The Do's and Don'ts of Equity Capital Raisings (for Mineral Explorers)

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The Do's and Don'ts of Equity Capital Raisings (for Mineral Explorers)

Period1 Oct 2013

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  • TitleThe Do's and Don'ts of Equity Capital Raisings (for Mineral Explorers)
    Degree of recognitionNational
    Media name/outletResourceStocks Magazine - Aspermont
    Media typePrint
    Duration/Length/Size1 page
    CountryAustralia
    Date1/10/13
    DescriptionDigging Deeper....The Do’s and Don’ts of Equity Raisings

    Allan Trench is a Professor at the Centre for Exploration Targeting, University of Western Australia and at Curtin University Graduate School of Business - and the Perth representative for CRU Strategies, a division of independent metals & mining advisory CRU Group. 
    Junior resources companies are typically led by highly competent technical people as managing directors – being often geologists for early-stage explorers and then engineers for project developers and also for small-scale producers. This relationship holds true across both the oil and gas and metals/mining sectors although of course many exceptions do exist to the general case.  
    These are appropriate choices in managing a resources company of course. The straightforward thinking is that a managing director from a commercial background may struggle to know the technical differences at the exploration stage between a ‘hot’ and other properties with far less upside resource potential. Likewise, as most first-time projects for emerging resources companies are typically a “bet the company” value proposition, it makes perfect sense to have an engineer at the helm at that stage of a company’s growth plans. Why? In order to solve first-hand for the myriad of operational challenges that will accompany the successful transition to profitable production. 
    Where such a leadership bias towards technical skills can create problems however is in the critical area of capital raisings. A managing director with a strong technical background needs strong in-house commercial support alongside him (or her – but the vast majority are still male) so as not to trip up when overcoming the various financing hurdles along the growth path to production.  
    With that in mind, here are some “Do’s and Don’ts” picked up over the years that characterise the way more successful companies handle equity-side capital raisings. 
    Hopefully both company managers and investors alike can take lessons away from what typically works well – and just as importantly what does not.
    DO
    - Utilise the support of existing strategic shareholders already on the company register to both underpin and to provide a firm price to equity capital raisings. 
    - Give all shareholders the opportunity to participate should a discount equity raising be a necessity – such as through a Share Purchase Plan, SPP (which can be issued at up to a maximum 20 per cent discount) or else through a top-up rights issue offering
    - Take steps to ensure that a broker to a placement knows the company story very well – including the detailed use of funds – such that the capital-raising story is communicated correctly.
    - Get on with it! Many companies have a habit of putting off difficult decisions around capital raisings. Indecision and internal discussions can stretch out for months. If a capital-raising is continually mentioned but is not actioned across successive board papers then there is a problem.  
    - Watch the cash balance very carefully – both as managers and investors. Remember that quarter-end cash balances do not report the monthly accounts payable. So to guestimate the real cash balance first look at the reported expenditure for the previous quarter, then take two-thirds of that number off the reported cash balance at the quarter’s end to estimate the approximate cash still in the company when the quarterly is released. For clarity, that is a one month cash burn to estimate unpaid accounts prior to the cash flow statement reporting date – then a second month for the additional running costs of running the company for a further month after the reporting date to the time the quarterly is released.
    DON’T
    - Be tempted to shop around a potential capital raising across a large a number of stockbrokers looking for support: Word tends to get out that the company is actively seeking new capital. The share price then mysteriously falls!
    - Let brokers send out blanket emails that either directly or indirectly ask “are you interested” to a large number of sophisticated investors with little or no direct relationship to the company.
    - Haggle excessively on the cost of an equity placement (typical equity raisings come in at around a benchmark 5 per cent cost of the funds raised). As long as the cost does not depart excessively from the benchmark the aim is to “just do it”.
    - As managers, do not let the available cash balance drop too low: Playing ‘chicken’ with the market is a dangerous game. As investors, it is a case of “buyer-beware” when choosing companies with less than $1 million cash to play with. Expect a letter from the company soon – with a subscription form attached to it.
    Producer/AuthorAllan Trench
    PersonsAllan Trench