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Kinetic Mines prioritizing acquisitions over cash return to shareholders

Kinetic Mines & Energy Ltd. would prioritize acquisitions over dividend payments, as it plans to take advantage of a government-led restructuring initiative across China's coal sector to expand its production capacity, according to MK Lau, head of corporate finance and investor relations.

"It is possible that we may suspend dividend payments if a good project becomes available for acquisition," Lau told S&P Global Market Intelligence at an earnings briefing in Hong Kong on March 22. For 2017, the company's net profit surged 291% to 540 million Chinese yuan, with revenues rising by 66.4% to 1.75 billion yuan.

The company declared a final dividend of 3 Hong Kong cents per share, in addition to an interim dividend of 1 cent per share, in 2017, according to Lau.

The eagerness in looking for acquisition targets has intensified as Chinese authorities have strengthened controls over the annual production capacity for domestic producers. The production capacity of the company's flagship Dafanpu coal project in China's Inner Mongolia province has been capped at 5.1 million tonnes by the government, Lau said.

Kinetic Mines sold a total of 3.7 million tonnes of commercial coal in 2017, up 35.3% from 2016, and plans to continue to ramp up production considering the positive market outlook, according to Lau.

"We are looking for high-quality projects to expand capacity," Lau said, noting that the Chinese government has been encouraging restructuring and M&A deals among domestic coal companies.

"It is a great opportunity for the company and we are open to deals with both private and state-owned companies," Lau said. He added that Kinetic Mines would prefer a restructuring or merger deal with a company that is of the same scale.

The ambition is also backed by the company's cash flow and balance sheet, according to Financial Controller Shelly Han. "Our finance costs have been declining as we repaid debts and secured lower interest rates from banks," Han said.

The company has 298 million yuan in cash as of Dec. 31, 2017, and its leverage ratio was around 33%, according to Han.

CEO Gu Jianhua said that the company will also continue to upgrade existing production capacity and increase investments in automation, safety and the environmental.

As of March 21, US$1 was equivalent to 6.33 Chinese yuan.