to capitalize strongly from its extensive efforts to gain direct access to end-use consumers in the Chinese coal market.
SouthGobi may embark on acquisition trail. We believe that SGQ may become major M&A player in Mongolia and pursue acquisitions in steel upstream assets such as iron ore and molybdenum. Capital raised and increasing revenue from 2010 onwards leaves substantial financial resources for SGQ to pursue further expansion.
What will Ivanhoe Mines do? Ivanhoe Mines recently announced that it would review its strategic options. “The sale of subsidiaries” was listed as one of options. We view a possibility of the sale of Ivanhoe’s controlling stake in SGQ as highly unlikely in the near term. However, if and when Ivanhoe Mines decides to sale its coveted SGQ stake, there will be a frantic scramble among global and Asian players eager to enter Mongolia which is considered as the Saudi Arabia of coal for its massive, largely untapped reserves.
New Emerging Star. SGQ is already an outstanding success story of brining a coal mine from exploration into production in a record time. The next target is become the largest coal producer in Mongolia in coming years. Thanks to superb management team, strong balance sheet and pole position in Mongolia in terms of expansion and M&A deals, SGQ has all ingredients in place to transform into one of most dynamic resource companies in Asia.
We maintain our target price of CAD24 per share. Our 12-month target price is based on a blended DCF and resource-based valuation approach. We take the average of DCF valuation (CAD21/share) and resource-based valuation EV/Resources (CAD28/share) and reach CAD24/share. This represents 35% upside to SGQ’s share price of CAD17.8 (Jan 22, 2010).