Reaching a tipping point

Emeco Holdings Ltd’s decision to go to the market this week seeking $1.1 billion is a clear and confident statement in the continuing strength of the current boom.

The West Perth earthmoving equipment group, whose display yard has long been a landmark on the Great Eastern Highway, joins an unprecedentedly long list of Western Australian floats and capital raisings in 2006.

This activity has been fuelled by a boom in commodities prices that has been reflected, and often magnified, by the stock market’s thirst for new investments.

It would have been hard for anyone in the resources-linked corporate sector not to have made a dollar this calendar year.

However, this rosy picture obscures the fact that the market may well have reached saturation. More than half of the IPOs listed during the past six months have had their current share price fall below issue price.

So with the current market volatility, highlighted this month by two of the biggest one-day declines in the share market since September 11, 2001, the question is where to from here?

Paterson Securities Ltd head of corporate finance, Aaron Constantine, told WA Business News he thought IPO activity would be pretty quiet over the next six to eight weeks with people needing to absorb the correction in the market.

“In a stable market… companies are always looking to float and raise capital,” Mr Constantine said.

“We might not see that at the same level in the future.”

Instead, more of a focus will be placed on aligning a company’s share price with its value.

“The share price isn’t always about a company’s overall value, so I think more people will be [more] acutely aware of aligning a company’s value with its share price,” he said.

“I don’t think the equity market will be as robust or as exciting in the foreseeable future as it has been.”

A more bullish view was taken by Grange Consulting executive director David Riekie.

“The general viable feeling is there are still legs in the market,” he told WA Business News. “There is still demand on quite a significant scale for infrastructure resources.

“I don’t see a slackening in the resource players with the likes of China requiring our iron ore, highlighted by a 19 per cent increase in contract iron ore prices,” Mr Riekie said.

There will always be a continued interest in resources, energy and base metals. However, it will be interesting to see how much life is left in the uranium market considering how much time it may take to get to production stage.

Mr Riekie said a reasonable litmus test was whether the company was going to be able to raise the money or not and to postpone the capital raising if necessary.

“Sometimes, like now when the market is overheated, it might not be the right time to sustain a float,” he told WA Business News.

In the past couple of weeks, WA companies have taken these words on board, citing the volatile market as reasons to pull their previously announced fund raising moves.

Last week, West Perth-based oil and gas explorer Baraka Petroleum Ltd advised that its proposed capital raising of up to $35 million had been postponed until later in the year following consultation with lead manager, Royal Bank of Canada, and co-manager Paterson Securities Ltd.

The previous week, Herdsman-based diversified explorer  Northern Mining Ltd withdrew its prospectus, dated June 6, citing the current volatility in the share market as the major reason.

Argonaut Capital Charles Fear said the correction, using the classic statement, was “something we had to have”.

“Equity market transactions are extremely buoyant,” he said.

“The resources market in Western Australia is a long-term stable market.  There has been a shift in the commodity prices but they should come back.

“When you get people selling in Perth and buying in Sydney, you know that is a good reflection on the market at present.”