08/04/2010 - 00:00

Shareholders come first

08/04/2010 - 00:00


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LISTED companies Western Areas and Coretrack are two businesses that raised capital during the March quarter, both effectively needing the funds to help with long-term growth strategies.

Shareholders come first

LISTED companies Western Areas and Coretrack are two businesses that raised capital during the March quarter, both effectively needing the funds to help with long-term growth strategies.

However, the differences between both companies are what helped shape the way in which those funds were pursued.

For nickel miner Western Areas, a combination of debt and equity was the way to go.

The miner a fortnight ago raised $125 million through a convertible bonds issue, a hybrid security with debt and equity features.

It essentially is a loan at a fixed interest rate that provides the bondholder the opportunity to convert the bond into equity, thereby sharing in the potential uplift in the value of the company down the track.

The Western Areas convertible bond issue has an annual rate of 6.4 per cent, with the bonds due in 2015. The bonds can be converted into Western Areas shares at an initial conversion price of $6.61 per share.

Western Areas chief financial officer Craig Oliver said the bond issue was the right capital-raising instrument as it allowed the miner to tap into the debt market at a modest price and prevented the dilution of shareholders’ interests.

“We were targeting better than 6.5 per cent interest rate or yield and in this market where interest rates continue to rise in Australia, to be able to lock money in for five years at 6.4 per cent has been welcomed by the market as a strategically good thing to do,” he said.

It’s the company’s second convertible bond issue, with funds from the first in 2008 used to find another Flying Fox nickel deposit, which it has done with Spotted Quoll, where mining recently started.

Funds from the second bond issue will be used to pay down all of Western Areas’ bank debt and provide the company with balance sheet flexibility to enable it to advance its exploration and mine development initiatives.

Investors of convertible bonds are predominately from the UK and Europe, however participants from Asia are increasingly looking at bonds, particularly if it has a connection to growth in China. Western Areas currently has a nickel off-take agreement with China’s Jinchuan Group.

Mr Oliver said a convertible bonds issue was not for everybody, with the instrument mostly used by companies that needed long-term funding to complete major projects.

He added that Western Areas wouldn’t have necessarily considered a bond issue when the company was an explorer.

“The bond market likes to see cash flows and likes to see a level of confidence in relation to repayment,” Mr Oliver said. “You can certainly do it but the pricing becomes difficult.”

Drilling technology developer Coretrack raised more than $10 million in January through a placement, rights issue and an options deal, all of which were underwritten by Cygnet Capital.

The move by the stockbroker to underwrite the capital raisings guaranteed Coretrack would receive the total amount of funds, a safe move for a company yet to start generating cash flows.

Funds raised for Coretrack will be used to complete the acquisition of private Kalgoorlie business, Globe Drill, which will help move Coretrack from a pure R&D outfit to a drilling services company that will soon commission its GT3000 drill rig.

Coretrack chief executive Nanne van’t Riet said the acquisition had prompted interest from different funds that would not necessarily have looked at the company beforehand.

“In small caps, you tend to get people or look for people with some appetite for risk; early on, they tend to be retail investors,” he said.

“As you grow and become larger, you get to a stage where smaller or specifically mandated institutions start following you.

“That’s what we’ve seen, particularly post the acquisition of Globe Drill; different fund managers are now talking to us as they can see the business model develop and they understand where we’re heading with the various product lines that we have.”

The potential revenue stream from providing the drilling service will also open a new door to capital for Coretrack – the debt market.

Mr van’t Riet said the company had previously not bothered with the debt market as it was considered too difficult to access, with Coretrack primarily an R&D business and holding little assets.

However, with cash flow likely to start coming in later this year, Mr van’t Riet said Coretrack would take the debt market route to avoid dilution of shareholders’ interest.


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