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Friday, 25 Apr 2014

Case study: China Vanadium Titano-Magnetite Mining Co. Ltd

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   China Vanadium Titano-Magnetite Mining Company Limited (the “Company”) is the largest privately owned and second overall largest operator of iron ore mines by output volume in Sichuan Province. The Company is primarily engaged in mining, ore processing, iron pelletizing, and the sale of iron concentrates, iron pellets and high-grade titanium concentrates.

 

The Company owns and operates vanadium-bearing titanomagnetite ore mines, a type of magnetite that contains vanadium oxides and titanium oxides in addition to iron oxide. It is used to produce iron ore pellets and concentrates containing vanadium, as well as titanium products. The Company derives over 90% of its earnings through the sale of vanadium-bearing iron ore products, while a fraction of its earnings also come from the sale of titanium concentrates.

 

Sky Mountain identified, closed and managed a US$90 million pre-IPO share swap buy-side investment in the Company in 2008. This transaction was short-listed for China Law and Practice Private Equity Deal of the Year. Sky Mountain worked closely with top management and in October 2009, the Company successfully raised US$ 266 million in a Hong Kong IPO.

 

The Company’s operations benefited greatly from the IPO. Having already owned two mines and two processing plants in 2009, the Company used the proceeds of its October 2009 IPO to acquire a further two mines and three processing facilities.

 

Sky Mountain identified the Company as a key investment opportunity in part because of its unique positioning and appropriate timing. The addition of vanadium to steel is necessary to improve the strength, hardness and malleability of steel. Vanadium has increased in importance in recent years due to PRC nation-wide policies specifically requiring the use of high-strength steel in construction, partly in response to the Sichuan earthquake. Titanium-related products exhibit strength and ensure resistance and are widely used in many industries, such as the painting, paper manufacturing, plastic, chemistry, aviation and metallurgy industries.

 

The PRC holds one of the world's largest reserves of vanadium-bearing titanomagnetite, along with Russia and South Africa. The Company's mines and production facilities are all located in Sichuan's Panxi region, an area that contains over 80% of the vanadium-bearing titanomagnetite reserves in the PRC.

 

The Company benefits from a number of competitive advantages. The ores can be mined using the lower-cost open-pit mining method. Furthermore, due to the relatively high titanium content of the ore, the Company is able to separate iron concentrates and titanium concentrates simultaneously through a single production process and thereby benefit from significant cost efficiencies. A further cost advantage is derived from the Company's proximity to Sichuan steel producers, the price of locally produced iron ore products being generally lower than imported iron ore because of transportation costs involved.