Australia is trying to claw its way back into the global resources capital markets but it may already be too late.
It is sadly ironic that at a time when Western Australia’s resources sector, the engine room of Australia’s economy, is running at an all-time high, the state and the rest of Australia is losing its share of the global capital markets.
More small-medium sized Australian companies are opting for the London Stock Exchange’s (LSE) less regulated, easily accessible Alternative Investment Market (AIM) and the intelligently tax incentive driven Toronto Stock Exchange (TSX) as the place to raise money and expand their institutional shareholder base.
Despite most retaining a dual Australian Stock Exchange listing, for WA it means that with less equity raised here, there will be less local exploration expenditure and less flow-on business to other sectors of the state economy.
The parlous state of WA’s falling resources exploration spend – down from an annual $250 million in 1997 to about $150 million – has been raised by various groups and companies, including the Association of Mining and Exploration Companies (AMEC), in WA Business News before.
The real fear is that moves by the privately owned, publicly listed ASX to remedy the situation, may be too late to reverse the shift to these growing, aggressive liquidity markets.
It is a point not lost on ASX chief executive officer Tony D’Aloisio, who told a Perth stakeholders meeting recently that once a market was known to have buyers and sellers (liquidity), others would flock to that market.
“They go there because that’s where investors in mining (and other) companies are likely to be. A tipping effect or flood is created in favour of that market. Once liquidity shifts to a market it is difficult to get back,” Mr D’Aloisio said.
Talk about preaching to the converted.
There is probably no clearer example of the problems facing WA, the ASX and the country’s economy in general than recent capital raisings by aspiring Perth-based copper/uranium producer Equinox Resources Ltd, which in the last three months has raised $210 million for its Lumwana project in Zambia.
It undertook the $170 million component of its recent capital raising via prospectus issues in Australia and Canada. About 80 per cent of the money was raised via the TSX.
Canada’s global share of mining capital raisings grew from 31 per cent in 2001 to 54.2 per cent in 2004, while Australia’s share decreased from 38.5 per cent to 17 per cent in the same period.
Both AIM and TSX offer opportunities the ASX, under current regimes, just cannot match, AIM’s major advantages being its more flexible, much less onerous listing requirements and access to probably the biggest institutional investment money pool in the world.
However, this may change slightly as AIM is close to finalising new rules to tighten admission requirements, particularly for mining and exploration companies on the issue of updating reserves.
The Canadians have got a tax-based incentive known as flow through shares, which provides shareholders with tax benefits on a company’s exploration expenditure. The flow through is available as an immediate deduction for exploration expenditure, returned to the shareholders, rather than being left locked in the company under the Australian system.
The ASX, along with AMEC and most major mining companies, is lobbying hard to get that system introduced and level out the playing field.
The ASX is also “taking steps” to amend the capital raising settings in its listing rules to align with the Canadian and AIM markets, is looking at generating independent equity research on stocks (juniors) that are poorly covered and is rolling out a new trading system Click XT from July.
For small to medium-sized companies – those with market capitalisations up to $100 million – the ASX wants to increase the limit of capital that can be raised in any year to more than the current 15 per cent of existing value, reduce the number of shareholders required in an Initial Public Offer (IPO) to less than 400 and lower the minimum listing share price to less than 20c (see AIM advantages box).
“While all these steps are important, they are unlikely to be sufficient to tip the balance back away from Canada,” Mr D’Aloisio said.
Head of capital markets with accounting network Baker Tilly International and the only practicing accountant on the LSE’s AIM Advisory Group, Chilton Taylor, sees AIM as the fastest growing small to medium market cap company market in the world.
It was no longer a secondary market, as evidenced by the increasing number of main board companies moving to it to save money, while accessing the same big gun institutional investors.
Resources companies make up 30 per cent of the AIM market and 80 per cent of all London IPOs are on AIM. There are 40 Australian companies on AIM, 19 from Perth.
“There is a propensity for UK investors to invest in overseas companies. Just over 40 per cent of institutional investment on the LSE is in international equities,” Mr Taylor said.
The key to listing on AIM is the necessity for a nominated advisor or Nomad, who is responsible for ensuring to the LSE that the applying company is suitable. The Nomad is LSE approved and co-ordinates the IPO process, capital raising and due diligence requirements.
If a company loses its Nomad, it is suspended and if not replaced within a month, the company’s listing is cancelled.
Most are stockbrokers and there are 85 registered with the LSE, one of which is Australian company Resource Finance Group and its Perth-based RFC Corporate Finance executive director Stephen Allen.
Mr Allen describes the Nomad role as akin to the school prefect.
“They regulate a market that is all about access to capital,” he said.
“AIM is primarily an institutional investment platform and London is still the place to raise money. Most of the big projects done out of Australia involve London money.”
WA was also recognised for its resources expertise and technical mining skills.
“We are seeing more African projects, with Australian management and funded out of London,” Mr Allen said.
“It’s all part of a new globalisation”.
He said on the ASX, small companies tended to get funded by individuals until they got too big, up to a $500 million market cap.
“AIM brings the big institutions to those smaller companies,” he said. “There are very few Australian institutions that will back an emerging story, whereas AIM is looking for good projects, held by growth companies with an international flavour.”
Consolidated Minerals Ltd’s AIM success came despite its WA focus because it gave the UK institutions access to a carbon steel business selling into China.
“A company drilling for oil in Bass Strait would not be so appealing, because the UK institutions have access to North Sea companies,” Mr Allen said.
There was also a clear need for Australian companies to have UK shareholders.
“Many fail because they don’t place any or not enough shares in the UK. The best AIM route is to make a placement then list on the back of it,” he said.
“And you have got to work the market, once you are there. Keep it informed and that usually means someone on the ground or lots of travel.”
WA iron ore producer Portman Ltd listed on AIM in 2001 and walked away in 2004, saying there was little trade in its shares.
However, brokers confirm the company made little attempt to market itself in London.
Much also depends on the choice of broker and nominated adviser, and Portman, an Australian company in London, chose Canadian broker Canaccord.
RFC is currently working on four specific new Australian AIM listings, including Kimberley Diamond Co NL.
Pitcher Partners senior partner Mark Ceglinski said companies in the feasibility stage or near production had been most successful on AIM. There was also a cheaper fast track AIM route, which required 18 months prior trading on an acknowledge exchange such as ASX.
A cost plus is that Australian generally accepted accounting practices will soon be accepted as an international accounting standard, rather than using UK standards with the resultant extra UK accounting costs. An announcement on this is expected this week.
