Nov. 29 (Bloomberg) -- China Coal Energy Co., the nation's second-largest coal producer, plans to raise as much as HK$13.16 billion ($1.69 billion) in a Hong Kong initial public offering to fund expansion, said two people with knowledge of the matter.

China Coal will begin selling 3.25 billion shares at HK$3.20 to HK$4.05 apiece today, according to the people, who declined to be identified until the terms are made public.

``It's a fundamentally good company,'' said Ke Shifeng, who helps manage $2.3 billion of Greater China stocks at Scotland- based Martin Currie Investment Management.

Coal accounted for about 70 percent of China's energy consumption in 2005. Coal miners in China, the biggest producer and consumer of the fuel, are increasing capacity to meet rising demand from power stations in the world's fastest-growing economy. Demand for the fuel may increase 8.5 percent to 2.51 billion tons in 2007, according to China Economic Information Network, a government-backed research center.

The company plans to invest 13.7 billion yuan ($1.75 billion) between this year and 2008 to expand coal production and trading, according to a Nov. 17 report by Citigroup Inc., one of the banks arranging the share sale. The amount would represent 66.5 percent of its total capital expenditure in the three years.

China Coal, which employs 51,792 people, is also China's largest coal mining equipment maker by turnover and one of the largest domestic coke producers that are not part of a steelmaker, according to the Citigroup report.

60 Years' Supply

China Coal has nine underground mines, where production is more costly, and three open-pit mines. Most of them are in the northern Chinese province of Shanxi. Three of the mines are still under construction.

It has 3 billion tons of marketable coal reserves, which will sustain production for 60 years at last year's output level, according to the report. The coal division, including both production and trading, contributed 84 percent of total revenue and 93 percent of net operating profit last year.

China Coal's output of 50.1 million tons of coal last year ranked second to the 121 million tons reported by China Shenhua Energy Co., the Hong Kong-listed unit of China's largest coal producer. The output would place China Coal as the seventh- largest listed coal producer in the world.

Could Be Boosted

China Coal's IPO could fetch as much as $1.85 billion should an option to allot more shares to cover excess demand be exercised. That would expand the sale to 31.8 percent of the company's enlarged share capital, the people said.

Institutions can buy shares in the IPO from today through Dec. 12. Hong Kong retail investors can begin placing orders on Dec. 6. The shares will start trading on the Hong Kong stock exchange on Dec. 19.

China International Capital Corp., Citigroup Inc. and Morgan Stanley are arranging China Coal's share sale. Spokespeople at the banks weren't immediately available for comment.

In addition to expanding production, the IPO proceeds will turn China Coal's 192 percent net debt-to-equity ratio to a net cash position, Citigroup said.

China Coal is mulling acquiring assets from its parent China Coal Group to diversify into the production of coal-based chemicals, the bank's report said.

Earnings Growth

Citigroup expects China Coal's earnings to fall 7 percent this year to 3.11 billion yuan. However, expanded production and cost cutting will drive earnings growth of 29.5 percent next year to 4.02 billion yuan and another 10.9 percent to 4.46 billion yuan in 2008.

While rising unit coal prices were a key driver behind its profit growth in 2004, increases in production costs outpaced those of selling prices last year.

Citigroup expects Chinese coal prices will peak after a 6.7 percent rise next year with the easing of a domestic shortage, increasing sector investment, expanded supply and reduced exports. Yuan appreciation will also make imported coal cheaper.

Macroeconomic tightening in China, leading to slower manufacturing growth, is slowing down increases in electricity and hence demand for coal.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

Last Updated: November 28, 2006 23:46 EST