Source: The Wall Street Journal                       Date: 21 April, 2011

Resource companies are flocking to Hong Kong to raise capital. Are they coming to the right place? One large deal Hong Kong would gladly add to its trophy wall is the IPO of the world's largest coking-coal deposit in Mongolia, due in late 2011 or early 2012. The Mongolian Government is expected to announce the listing venue for state-owned Erdenes Tavan Tolgoi Co., which controls a giant coal deposit in the South Gobi desert, in the coming months and Hong Kong Exchanges & Clearing Ltd. is a leading candidate.

HKEx, as it is known, is keen to attract resource companies away from other venues and increase its own earnings from new listings. It is already a powerhouse in initial public offerings: It attracted more of them than any other market last year for a second year running.

The drive for resource-related business has become a theme in consolidation of the global exchange industry. Part of the rationale behind Singapore Exchange Ltd.'s USD8.88-billion bid for Australia's ASX Ltd. was to make itself more attractive to mining companies of the kind that dominate Australia's market. Australian regulators dashed Singapore's aspirations when they ruled recently the purchase was against their nation's interest.

London Stock Exchange Group PLC, already the primary listing choice for many resource companies, is looking to convince miners they will benefit from the extra liquidity if it succeeds in taking over Toronto Stock Exchange owner TMX Group Inc., another market popular with the minerals and metals sector.

Resource companies have not traditionally thronged to HKEx, but the exchange is actively trying to change that. Last June, it changed its listing rules to make it easier for mining companies to raise capital for discoveries they have already made. A total of 82 metal and mining companies are listed in Hong Kong, with a collective market capitalization of USD122 billion, the exchange said. Weighing in Hong Kong's favor is its appeal for commodities companies as a gateway to China, a dominant global consumer of energy, minerals, metals and foodstuffs.

"This is one of the major focuses for this year," said Mr. Eric Landheer, head of issuer marketing for HKEx. He has gone on roadshows promoting Hong Kong in Canada, Australia, Indonesia, Europe, Japan, Mongolia, Russia, Taiwan, Kazakhstan and the U.S. "We're seeing a lot of portfolio managers coming here to be closer to the demand side of the equation, which is China," Mr. Landheer said, noting for example that China now accounts for 50% of global iron-ore demand.

He points to the success of the October 2010 listing of Mongolian Mining Corp., which produces coal used in steel production, that raised USD746 million). The stock has risen 35% since then. Not all of the Hong Kong exchange's customers are happy. G-Resources Group Ltd., a Hong Kong-listed gold-mining company that owns the Martabe gold and silver mine in Indonesia's Sumatra island, believes it is undervalued. "We're slaving away as the pioneers," says company Chief Executive Owen Hegarty. "We're taking the bullets for the rest."

It estimates its cash flow from Martabe will be USD300 million a year once production starts, based on current gold prices. That means the company is now trading at roughly three times earnings—about half of what a company in a comparable stage of development would trade in Toronto, London or Australia, where investors are more familiar with how to value mining companies, Mr. Hegarty says.

Bankers note that Hong Kong retail investors generally know little about exploration companies and don't know how to analyze them. Some 35% of Hong Kong's stock market investors are retail investors, compared with only 10% in the U.S. market. In mainland China, the reverse is true: Only 10% are professional institutional investors.

"There are some quirks in listing rules how reserves and resources are characterized, and Hong Kong investors are not as familiar with resource stocks as, say, investors in Toronto, Johannesburg or London have been," said Mr. Andrew Michelmore, chief executive of Minmetals Resources Ltd., the Hong Kong-listed arm of a Chinese state-owned mining and metals company. "But in the long run we have a very robust view of Hong Kong in the global market. It won't happen overnight by waving a magic wand. People will get frustrated, but longer term we can see a very attractive market."