What happened
Jiangxi Copper （JXC） announced it proposes to acquire a 29.99%equity stake in Yantai Humon for Rmb2.98bn, or Rmb10.9/sh. Thedeal is subject to the approval of related authorities. If this deal iscompleted, JXC will become the controlling shareholder of Humon.
Comments
Yantai Humon is one of the leading gold smelters in China. With50t/yr gold production capacity, Yantai Humon mainly purchases goldconcentrates from third parties. As of June 2018, Humon had 16 goldmining rights, 21 mineral exploration rights and 112t of gold reserves.
It also operates production capacity of 250kt of copper, 1.2kt of silver,1.4mnt of sulfuric acid, 400kt of fertilizers, 60kt of lubricants, 10kt ofcutting fluid, and 30kt of mineral processing reagents.
Financial data and valuation of Humon. Humon preannounced itsrevenue increased 7.2% YoY to Rmb21.2bn, and net attributableprofit rose 1.5% YoY to Rmb404mn in 2018. As of end-3Q18, Humonhad a net debt ratio of 106%. Operating cash flow was Rmb695mn in2017, and Rmb650mn in 1–3Q18. Humon has a market cap ofRmb9.1bn, and its preannounced net attributable assets and netattributable profit in 2018 were Rmb4.37bn and Rmb404mn. A29.99% equity stake implies market cap, net attributable assets andnet attributable profit of Rmb2.73bn, Rmb1.31bn and Rmb121mn.
The consideration implies a premium of 9%, 2.3x P/B, and 25x P/E.
Deal should help JXC expand and diversify business operations. JXChas 210kt/yr of copper concentrate output, more than 1.3mt/yr ofcopper cathode production capacity, and 1mt/yr copper productprocessing capacity. This deal should help JXC expand and diversify itsbusiness operations. In addition, the deal could generate synergybetween Humon and JXC.
JXC will likely take measures to avoid competition with Humon sinceboth companies are smelters. JXC announced that if this deal iscompleted, it will use Humon as its gold business platform, and mayinject JXC’s high-quality gold assets into Humon.
Risks
Uncertainties in the deal; sharper-than-expected declines in copperprices.