BDO audit partner and resources expert Matt Crane spoke to Mining Journal Intelligence about the key considerations for mining companies who - from the junior end into the major space - need to raise money and keep a handle on their financial risks.
How should listing resources firms be choosing their host market?
This really depends on the risk appetite of the investor and it closely links to the geographical location of the assets, type of resource and life cycle of the asset (exploration, development or production). If you are a junior miner operating in Australia, then clearly the ASX offers the best opportunity to raise funds as investors understand the market and the risks. Traditionally, if you're a junior miner operating in Africa, investors in Australia and Canada have had less appetite for that risk profile. This is changing over time but investors in the London market have a better understanding of geopolitical risk in developing economies such as Africa and will therefore generally give you greater support. Similarly, investors on the TSX have traditionally embraced the geopolitical risk in South American developing countries and therefore remain attractive to resource companies with assets based there.
Resource companies should also look at the cost of the continued regulatory requirements of each exchange. The TSX is probably the most heavily regulated among the junior exchanges, with a requirement for quarterly reporting as opposed to half yearly on both AIM and the ASX. This can increase costs for small miners without driving any tangible benefit, although at the same time it also builds discipline in terms of internal corporate governance, which isn't a bad habit to get into given the trend toward growing corporate governance demands from all stakeholders. This decision will really depend on the specific maturity of the corporate.
Ultimately, resource companies are going to look at the host market that provides the best opportunity to raise the required funds. If you are a resource company looking to raise a significant amount of capital funding for M&A or to take a mine into development, the UK (Main Market or AIM 100) or TSX provide access to large institutional investors and the North American investor pool. Traditionally the ASX has been retail led so any resource company needs to be conscious of the type of investor they are looking to attract.
Resource companies should also look at the cost of the continued regulatory requirements
How effective is the two-tier system in London and Toronto?
Where you have the two-tier system, it does offer a benefit to that junior end of the market and AIM in particular is well suited to junior resource companies - it understands them. The risk appetite of investors on markets such as AIM and TSXV closely matches the return opportunity presented by junior miners. It also allows resource companies who are on the journey from exploration through to development to step up to access funds in the Main Market when the opportunity arises.
Whilst the regulatory environment in the AIM and TSXV space continues to develop and tighten, it still offers an attractive alternative to the fully regulated spaces of the FTSE or main board TSX.
The ASX has a much tighter financial reporting framework. For example, if you are a junior miner with production you are going to need to report your yearend financial results within two months - that is a challenge. The same resource company would have six months to report on AIM.
Are investors ready to re-engage with the resources sector, yet?
There's still caution. A decade ago, most companies could come to market and find the funds they needed regardless of their assets or management but today you've got to have a good asset backed by a strong team with a track record. If you have that, you can definitely raise funds but, if you don't or there is a geopolitical risk, the chance of success will be limited. If you have a cornerstone investor to underpin the raising, whether that be a major shareholder or sovereign wealth or private equity, then other investors are willing to follow. That can be the key.
There has been a lot of talk recently that with gold prices on the rise there would be a significant increase in market activity, especially where gold miners dominate the exchange. However, despite the rise, investors are still wary of the current global financial uncertainty and are keeping their powder dry. Funds are there, but investors are far more selective and continue to see risk in the resource sector rather than long-term reward.
What should companies looking to IPO in this market be wary of? If you're looking for an IPO, then you have to be prepared in an advance - you have to be ‘IPO ready'. If you are a CFO, you can't go into that undertaking without a realistic understanding of what is required, where the issues are and what resources are needed to manage the process.
Any IPO will put pressure on you and your finance team. To manage this pressure, you have to have your ducks in a row: your licences have to be in good standing; your competent person's report needs to be up to date; your tax due diligence and tax structures have to be in place without any skeletons ready to jump out of the closet; and your financial statements that ultimately underpin the fund raise have to be audited and presented under the appropriate standards to meet the exchange requirements. If you can tick those compliance boxes, the process will be much smoother. This will give you time to concentrate on the important part, which is raising the funds.
It is never too early to engage your professional advisors (reporting accountants, tax advisor, lawyers, brokers, nomad, competent person) about a potential IPO. The key point to take on board is to make sure you do sufficient due diligence on your advisors and, in particular, the broker. Be prepared to ask key questions around what other companies they have recently raised funds for, which investors will provide the majority and what they like about the business - do they understand the proposition being sold?
Any early test marketing can help avoid incurring any significant costs that won't get the result you are looking for. Any IPO involves a significant amount of management time and cost so you need to make sure the company is ready - don't start the process too early, and think about whether there are other alternative sources of funding.
What finance trends do you see shaping the market?
At the junior to mid-cap level and those companies looking to move a project through development and into production, with the downturn in the equities market, the traditional debt-equity funding structure will no longer be the norm. Resource companies will have to consider other ways to fund this development. An example of this is private equity, which is playing a more important role in this space. More companies will look to private equity to provide mezzanine finance in between the traditional public equity and debt components that helps bridge the gap.
The ASX has a much tighter financial reporting framework
BDO recently published ‘2023: the near future of mining' where we predicted that crowd funding would become a more important source of funding for the junior end of the market. There is still some way for the regulation to catch up with that but, once it does, you can definitely see that being a key source of small-scale funding, especially for an early stage exploration company.
At the top end of the market, you have far more flexibility and greater diversity in asset base to work with when you're either considering refinancing your debt profile or accessing new funds. Larger mining companies can look at a variety of debt opportunities, royalty or streaming options, divestment of nonstrategic assets to mid-cap and junior resource companies, or access to institutional investors who will throw their weight behind an equity raise. Whilst the opportunity is there, there remains scrutiny over balance sheets, quality of earnings and cost bases, which means all investors want assurances we're not going back to a time when debt profiles where greater than the value of the assets. Majors and midtiers need to be strategic about how and when they raise capital so it fits in with shareholder expectations.
Are majors under increasing pressure to finance for growth?
If you're an investor looking to put money into a major, one of the things you're looking for is a continual dividend stream - you're not necessarily concerned about significant capital gains. That stream requires a long-term growth strategy or, at the very least, a strategy to develop or acquire new assets to maintain revenue, quality of earnings and provide annual returns.
This creates pressure on management teams to take informed, long-term views on commodities, which includes major trends around issues like energy and the minerals required for that transition from carbonbased power. There's also greater scrutiny around ESG and CSR factors that are in play for a growing number of major debt providers, which won't invest in poorly governed companies and will veto some commodities such as coal, which speaks to a major's ability to finance future production in certain spaces.
What tools do miners have to cope with growing financial risk?
There are two things. The first is about balancing the books and managing working capital. We know it's more difficult to raise equity, so you're not able to allow a situation to develop where you have a short-term working capital issue that can be addressed by having to go to the equity markets. You have to have much more control over your balance sheet, your debt profile, your future funding needs, your capital projects, costs and your current debt covenants.
This comes down to greater financial scrutiny but it's also about making sure your finance guys are properly linked to your operating teams because if those relationships aren't strong, you can have a disconnect where the operating teams are making decisions with no regards to financial responsibility. If the finance team is unaware of such activity it creates a substantial financial risk.
How can miners and investors protect themselves from increasing volumes of legal disputes in emerging economies?
This really comes down to relationships. Ensuring those in-country relationships are strong between yourselves and local and national government and local communities, and that you fully understand the terms of your licence and the mining code. You have to ensure you're operating within the regime and, where you have issues with the licence or the code from a fiscal or compliance perspective, that you manage those closely with the authorities and the dialogue is open. Where you see disputes arise is when that dialogue has fallen away and the political risk hasn't been managed. That leaves you open to a longer-term dispute arising.
We predicted that crowd funding would become a more important source of funding for the junior end of the market
These relationships have to be particularly closely monitored around a change in regime or government. Companies have to take an ongoing view of the political risk and make sure they're aware if an incoming government has a change in political stance to the previous regime, or if a new government's position is yet to be established. It doesn't need to be a government either, it could just be a key minister within the existing government.
Community relationships often hold the key. When these aren't maintained, then a change at a federal level can cause series problems on the ground at the development or operation and, similarly, if those relationships have been maintained locally, major political shifts nationally have less of an impact.