Chinese Magnesium Launches $8 Million IPO

2010-06-09

Vertically integrated magnesium company, China Magnesium Corporation Limited recently announced it has lodged its Prospectus with ASIC for an $8 million initial public offer and listing on ASX. 

The purpose of the offer is to fund an initial upgrade and expansion of the Pinyao Magnesium Project, an existing magnesium ingot production plant in the Shanxi province of northern China, and complete CMC’s earn in of a minimum 75% interest in the project.

CMC aims to be one of the largest producers in the world of pure magnesium and magnesium alloy, supplying domestic Chinese and international customers with long term, reliable supply. Magnesium is a light-weight structural metal, used in motor vehicles (improving fuel efficiency) and mobile electronic devices.

CMC’s board includes significant public and private company senior management or director experience in China, Australasia and the United States, which includes companies such as Anzon Australia, Billabong, Chase Securities and Macquarie Harbour Mining.

CMC Non-Executive Chairman, Mr William Bass, said that the Group is backed by a supportive Government and guided by a management team with significant experience in China.

“CMC operates in a country that is actively encouraging resources industry and investment – so the project is not exposed to the current uncertainty created by Australia’s proposed resource super profits tax, and the expansion project has been classified by the local provincial government as a ‘preferred project’,” said Mr Bass.

“Importantly, the key personnel including have a significant shareholdings in CMC, which ensures they have a vested interest in CMC’s success. We look forward to welcoming new shareholders with an appetite for the development of a leading magnesium operation in China.”

CMC managing director, Tom Blackhurst said that the launching of the IPO is an exciting milestone for the Company. 

“The IPO represents more than five years of planning, negotiation, securing of regulatory approvals and permits and building local relationships. 

“China is a rapidly developing country, with an abundance of opportunities available to those who know how to operate in China. I believe that the really outstanding business opportunities, such as the Pinyao Magnesium Project, are found not only in the major developed cities, but in the less developed areas and provinces in China where foreign companies rarely set foot.”

China dominates world magnesium production using the pidgeon process – a simple, cheap, robust and technically low risk thermal process, compared with the higher cost, capital intensive electrolytic processes used in the few remaining western operations. Importantly, most of the Chinese production comes from the Shanxi province of northern China.

Magnesium’s main advantage is its weight to strength ratio, with a density is two-thirds of aluminium’s. CMC believes that magnesium alloys are a superior and economic substitute for aluminium in many applications, such as in reducing the weight of motor vehicles (eg, lithium battery powered electric cars) and mobile electronic devices.

CMC aims to be one of the largest producers in the world of pure magnesium and magnesium alloy, supplying domestic Chinese and international customers with long term, reliable supply. 

Mr Blackhurst said that the group has “shovel ready” plans (subject to financing and final formalities) to upgrade and restart the plant as a low-cost producer, targeting practical completion and commissioning of an initial upgrade/expansion to a capacity of 20,000tpa by the March quarter 2011. 

“Once our ASX listing is complete we will be able to commence the upgrade and expansion of our magnesium operations. Our long term goal, for which we have key permitting in place, is to expand magnesium production to 105,000tpa over three major phases by 2013.

“We have already received a non-binding letter of intent from the China Construction Bank, one of the world’s largest banks, to debt fund US$14.6 million of the total expansion capital expenditure to 105,000tpa,” said Mr Blackhurst.

The project’s key competitive advantage is its license to substantially expand capacity – which is uncommon for an existing, relatively small plant in China – and plans for vertical integration, including a nearby source of good quality dolomite (magnesium ore) and new magnesium alloying capacity.

Existing alloyers generally buy pure magnesium from magnesium producers, then re-melt the magnesium to add the alloying ingredients, with additional metal loss, energy costs, plant infrastructure and overheads.

“We will bypass this in one stage, capturing the whole alloying margin at nil or negligible additional cost, and we are expecting to maintain long term operational viability regardless of the long term magnesium price.

“This is an exciting time for the Company and its shareholders, for whom we expect to deliver significant returns over the months and years ahead,” said Mr Blackhurst.

The IPO prospectus is presently subject to a mandatory exposure period, which expires on Wednesday, 9 June, and the offer is scheduled to close on 3 July. The offer is not underwritten.

CMC aims to be one of the world’s largest producers of pure magnesium and magnesium alloy, supplying domestic Chinese and international customers with long term reliable supply. 
CMC believes that magnesium is a growth market that is far from mature and has enormous potential. Magnesium’s main advantage is its weight to strength ratio – its density is two-thirds of aluminium’s so it is often cheaper on a volume (rather than weight) basis, and the Board therefore believes that magnesium alloys are a superior and economic substitute for aluminium in many applications, such as in light weight vehicles and mobile electronic devices. Roskill Consulting Group has forecast strong consumption growth over coming years (approximately 6%pa), particularly in the magnesium alloy market (approximately 8%pa).

China dominates global magnesium production using the pidgeon process – a simple, cheap, robust and technically low risk thermal process, compared with the higher cost, capital intensive electrolytic processes used in the few remaining western operations. Most of the Chinse production comes from the Shanxi province of northern China due to the abundance of low cost coal, dolomite (magnesium ore), ferrosilicon and skilled labour in or around the province. 

CMC's Pingyao Magnesium Project, in which it is earning a minimum 75% interest, involves an upgrade of an existing magnesium ingot production plant in Shanxi province and a staged expansion to an ultimate production capacity of 105,000 tpa of pure magnesium and magnesium alloy by 2013. It has already received a non-binding letter of intent from China Construction Bank, one of the world’s largest banks, to debt fund up to US$14.6 million of the total expansion capital expenditure to 105,000tpa. 

CMC plans to restart the processing plant as a low-cost producer with a first phase expansion to 20,000tpa, including new, value adding magnesium alloying capability. The first phase expansion, which was subject to a technical review by Coffey Mining, is budgeted to require only US$7.9 million in capital expenditures, plus working capital.

Importantly, the Group intends to be a vertically integrated magnesium alloy producer over three key stages: dolomite supply, magnesium production and magnesium alloy production. Existing magnesium producers generally sell pure magnesium to alloyers, who then re-melt the magnesium to add the alloying ingredients (with additional metal loss, energy costs, plant infrastructure and overheads). The Group's strategy is to produce both pure magnesium and magnesium alloy and capture the whole alloying margin. 

The Group is backed by a management team who know how to operate in China and these key personnel (including the owner of the minority joint venture partner) have aligned their interests with shareholders by having a material shareholding in CMC. The local community also has a vested interest in ensuring the Group’s success, with the expansion project having been classified by the local government as a “preferred project”. A major Chinese automotive group is also planning to construct a car production plant in the area.

The Project has a rare permit for the full expansion to 105,000 tpa capacity.

The Group believes its competitive advantages – including its permit to substantially expand production (and therefore invest in its plant with confidence), its nearby source of good quality magnesium ore (dolomite) and proximity to other infrastructure and production inputs – will enable it to produce magnesium and magnesium alloys at a relatively low marginal cost compared with its peers, and that it will therefore maintain long term operational viability regardless of the long term magnesium price.