REHT's GSRE Plan Facing Cancellation

Reports say that Gansu Rare Earth New Material Co., Ltd. (GSRE) will submit all relevant material by the end of 2010 to secure their IPO in the first half of 2011. This implies that Baotou Steel Rare-Earth (Group) Hi-Tech Co.,Ltd. (REHT) has aborted its plan to acquire GSRE. However, according to an insider, the plan to acquire is still active despite of GSRE’s intention to list. Thus, Gansu is preparing for both listing and restructuring.

Founded on 15 May 2003, GSRE, formerly known as 903 Factory, was initially established in October 1969. According to information,GSRE offers integrated services including smelting, separation and deep processing of rare earth with a smelting and separation capacity of 30,000 tons of rare earth concentrate and a sorting and casting capacity of 20,000 tons of rare earth chlorides per year. GSRE has total assets of RMB 0.7 billion and net assets of approximately RMB 0.1 billion.

According to a source, REHT originally intended to acquire GSRE as early as 2008. The practicality of the matter is that in the midstream of the rare earth production chain,GSRE does not have the rare earth resources it needs itself, and it does, in fact, purchase this material from REHT. This opportunity therefore offers the chance of further cooperation between two companies whose resources complement each other.

In August 2008, REHT and GSRE, with a shareholding ratio of merely 3%, worked together on the creation of the Inner Mongolia Baosteel Rare Earth International Trade Co.,Ltd. At that time, REHT establishing a trade company as a major shareholder was widely considered a step for consolidation within the rare earth industry.

Unfortunately, nothing materialized from this.An insider disclosed that REHT has maintained contact with GSRE on the issue of consolidation, even during the financial crisis. However,consolidation seems to have stalled since REHT did not submit a mature restructuring plan to the Gansu State-owned Assets Supervision and Administration Commission. This made the local government anxious.

REHT has remained silent as to the reason for slow progress of consolidation. Indications from an insider suggest that cooperation between GSRE and REHT is insufficient at present.

Gansu, though eager to develop its local enterprises, has found it impractical to develop GSRE merely by relying on the industry leader.Therefore, with the encouragement of the Gansu provincial government, GSRE has been planning for independent listing since 2009.

“At the end of 2009, GSRE submitted relevant material but later withdrew”, a China Securities Journal reporter was told. At that time,GSRE completed all preparatory works for listing, but due to the impact of the sluggish econ-omy, GSRE was severely hit in 2008 and the first half of 2009, resulting in a suspension of the listing plan.

Now, steps to list GSRE have been taken again.The Gansu State-owned Assets Supervision and Administration Commission requires that GSRE makes full use of the current favorable market conditions, strengthen its evaluation of the economic situation, and organize intermediaries to prepare the application materials, so as to be able to submit the relevant materials by the end of 2010 and secure IPO listing in the first half of 2011. According to the insider, due to the preparatory work previously conducted,GSRE is expected to become the first stateowned enterprise to complete its IPO listing among all unlisted state-owned enterprises in Gansu.

REHT do not seem to have given up its acquisition plan despite the independent listing plan of GSRE. “REHT has kept in touch with GSRE,” said a GSRE insider. Since REHT did not reject the acquisition plan outright, Gansu hopes that GSRE will fully prepare for both aspects.