16/01/2013 - 07:17

Strategic partnering an option in weak market

16/01/2013 - 07:17

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Strategic partnering an option in weak market
FALL-OFF: Mining’s a costly business, with just 27 IPOs went to market in the metals and mining sector last year, compared with 80 in 2011.

LAST year is likely to be one of the more forgettable years in terms of capital raisings and IPOs for the metals and mining sector.

In 2012 there were 27 metals and mining IPOs compared with 80 in 2011 and 71 in 2010. The average IPO deal size last year was $6 million, versus $7 million in 2011 and $17 million in 2010.

In terms of placements in 2012, the total number of metals and mining deals was 266 versus 342 in 2011 and 361 in 2010, with the most notable feature being the collapse in average deal size to $6 million from $14 million in 2011 and $12 million in 2010. (Note, share purchase programs and rights issues are not included in these calculations.)

Cash balances are under pressure, with 341 (42 per cent) out of 748 ASX-listed metals and mining companies holding less than $5 million in cash and 147 (20 per cent) with less than $1 million in cash.

During tough times when equity capital is scarce, companies need to think strategically about raising funds. This may include strategies such as raising debt, selling royalties/commodity streams, or looking for strategic project partners.

In relation to sourcing strategic project partners, joint venture structures are becoming increasingly sought after by all sectors of the metals and mining business and provide an attractive conduit for capital out of Asia.

Set out below are five rules for anyone considering soliciting a JV partner through a strategic partnering process. This won’t guarantee a deal by any stretch, but will give the vendor the best possible chance of extracting maximum value.

1) Get your data organised

Get your data organised into an easy and accessible package. Ideally in a virtual data room, but once a confidentiality agreement is signed don’t be afraid to provide data in a portable hard drive. Parties with cash are spoilt for choice, so don’t put up any more barriers to entry than you have to.

2)    Present a compelling business case

Make sure your key selling documents (being flyers and information memoranda) are concise and compelling and clearly state the business case. Be precise about the project’s merits and ensure that you have updated any JORC resources, feasibility studies, tenement information, environmental and indigenous commitments and provide details of all liabilities.

3)    Know your asset and your market

A managing director initiating a strategic part-nering process has to make three sales: first, the sale of the concept to the company’s stakeholders/board; second, selling the opportunity to the market; and third, selling the final deal structure and pricing back to the stakeholders/board. The third sale is often where deals fall over, especially if there has been a disconnect between stakeholder expectations and market offers.

4)    Manage the process

Competitive tension can be a very valuable tool in delivering premium prices and is well assisted by a good process timetable. Indicative bid and final bid phases may seem tedious to participants but are an important part of the structured partnering process and building value. Responses to queries must be timely and feedback on CAs and any process documents.

5)    Be prepared to look beyond your back yard for interested parties

While we all think we know the most likely 10 bidders for a given opportunity, the fact is that you need to have a broad list of potential parties from both Australia and overseas and ideally parties who have current form in your commodity.

Following these five rules will give you every chance of securing a great outcome and keeping your shareholders happy. Vendors should be mindful of the potential for a JV enquiry to lead to a corporate transaction and therefore ensure that the necessary precautions/standstill agreements are in place.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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