Prosperity Minerals Holdings (AIM: PMHL) has taken another step towards selling its Chinese cement business Upper Value Investments Limited official, having entered into a conditional sale and purchase agreement for the disposal with TCC international Holdings (HKG: 1136) to focus its investment strategy on its iron ore business and seek expansion into new markets in China.
Upper Value, which is currently owned by Prosperity’s wholly owned subsidiary Pro-Rise Business Limited, will be sold for a total cash consideration of HK 3,800 million (circa £300 million), or roughly twice Prosperity’s current market cap. The consideration assumes that the shareholder loan to be transferred to TCC is about £86 million.
Following the completion of the transaction, which is now subject to approval from Prosperity’s shareholders, the company will increase its cash position by £300 million and will have no significant debt. The agreement will terminate if not completed by 31 May 2010.
The completion is expected in March 2010.
The “capital intensity” of the cement business was stated as the reason behind the sale as due to high transportation costs each cement plant had a limited geographical reach and would require a continuous investment flow in new production facilities, thus limiting Prosperity’s ability to invest in its existing iron ore related business, which it now intends to concentrate its capital. The company will also look into venturing into other businesses in China, such as real estate or natural resources.
“Capacity expansion is also often hampered by lack of suitable sites for the new plants. Therefore, while the cement business has generally performed well historically and the outlook for its existing cement operation is promising, the board believes that it will become harder to achieve further significant organic growth in the cement business,” said Chairman and Chief Executive of Prosperity Wong Ben Koon.
The agreement follows the MoU (memorandum of understanding), which was signed by the companies in late November. Shares in Prosperity rose 17% on the news of the MOU and were suspended from trading on 14 December, pending the issue of an announcement about the transaction. The suspension was lifted today and shares added a further 20%.
Prosperity will retain its 33.06% interest in Anhui Chaodong Cement, which is located in Anhui Province in eastern China, currently producing approximately 3.4 Mt (million tonnes) of cement per annum with plans to increase production to 6.7 Mt per annum by the end of 2011. Anhui Chaodong Cement is listed on the Shanghai Stock Exchange (SHA: 600318).
Prosperity will also retain its iron ore trading business.