BC’s mining industry is booming thanks in part to China’s voracious appetite for resources, but few companies have jumped the pond to take advantage of investor interest in Asia’s capital markets.
Instead, they’ve relied on the Toronto Stock Exchange, Canada’s battle-tested resource trading platform.
Terry Krepiakevich, CFO at SouthGobi Resources (TSX:SGQ; HK:1878), believes a lot of companies have failed to recognize the advantage of having a listing on the Hong Kong Stock Exchange (HKSE).
“They don’t understand the value proposition with listing in Hong Kong,” said Krepiakevich.
Last year, Vancouver-based SouthGobi became the first Canadian mining company to list shares on both the TSX and the HKSE.
The listing not only signalled China’s ongoing interest in Canada’s resource sector, but also the end of a near-three-year process to obtain a listing abroad.
Krepiakevich, who Business in Vancouver recently named one of its CFOs of the year, said it was a gruelling process to obtain the HKSE listing but worthwhile in the end.
SouthGobi raised $459 million via an international equity offering to expand operations at its flagship Ovoot Tolgoi coal mine in Mongolia.
“We believe we couldn’t have done the full $459 million in Canada,” Krepiakevich said.
Some of the money stemmed from sovereign wealth funds such as China Investment Corp. (CIC) and Temasek, while Hong Kong institutions and individual investors also played a major role.
Krepiakevich said the listing shed new light on the company’s growth story.
“We brought attention to the company, and that visibility through the Hong Kong listing process, everybody started to understand the story, and as soon as they understood the story they started to believe in the company.”
The road to secure that listing, however, was long and arduous.
In 2007, the company realized that because its coal resources were so close to China and would be sold to China, a listing on the HKSE might help it gather the capital it needed to get its mine up and running.
At the time, representatives from the HKSE were travelling back and forth across Canada advertising the benefits of a listing on their exchange.
But B.C.’s 800-odd mining companies were destined to miss out for regulatory reasons.
“The significant point they missed was British Columbia … had not been accepted by the Hong Kong Stock Exchange for listing,” Krepiakevich said.
The other problem was that, at the time, SouthGobi didn’t have any revenue, which was a requirement for any listing on the HKSE.
On top of that, the HKSE required all listed companies to file their financial reports according to International Financial Reporting Standards (IFRS), which SouthGobi knew little about.
The company was used to filing reports according to Generally Accepted Accounting Principles (GAAP).
Hoping the benefits would outweigh the short-term pain, the company put its nose to the grindstone and learned IFRS standards.
“So we were running two sets of reporting standards … it was really, really tough,” said Krepiakevich. “We were working 24 hours a day, seven days a week to get this done.”
Along the way, the company attracted the attention of CIC, which helped SouthGobi raise $500 million in October of 2009.
The company also hired Citigroup Global Markets and Macquarie Capital Markets to advise on the listing.
Krepiakevich said using investment banks as advisers is key to meeting foreign stock exchange requirements.
After hundreds of hours of work and a $14 million listing cost, the company broke down the barriers for B.C. companies and obtained its listing.
“They were the first one, so it took much longer than anyone expected,” commented Lawrence Fok, chief marketing officer at the HKSE.
Now that he knows how to get a listing, Krepiakevich believes he could cut the cost of getting listed in half.
Be he still has a tough time explaining to people that a dual listing has benefits.
One benefit, he said, is that the HKSE is far more liquid than the TSX, and issuers can expect to get higher valuations.
Hong Kong’s strengths are liquidity and valuation.
Fok said that according t0 Bloomberg, the average daily turnover on the HKSE for the first four months of this year was approximately US$9.8 billion, whereas the TSX is US$6.6 billion.
Since SouthGobi launched its HKSE listing, its trade volumes on the TSX have shown substantial increases.
But an HKSE listing isn’t for everyone.
The exchange refuses to list junior companies, meaning that most of Vancouver’s mining sector wouldn’t make the cut.
“We do not allow the listing of junior mining companies or exploration companies as we require a mining company to have at least indicated resources, but we shall review the situation as time goes by,” Fok said.
On top of that, Fok said investors in Hong Kong are typically interested in companies that are closely aligned with Chinese growth.
In other words, if your assets aren’t in Asia and you’re not selling into Asia, you will have to find a story to attract their investors.
But for SouthGobi, the HKSE opened up a world of investment opportunities that allowed the company to pull capital together at a time when lending markets remained tight.
Still, the company has no plans to de-list on the TSX.
“It’s always going to be Canada first in our world and Hong Kong second,” said Krepiakevich.
At press time, SouthGobi’s Toronto shares were valued at $10.44, while its HKSE shares were valued at HKD$82.55.