09/01/2007 - 22:00

Caution urged amid record IPO high

09/01/2007 - 22:00

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Float activity in Western Australia may have hit all-time highs last year, but analysts remain wary that quantity doesn’t always mean quality.

Caution urged amid record IPO high

Float activity in Western Australia may have hit all-time highs last year, but analysts remain wary that quantity doesn’t always mean quality.

In 2006, WA-based IPOs fell one short of a century, with capital of more than $2.3 billion raised compared with 54 IPOs in 2005 that raised $1.1 billion.

Of last year’s 99 IPOs, almost 64 per cent were trading above issue price for the year, substantially higher than the performance of previous years.

The trend throughout 2006 was a rush of mining juniors eager to cash in on the booming commodities sector, with more than 73 per cent of total IPOs involved in some form of mining and/or exploration.

However, while IPO numbers were at a record, analysts were wary about the quality of some of the floats for 2006 and stressed the need for investors to take a closer look at new offers, since quality projects would be harder to find.

According to Pattersons Securities executive chairman Michael Manford, there would continue to be substantial deal flow for this year, “...but I think the market will become more selective about what it will and what it won’t support.”

This was a view echoed by Asandas investment adviser Rod McMahon, who said investors would need to be more selective this year.

“The quality has not been as good across the board but there are some good deals in the pipe line,” he said.

Analysts believe investors have become more wary of pricing for new issues with an increase in the amount of risk involved in new floats since pricing was at a premium.

“Investors have been very successful in the past few years,” Mr Manford said.

“They’ve had good experiences with new issues and most capital raisings have been successful…but I think the risk has increased now in terms of pricing for new issues.”

However, while investors may have become more cautious about where they place their hard-earned cash, it doesn’t mean the end of IPO activity.

“I think that there will be continued deal flow for capital raisings in the early part of the year,” Stripe Capital director Tim Weir said.

“A lot of investment will still go in the ground and I think there will be a lot of prospectuses put together, but the focus will be on exploration.”

Of the junior explorers that clamoured to make their mark on the ASX in 2006, 13 were uranium explorers, with nine listed inside the top 20 floats based on share price performance above issue price.

The better performers among the uranium juniors included Northern Uranium Ltd (up 315 per cent), Mantra Resources Ltd (up 250 per cent), Encounter Resources Ltd (up 198 per cent) and West Perth-based Giralia Resources Ltd spin-off, U308 Ltd, (up 195 per cent).

But the highest return belonged to another spin-off of Giralia’s, iron ore, gold and base metals minnow, Red Hill Iron Ltd, which gained a 700 per cent from its issue price after listing last February.

Following the float, the company, through its joint venture with API Management Pty Ltd, a joint venture company 50 per cent owned by Aquila Resources Ltd, has explored prospects at its Red Hill tenements in the West Pilbara. API recently spent more than $4 million on the exploration for deposits, earning it a 60 per cent interest in the project.

Gold explorers Ironbark Gold Ltd and Fairstar Resources Ltd also fared well in 2006, posting 550 per cent and 420 per cent hikes on their issue prices respectively.

The top 20 floats of 2006, despite being dominated by iron ore, uranium and gold miners and explorers, also included engineering and mining service companies.

Civil and structural engineering player VDM Group Ltd, which listed in February after completing a $12 million capital raising, gained 152 per cent on its issue price, while mining services and contracting company Mineral Resources Ltd gained 122 per cent.

Nationally, WA recorded the greatest amount of IPO activity for the year and second highest in terms of total capital raised. New South Wales generated the greatest value of IPO activity with 49 raising a total of more than $4.3 billion, according to the latest Deloitte IPO report.

While value generated by IPO activity almost doubled in Western Australia, nationally it was a different story with total capital raised reducing from $15.2 billion in 2005 to $8.5 billion due to a reduction in the number of large infrastructure and listed investment company floats in the past 12 months.

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