UPDATE 2-Shares of Petropavlovsk's IRC slump in Hong Kong debut

Thu Oct 21, 2010 11:56am BST

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* Shares end down 8 pct after being down as much as 11 pct

* Weak debut was expected as demand was poor for $242 mln IPO

* Caution on Russia-related firms, newness of miners factors

* Mapletree shares soar 25 pct in Singapore debut on Thursday (Updates closing price, adds fund manager comment and details)

By Kennix Chim and Alison Leung

HONG KONG, Oct 21 (Reuters) - Shares of IRC Ltd (1029.HK), the iron ore unit of London-listed gold miner Petropavlovsk Plc (POG.L), slumped 8 percent on their trading debut on Thursday, reflecting caution on prospects of Russia-related companies.

IRC, which more than halved the size of its initial public offering to $242 million, is the second Russian-related company to list in Hong Kong, after the world's top aluminium producer UC RUSAL (0486.HK). But shares in RUSAL, which raised $2.2 billion in January, dived on their debut and have traded below the IPO price ever since.

Teresa Chow, a fund manager at RBC Investment Management in Hong Kong, said visibility was low for Russian companies' assets and production as the mines are located outside mainland China. The lack of familiarity among Hong Kong investors with the mining industry also played part, some analysts said.

"People tend to buy in the industries that they understand and mining companies probably would need a bit more time for investors to get familiar with," said Alfred Chan, chief dealer, Cheer Pearl Investment Ltd.

IRC had initially planned to raise up to $513 million by offering 1.325 billion shares, of which 80.8 percent were to be new shares and the rest secondary shares, at HK$2.20 to HK$3.00 each. Due to poor demand, however, the company did away with the secondary shares and slightly cut the number of new shares on offer and lowered the price to HK$1.80 per share. [ID:nLDE69C0KC]

Shares of IRC, which operates in the Russian Far East, fell as much as 11 percent from its offering price, before pruning the losses to close down 8 percent at HK$1.65, compared with the Hang Seng Index's .HSI 0.4 percent gain.

The market had expected a weak debut for IRC as there are several IPOs in the market competing for investors.

That includes AIG's (AIG.N) AIA Group Ltd, which could raise up to $20.5 billion IPO with upsize and greenshoe options.

IRC's poor showing compares with Mapletree Industrial Trust (MAPI.SI), which owns factories and other industrial properties in Singapore, and whose shares ended up about 25 percent on their trading debut on Thursday. [ID:nSGE69K0AF]

LOSS IN 2010

IRC, which sells all of its iron ore concentrate and ilmenite to China, will benefit from China's stimulus package, said chairman Jay Hambro.

"It's a great positive for companies like us that are feeding the resources necessary for the stimulus," he told Reuters in an interview ahead of the trading debut.

IRC's mines are close to Russia's border with China, which allows the company to move its products to customers at much lower costs than its competitors in Australia or Brazil, he added.

IRC had secured two cornerstone investors, including private equity firm General Enterprise Management Services (GEMS) and CEF, a joint venture between Cheung Kong (Holdings) Ltd (0001.HK) and the Canadian Imperial Bank of Commerce, to subscribe to $60 million worth of IRC shares.

Investors are usually cautious about early-stage resource plays as those companies often suffer losses during the development stage and lack supporting infrastructure or transportation.

"It is difficult to persuade investors to buy a company which is still suffering a loss and future prospects are dependent on variables such as market demand and commodities price," said Chow of RBC Investment.

IRC said it expected to record a loss of no more than $95 million by the end of 2010 as its first project only came into production this year.

Underwriter UBS forecast the company would record a net profit of $168 million in 2013.

The retail tranche of the offering was undersubscribed. The company generated orders for only 24 percent of the shares initially on offer to Hong Kong retail investors while the international offering has been moderately over-subscribed.

In August 2010, Petropavlovsk completed the transfer of three major iron ore projects in the Amur region, north of China's Heilongjiang Province, to IRC Ltd.

The Kuranakh mine restarted production in June 2010 and is expected to reach full capacity in 2011. Production at the Kimkan and Sutara mines, with 3.2 million tonnes per annum (mtpa) of concentrate capacity, should start in 2012. Operations of the Garinskoye mine, which has 4.6 mpta concentrate capacity, should start in 2014.

BOC International, Bank of America Merrill Lynch (BAC.N) and UBS UBSN.VX are joint bookrunners. (US$1=HK$7.75) (Editing by Jacqueline Wong and Muralikumar Anantharaman)

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