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Canada's Sunshine Oilsands heads for Hong Kong IPO

A Sunshine Oilsands project.

Sunshine Oilsands

Sunshine Oilsands, a Canadian company backed by Chinese state-owned enterprises, has shunned Toronto and will next month launch an initial public offering in Hong Kong that could raise as much as $600m.

The company plans to sell a 25-per-cent stake in the offering, according to people close to the deal, with the shares due to start trading by the end of February. It would be the biggest IPO so far this year anywhere in the world, according to Dealogic.

Sunshine's decision to float its shares on the Chinese exchange is significant because its peers have traditionally listed in Toronto, where investors have years of experience valuing unconventional oil deposits.

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Sunshine's choice of Hong Kong was influenced by some of its key shareholders, which are controlled by the Chinese government. Last March Sunshine raised $230-million from investors including China Life Insurance and Bank of China Group Investment.

China is the world's second-largest crude importer, after the U.S., and its voracious appetite for oil has prompted Chinese companies to invest aggressively in non-traditional oil sources including oil sands, shale oil and gas, and deepwater oil reserves.

While oil sands projects, most of which are based in Alberta, have come under criticism in Canada and the US because of their environmental impact and carbon emissions, Chinese companies have had few qualms about investing in them. Last year CNOOC Ltd. , China's largest offshore oil producer, acquired Opti Canada, a bankrupt oil sands producer, for $2.1-billion including debt.

Sunshine and its IPO bookrunners - Bank of China International, Deutsche Bank and Morgan Stanley - started sounding out potential investors on Monday and will begin taking formal orders for the shares next week.

The company plans to set a final price for the shares on Feb. 14, ahead of its stock market debut on Feb. 21.

The share sale will provide a key test of investor demand in the Hong Kong market, which has hitherto seen few listings by early-stage resource companies.

As Sunshine's projects are at an early stage of development, the company will not generate a profit until 2014 at the earliest, according to a report by Bank of China International. The report values the company from about $1.8-billion to $2.3-billion, but warns that it faces "high execution risk" and would suffer from a decline in the price of oil.

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Sunshine was founded in 2007 by Michael Hibberd, a former financier at ScotiaMcLeod, and Songning Shen, a professional geologist who has worked at several oil groups including Bohai Company, a subsidiary of CNOOC. Mr Hibberd and Mr. Shen are now co-chairmen of the group.

Oil sands are composed of bitumen mixed with sand, clay and water. In an expensive procedure, the bitumen needs to be extracted from the sand using hot water or steam and then processed before it can be fed into a typical refinery.

Other major oil sands investments from Chinese companies include Sinopec's $4.7-billion investment in Syncrude in 2010 and PetroChina's $1.7-billion investment in Athabasca Oil Sands, a private company, in 2009.

In the U.S., controversy over Canadian oil sands has become a key political issue for President Barack Obama as he faces re-election later this year. Environmental groups have pressed the president to deny approval for the construction of a major oil pipeline, known as Keystone XL, that would link Canada's oil sands with the Gulf of Mexico. Subsequently the U.S. Department of State delayed approval for the pipeline on the grounds that it needed more time to study its environmental impact.

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