A bunch of junior metals explorers are heading for the ASX boards, so we asked an expert what it all means
2019 proved to be a pretty strong year for ASX debutantes, and many investors are keeping an eye out for new opportunities.
Activity last year spanned a range of industries, although the resources sector was more muted — both in the number of listings and relative performance.
But heading into 2020, the mood appears to have shifted. Stockhead’s IPO Watch flagged 11 companies that are scheduled to go public shortly — six of which were minerals explorers.
With some evidence of a change in sentiment, Stockhead caught up with Hedley Widdup — executive director at investment firm Lion Selection Group — for an expert view on some of the market forces at play.
As gold prices continue pushing to new all-time highs in Aussie dollar terms, it’s perhaps not surprising that more junior explorers are taking the opportunity to tap public markets for capital.
But Widdup noted that he’s noticed more optimism towards other base metals too, particularly nickel and copper. He also said the uptick in IPO activity looked familiar when compared to previous commodity cycles, such as iron ore in the mid-2000s and lithium in 2015/16.
“I would say without doubt that reflects improvement in investor sentiment, not only towards those metals but situations where you need to take on a bit more exploration risk to get those projects off the ground,” he said.
In particular, he noted that IPOs don’t just happen “by themselves”. They’re almost always driven across the line by a broker, who in turn needs to gauge interest before pulling the trigger.
“Quite a few of those new listings are brokered deals, and the broker won’t launch an IPO unless they know they’ve got it filled,” Widdup said.
“So it kind of tells you their read on the market – the ducks are quacking and they’re prepared to feed them.”
While support from institutional investors (“instos”) is critical in getting an IPO off the ground, Widdup said that funding network was still something of a two-tiered market.
In other words, junior explorers looking for listing-support are unlikely to get far with the major investment funds, whose attention is “still very much towards the big end of town”, he said.
“There’s a litany of smaller instos, who are a lot more mobile in terms of where they can put their money — but they don’t have that much of it,” he said.
In addition, it’s worth keeping in mind that such funds don’t always go into an IPO with the aim of taking a cornerstone investment and sticking around for the long-haul.
“They won’t flood the junior market with liquidity, but what they can do is take a clip of an IPO,” Widdup explained.
He used the example of a company “coming to market with what looks like a couple of hot copper intersections, and they say they’ve lined up investment backing from some big names in the sector”.
“Instos would be keen, but how long they hold it I’m not sure. If they invest in 20 and sell out at 25, they’re probably still very happy with that return,” Widdup said.
A number of investors in that space also structure deals to generate a discount in return for providing the capital for an IPO to get to market.
A common example is the payment of underwriting fees, to compensate for liquidity risk in pre-IPO deals compared to, say, share placements.
Widdup stressed that he’s not being overly cynical about the funding process for junior explorers, but that it was a consistent theme to be aware of.
“A fair a bit of the insto money which floats around — particularly for the smaller end of the market — has quite a short-term time frame, and we’ve observed that over and over again,” he said.
That said, given the nature of commodity cycles, junior explorer IPOs can often still be years in the making, as opposed to other sectors where popular trends can give rise to a spate of new listings.
“Keep in mind that a lot of these things might’ve been in preparation for some time, perhaps years, and they’re spying an opening to get their project to market,” Widdup said.
As always, predicting the near-term outlook for commodity prices and the resources market is a fraught exercise.
Widdup said he’d fielded an increasing number of questions from clients about the impact of the coronavirus, but the net impact was very difficult to predict.
He also said investors were watching for signs of a recessionary pullback in developed markets such as the US, Australia and Canada.
Speaking of Canada, Widdup offered some interesting insights into the potential for renewed capital flows in what has been a pretty rough market for small-cap explorers.
“What I think is clear, but perhaps not well known in Australia, about Canada is that it has been far more depressed than our own market — especially for juniors,” he said.
But in conversations with investment bankers and other analysts on the ground, Widdup said he’d picked up a notable change in mood since the Thanksgiving holiday (in late November).
More broadly, there’s the potential for money that previously flowed into the hype around Canadian pot stocks to move back into resources. And that could have an impact locally, if investors shift their focus towards hunting for bargains in the Great White North.
“If you want to say that Canadian juniors look a lot cheaper than most Aussie juniors, that would not be incorrect,” Widdup said.
Indeed, there is the added difficulty of investing from a different jurisdiction and assessing the quality of management teams, which may not be so easy from Australia.
However “opportunities do exist”, Widdup said, “some of which are great value compared to what we see on the ASX — at least at face value. Time will tell.”