Miners still need to plant their flags in London

November 22, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

HONG KONG — Carpet-bagging miners are going where the money is. Russian aluminium producer Rusal started a trend in January when it pitched its $2.2 billion initial public offering in Hong Kong. Now Resourcehouse, an Australian miner, may follow, and Brazilian iron ore giant Vale is considering Hong Kong for a secondary listing. For all that, though, London still comes out on top.

Hot Asian share prices make for attractive IPOs, but liquidity counts for more in the long run. The annual value of shares traded in Hong Kong more than tripled over five years to $1.5 trillion in 2009, says the World Federation of Exchanges. Yet in the same study, London registered twice as much. The number of mining companies listed in Hong Kong remains in low double digits — with many of them based in China.

That leaves Hong Kong short on another valuable resource mining companies need: good information. Star sell-side analysts still sit in London or Sydney, where giants like Rio Tinto and BHP Billiton reside and where global investment firms still make many of their big decisions. When analysis is hard to come by, statistical studies have shown that companies’ costs of capital tend to be pushed higher.

Finally, there’s governance. High standards matter in a corruption-prone industry like mining. Here, Hong Kong is still playing catch-up. Quarterly reporting is almost unheard of, and local tycoons often overpower regulatory reformers. Look at free floats: Rusal was allowed in with a narrow public float of 11 percent, where London generally demands 25 percent.

Smart miners may choose to follow Vale and have a foot in both camps. Glencore may also list in London but host a secondary listing in Hong Kong. That would give the Swiss trader strong liquidity, and a common share currency with putative takeover target Xstrata, but with an option to shift its weight towards Asia later.

There’s cache, too, but depth of the market knowledge sharpens London’s edge and crucial advantages come in terms of costs of capital. It is no coincidence that Indonesia’s wily Bakrie family, when it announced this week it planned to create a national coal-mining champion, chose London-listed Vallar as its vehicle. Mining companies’ trade flows point East, but for capital, West is still best.

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