SINGAPORE (Nov 25): Suspended for about eight years, and counting, China Hongxing Sports is a counter that its long-suffering minority shareholders have most likely written off. A reprieve might be seen soon.
In March 2018, shareholders voted to sell the operating assets worth RMB470.7 million for just RMB100 million to the Wu family, which controls the maker of sports shoes, effectively turning the company, which had a peak market value of $3.4 billion in 2007, into an empty shell whose residual value is basically its Mainboard listing status.
More than a decade ago, China Hongxing was among the clutch of high-flying S-chips that investors in Singapore chased after — until a growing string of them fell under because of corporate governance issues or simply failed at their businesses. In the case of China Hongxing, accounting irregularities were discovered in 2009 and cash balances were found vastly inflated. The stock has been suspended since then.
Early this year, China Hongxing announced that it has managed to find Mining and Minerals Industries Holding (MMIH) to inject its wholly-owned subsidiary, MMJV, which owns gold mines, into China Hongxing via a reverse takeover (RTO).
Under the terms of the agreement announced on Nov 14, China Hongxing will issue new shares at 0.357 cent each, valuing MMJV based on an independent valuation report pending completion, less a discount rate of 20%, at $125 million. A consolidation of 100 shares into one is planned. Upon completion of the deal and assuming a consideration of $100 million (based on an assumed valuation of $125 million), existing China Hongxing shareholders will hold around one-tenth of the company, with MMIH shareholders gaining control over 90% of the enlarged share capital of the listed entity. The terms are to be finalised, subject to subsequent revisions, if any.
Alfred Cheong, one of three long-serving China Hongxing independent directors asked by the Singapore Exchange to stay on since the suspension to clean up the mess, believes the RTO will bring new value to all China Hongxing shareholders and “closure for everyone”.
In an interview with The Edge Singapore, MMIH president Kunal Awasthy says the RTO process is “well on track” to being completed by March 2020. He sees an RTO, via China Hongxing, instead of an IPO by MMIH, as an “easier alternative” to fund the expansion plans. When he found out China Hongxing was available, “we had to grab it”, he says.
Besides gold, MMIH plans to produce another mineral too: copper. The two metals tend to exist in proximity to each other in nature and there is operational efficiency in producing both minerals together.
On Oct 4, MMIH agreed to pay Bezant Resources, a London AIM-listed entity, $18.62 million for an 80% stake in its copper-gold project, Mankayan, in the Philippines. Bezant will hold the remaining 20% stake. Awasthy describes the project as an “underexplored asset”. Home to more than 4.3 million ounces of gold and 1.1 million tonnes of copper, the mine is among the world’s top 100 copper assets.
In a Nov 13 supplemental deed to the RTO agreement, MMIH says it is adding the Mankayan project to the portfolio of mining assets it is selling to China Hongxing, while dropping another project that is deemed, on hindsight, too “greenfield”. Of the $18.62 million to be paid by MMIH for Bezant’s stake in Mankayan, part of the payment will be used to fund exploration and the renewal of the exploration licence, which will expire in April 2020. The bulk of the payment will be paid in the form of $10 million worth of China Hongxing shares, giving Bezant shareholders a significant stake in the enlarged share base of China Hongxing and making the latter a producer of both gold and copper.
Soh Zhau Sen, finance manager of MMIH, has confirmed that Bezant and MMIH have no common directors, associates or shareholders.
$20 mil to be feasible
MMIH faces the typical challenge that confounds early-stage mining companies. It takes significant time and funding before production can go into full swing, the precious metal can be mined and sold, and earnings generated.
To get the Mankayan mine to the feasibility stage, MMIH will need to spend $8 million over two years. Two of the group’s other assets — its Hinoba-an and Mainit mines — need an estimated $5 million and $2 million respectively to take to the feasibility stage. The former will take 18 to 20 months to start generating revenue for the company; the latter, eight to 10 months.
Awasthy estimates that, over the course of the next two years, MMIH will need a total of $15 million to $20 million to take the mines to feasibility, which is why he has been wanting to tap the capital markets via either an IPO or RTO. “After the listing, the company will have wider access to the capital market, and that’s where we are looking to raise capital,” says Awasthy, who, according to MMIH’s website, has around five years’ experience in Southeast Asia’s mining industry. He was also with companies such as IL&FS, Elbee, Orix and All Cargo Logistics.
Awasthy notes that, prior to the deal with China Hongxing, MMIH had raised funds from private investors as well as contributions from friends and family of the company’s owners. “The company will be well placed to unveil the real value of the assets that have every chance to contribute significantly to our revenue,” he adds.
Towards US$2,000 an ounce
Despite the funding difficulties, Awasthy believes the gold mining industry is always one that can generate value — and this will not change anytime soon. “While assets have little value in a greenfield stage, drilling holes and taking a mine to the next level of reserves just adds value to them,” he says.
Awasthy says MMIH is unlikely to make other acquisitions as it focuses on taking its current assets into the revenue-producing stage.
The outlook for gold “can never be bleak,” he says, sounding like a permanent gold bull. He agrees that gold prices do move up and down. Even so, the whole industry is always looking favourable — and resilient. “Precious metals like gold can never succumb to a recession,” he says.
He notes how the Hong Kong protests have resulted in a significant investment outflow into Singapore, which could in turn present local gold mining companies with an added advantage. “There is always a scarcity value tied to gold, and there is generally positive investor sentiment,” he says. “If you were to take a look at the global scenario, gold is always a safe haven in terms of investments. I don’t see gold prices going down in the near future; in fact, it will be interesting to see gold cross the US$2,000 mark.”
For all his optimism about where gold prices are heading, Awasthy will concentrate, for now, on executing the assets MMIH has in the Philippines. The country, rich in mineral resources, has a lot more potential to tap. For example, it is not among the top 20 gold producers, which is why MMIH will be focusing its efforts on this country. “That’s a clear indicator of the opportunities available here,” he says.
Awasthy rues that Philippine companies in general suffer from valuations that are “a lot lower” than, say, Indonesia and Malaysia. The government is aware of this disadvantage and, specifically for the mining industry, revisions in regulations are now making it easier for companies to operate. In July 2018, for example, the country lifted a two-year moratorium on approving mining exploration permits.
Awasthy is “extremely optimistic” in the near term — not just for the Philippines, but also other gold-producing regions. The key is to raise capital in time, so that the mining can start and the precious metal brought to the market. “The company’s strategy is still evolving and things are very much still open to circumstances. Although we have to find ways of raising capital and bringing more investors and partners on board, gold is always one of the safest industries to place your money in,” he says.
