03/10/2013 - 15:37

Juniors warming to green shoots

03/10/2013 - 15:37

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The past year has been tough for listed WA companies looking to raise funds but a lift in activity during the past three months has the industry cautiously optimistic.

Juniors warming to green shoots
Hartley’s head of corporate finance Grey Egerton-Warburton said activity levels remained relatively low compared to two years ago.

“HOPE is a good thing. Maybe the best of things, and no good thing ever dies.” So said Tim Robbins’ character, Andy Dufresne, in the 1994 film, The Shawshank Redemption.

Andy, a prison lifer, knows the importance of keeping hope alive, positively dealing with the issues he can control and remaining upbeat about those he can’t.

It is a sentiment adopted by many of the state’s junior resources firms, which, while hopefully not serving a life sentence, have weathered a torrid 12 months on local markets.

Fundraising activity through the Australian Securities Exchange has been largely subdued, as the sector adjusts and adapts to the new reality of super-tight access to capital, volatility across commodity prices and global economic uncertainty.

‘Mum and dad’ retail investors have almost disappeared, while institutions are currently only interested in funnelling funds into companies with a solid track record, prominent and experienced management teams, and, perhaps most importantly, quality projects.

The initial public offerings market has also been hit hard, with no fresh listings occurring in Western Australia in the financial year to date.

“Capital is a finite resource,” Steinepreis Paganin partner Jonathan Murray said. “It’s not there for everyone, and the market is quite different to what it was six, to nine, to 12, to 18 months ago.

“I’m not saying where caution there is scepticism, but people are really looking before they leap and writing cheques to back projects, or provide their intention to support.”

Argonaut Securities managing director Eddie Rigg said raising funds was particularly difficult for speculative explorers in the resources sector.

“In the small resources index, people don’t necessarily want to play,” he said. “They just don’t want to deal with resources; they will play in oil and gas, but they particularly don’t want to play in metals and mining.”

The situation has left junior resources companies, reeling from the cumulative effect of external events, looking for their ‘Andy’ – a catalyst to snap the market out of its slumber.

While it is not a cure-all for the ills facing local equity markets, many consider the recent change of government in Canberra as a significant step towards rebuilding confidence.

Cannings Purple managing director and Business News 40under40 winner, Warrick Hazeldine, said the change of government should encourage more significant transactions from offshore fund managers.

“Any large transaction into Australia will require Foreign Investment Review Board approval and there was a caretaker period throughout the last quarter so these larger transactions haven’t been approved,” he said.

“I expect leading into Christmas you’ll see a number of larger transactions being announced to the market.”

Before the election, however, the first ‘green shoots’ were already starting to appear, with a flurry of fundraising initiatives launched by small to mid-cap resources firms.

According to Business News’ research, there were 69 capital raisings launched over the three months to September 30, with 43 of them totalling $5 million or less.

In the previous three months, there were 53 raisings, with 31 coming in under $5 million.

The vast majority of these, however, was at significant discounts to companies’ prevailing trading prices, Mr Murray said.

“Sometimes those discounts, they are really what the market dictates or what the market will bear, so they can be quite savage,” he said.

“But what are the prospects facing that company if you don’t resuscitate and recapitalise? You’re probably faced with pretty dire decisions and consequences.”

Those market conditions, Mr Rigg said, had forced companies to consider alternative means to raise money than the issuing of shares.

An example was Gindalbie Metals, which announced in late September it was selling more of its stake in the Karara magnetite project in the Mid West to its joint venture partner, Chinese steelmaker Ansteel, to boost working capital.

Under terms of the transaction, Gindalbie’s stake may be reduced to as little as 38 per cent in return for a $US230 million cash injection.

Gindalbie chief executive Tim Netscher said the funding solution was the best possible scenario for shareholders; a concept backed up by Mr Rigg.

“Virtually all of the alternative means are less dilutive than raising ordinary equity,” Mr Rigg said.

“We have got big pools of money available for those sorts of deals, but the difficulty is finding companies and management teams that are prepared to do that.

“They may cause a little bit of impost on the management team, but the benefit to shareholders can be far greater by doing a non-traditional or project level financing.”

Hartley’s head of corporate finance, Grey Egerton-Warburton, told Business News activity levels remained relatively low compared to two years ago, but signs of increased trading volumes and more readily available capital were evident.

“The phrase ‘green shoots’ has been used by various financial commentators since the early 1990s, to describe the early signs of economic recovery,” Mr Egerton-Warburton said.

“It seems an appropriate term to describe this junior and mid-cap resources and energy market,” he said.

Recent raisings include Talga Gold, which secured $2.3 million in July, to upgrade resources at its Nunascaara and Raitajarvi graphite projects in northern Sweden, which are considered among the highest grade and most advanced graphite deposits in the world.

Perennial explorer, Clive Jones’ Corazon Resources, also holds a project considered to have the potential to become world class – its Top Up Rise copper-gold deposit in the Gibson Desert.

The company raised $3 million in September, with Hartleys as its lead manager, to fund the second phase of drilling at Top Up Rise, which is considered crucial for the potential development of the project.

Underlining the importance of a project’s perception in the marketplace, however, was Buru Energy, which lined up a $100 million funding package to advance drilling programs in the company’s highly prospective Ungani oil field in the Canning Basin, in early August.

The package included a $35 million share placement, lead managed by Deutsche Bank, and a $5 million share purchase plan, which was five-times oversubscribed.

Buru’s plans for Ungani caught the eye of international giants Mitsubishi and Alcoa, which will separately provide $27 million in joint venture support, and $20 million in project support finance, respectively.

At the big end of town, UBS had a strong quarter, helping to arrange a $200 million rights issue for BWP Trust, as well as managing an $88 million placement for debt-ridden uranium miner Paladin Energy.

Paladin managing director John Borshoff gave credit to UBS and its network of institutional investors for the success of the placement, which was done at a 30 per cent discount to the company’s prevailing trading price at launch.

“They have good connectivity with our existing shareholder base, and because of their relationship with us, they know the Paladin story,” Mr Borshoff said.

“They have known us quite some time, and they are quite a powerful raising house in Australia. I think it was that combination that made it a success.”

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