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China Hanking earmarking US$300M for project acquisitions

? China Hanking will launch a US$100 million fund with joint venture partners for mining asset acquisitions and will secure US$200 million in lines of credit

? Targeting a debt ratio of less than 60% this year

? Company may sell high-cost iron ore assets to "optimize" its portfolio

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President and CEO Pan Guocheng

After the A$330 million sale of Australian gold unit Hanking Australia Pty. Ltd., China Hanking Holdings Ltd. is seeking to diversify its asset portfolio through acquisitions while limiting additional investments in its existing iron ore and nickel operations.

S&P Global Market Intelligence sat down with President and CEO Pan Guocheng in Hong Kong to discuss the company's appetite for M&A as well as development strategies. The following is an edited transcript of that interview.

S&P: China Hanking has in recent years been seeking to diversify its portfolio. How is that coming along?

Guocheng Pan: We are still searching for acquisition targets, especially in countries with lower operating risks, including Australia, as well as some countries in North America, Central Asia and Southeast Asia.

In terms of metals, we are interested in precious metals and strategic metals like lithium, uranium, nickel and zinc. The operation model will be similar to what we have done with the Southern Cross gold project in Western Australia, where we maximize the project value through exploration and operation, then sell it.

Does this mean that China Hanking will not hold these assets in the long term?

The timing to sell is very important. We hope to acquire a project during the bottom of a cycle and sell it when the market recovers. The assets could change hands quickly or we may treat them as long-term assets, subject to market conditions.

Generally speaking, we are looking for an over-50% compounded annual growth rate in asset value with these acquisitions.

What is your budget for acquisitions? Will this planned expansion affect cash flow or debt levels?

The acquisition war chest will be around US$300 million, consisting of a US$100 million investment fund for mining asset acquisitions and US$200 million lines of credit.

We are negotiating with mining companies and investors to establish an investment fund of around US$100 million, with each stakeholder contributing around US$20 million. With that, we can secure an additional US$200 million in credit lines from banks.

Such a plan will not affect our cash flow as we are not planning any significant CapEx for our iron ore or nickel operations. The capital will focus on securing new projects.

On debt, we are looking to reduce our debt ratio to below 60% this year, as we consider debt restructuring options such as equity financing and issuance of convertible notes.

What role will your nickel and iron ore operations play in the expansion?

We are making strategic adjustments for nickel business. While we are seeking partners for our nickel processing plant in Indonesia, we expect production at our Hanking Group nickel project in the country will record significant increases over the next few years.

Amid these changes, our iron ore operations ensure a stable and healthy cash flow. We may sell iron ore projects with high production costs in a bid to optimize our asset portfolio. With the ramp-up at the laterite project, we expect our iron ore and nickel segments to run neck and neck in contributing to the company's revenues.

Why is China Hanking moving to diversify its assets?

The idea is to hedge against the cycle risks. It is not sustainable if we solely rely on one metal. It is also in line with the promise we made to shareholders when we went public in 2011 to develop into a more diversified miner. The experience with the Southern Cross deal also proves that our team is capable of this.

Gold operations accounted for over 50% of the company's total revenues in 2016. After the sale of Hanking Australia, do you expect earnings to decline this year?

Our net cash flow and profits were mostly supported by our iron ore business in 2016, so I don't think the underlying would be significantly affected by the sale. We currently have no exposure to gold projects, but we still have a professional team for the metal. So we will continue to seek gold project opportunities.