Only a handful of WA companies completed substantial capital raisings in the March quarter. We analyse how they went about it.
Only a handful of WA companies completed substantial capital raisings in the March quarter. We analyse how they went about it.
MARK Connelly didn’t spend much time settling into his new office when he joined Papillon Resources last November. Instead, just a few days in the role, the new managing director embarked on the first of several interstate and overseas road shows.
In the space of four months, Mr Connelly estimates he made about 100 presentations to investors and brokers, in cities from Cape Town to Toronto, and Melbourne to Miami.
He did manage a visit to Rottnest Island, but that was for work as well, for the annual Euroz investor conference.
When Papillon decided it was time to raise new equity to support development of its Fekola gold project in Mali, the investors and brokers were primed.
Its $52.9 million share placement ended up being two-and-a-half times oversubscribed, an extremely rare experience in the current market environment.
Mr Connelly believes constant courting of the investment community is now an integral part of the job.
“The role of the CEO has changed dramatically over the past five years,” Mr Connelly told WA Business News.
“You are a marketing machine more than a technical machine or a financial machine.”
Papillon was one of only three Western Australian companies to raise more than $50 million of new equity in the March quarter, WA Business News’ latest corporate finance survey has found (see Corporate Finance tables).
And it was one of only 14 companies to raise $10 million or more, which explains why most brokers and corporate advisers say there is a ‘capital strike’ in force.
Another standout in the March quarter was mining contractor MACA, which raised $56 million in fresh equity along with a sell-down of 14 million shares by five of its founding shareholders.
The Papillon and MACA deals are notable for a few reasons; they were relatively large capital raisings in a weak market, they issued straight equity, and they raised the funds at only a small discount to their prevailing share price.
Other companies have been forced to deeply discount their capital raisings, or they have opted for quasi-debt or structured debt instruments.
Or they have jumped into bed with a major, usually offshore, investor.
None of these options is particularly appealing for company directors trying to build a business for the long term, but the difficult market conditions mean most listed companies that need the money have little choice.
The dearth of initial public offerings is another measure of how tough market conditions have become.
One of the few companies that launched an IPO was Frontier Resources, which tried to spin-out its subsidiary, Torque Mining, in a $4 million deal.
However, Frontier canned the IPO after failing to attract sufficient investor interest.
On a positive note, a couple of large block trades took place during the March quarter.
Macquarie Capital managed the sale of Clough’s shareholding in contractor Forge Group, realising total proceeds of $187 million.
It also managed the sale of Regent Pacific’s shareholding in iron ore miner BC Iron, a deal worth $81 million.
Papillon’s $53 million capital raising followed increased investor interest in the stock over the past four years.
This was reflected in its share price, up from just a few cents in mid-2009 to a peak of nearly $2 in October 2012.
Like most gold stocks its share price has weakened over the past six months, and is currently trading just above $1.30, in line with the pricing of its placement.
Mr Connelly said the number one selling point for the stock was the size and grade of its Fekola gold project, and the potential for growth in its gold resource.
It expects to be a low-cost gold producer with a 12-year mine life and the potential to at least double that.
Another plus for Papillon is its board of directors, led by chairman Ian Middlemas and nonexecutive director Robert Behets.
Their track record includes the highly profitable development and sale of Africa-focused uranium stock Mantra Resources.
Mr Connolly said he was attracted by the uncomplicated, clean structure at Papillon, and the disciplined approach it took to its business.
“That’s a testament to the way Ian sets up companies,” he said.
Mr Connelly brought extensive mining experience in Africa to Papillon, having worked for Newmont and Adamus in several different countries.
His experience at Adamus, since merged with Endeavour, makes him one of the few Australians to have actually developed a greenfields mining project in Africa.
Its capital raising, lead managed by Canadian firm RBC Capital Markets and backed by local brokers Euroz and Argonaut, gives it sufficient funding to mid-2014, when it expects to have a completed definitive feasibility study.
Northern Minerals managing director George Bauk is also trying to lock in sufficient funding for his company, so that it doesn’t have to go back to the market for small ‘drip feed’ capital raisings.
Northern put together a $58 million funding deal with its main backer, investor Conglin Yue, which featured two asset sales, a share placement, and an underwritten entitlement issue.
However, with its share price around 15.5 cents, well below the entitlement issue pricing of 20 cents, it’s proving hard to sway investors.
Northern has extended the closing date for the entitlement issue by a month, and taken an interest-free $4 million loan from Conglin International Investment Group so that it can start drilling its Browns Range rare earth project.
“We are confident of achieving results that will drive value for our shareholders,” Mr Bauk said.
Tanami Gold completed a $65 million entitlement issue during the quarter, but only after accepting a deep discount on the pricing.
It was forced into action late last year because it had a $50 million debt due to be repaid.
A road show to drum up interest in a capital raising had gained little traction, and discussions over a convertible note facility had similarly failed.
Consequently, there was little option left for Tanami Gold but to undertake a rights issue at a heavily discounted price - in this case 64 per cent less than what its shares were trading at.
Acting chief executive Peter Cordin was the man to negotiate the rights issue, priced at 20 cents per share.
“Obviously the board looked at a number of ways to refinance the company; in today’s market it’s very difficult to raise funds,” Mr Cordin told WA Business News.
“At the end of the day with the quantum that was required, the sentiment was that new investors would prefer to put money into further advancing the company’s assets.”
Major shareholder Hong Kong-based Allied Properties Resources accounted for much of the $65 million raised.
Allied also provided a bridging loan, which had been extended by just over $6 million at the start of 2013 to make the total debt owed about $51 million.
“The fact that they had provided the debt funding to support it through 2012 was a strong indication that they were supporters of the company and its assets,” Mr Cordin said.
“So for them it was quite an easy decision to participate in the rights issue.”
It’s been only three months since Mr Cordin joined Tanami on a temporary basis; his next job is to find a managing director to handle the development of the Central Tanami project, which is subject to an imminent feasibility study, That project would be the key to taking the company forward with cash costs of around $850 per ounce, much less than the $1,500 cost of producing an ounce from the company’s other project - the Coyote Gold Project - which currently only has a couple of months of mine life remaining.
But advancing that has been somewhat thwarted by the departure of a number of key staff; company founder Dennis Waddell left in November due to what’s understood to have been ‘political’ tensions, while former managing director Graeme Sloan left a year earlier.
“There’s always a challenge in the mining industry but there’s a good technical team here,” Mr Cordin said.
