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Mining
If you’re an active investor, there’s a good chance SPACS – or special purpose acquisition companies – have popped up on your radar.
An easy way to understand them from an ASX perspective is their similarities to ASX shell companies, which are used to reverse-take over (RTO) mining assets, giving the listed company a new lease of life.
SPACs are formed without commercial operations and strictly for the purpose to raise capital through an initial public offering (IPO) via acquiring or merging with an existing company.
They have been a component of the US equity markets for decades, albeit of vastly different sizes and structures, but most recently the equity bull market of 2020 and 2021 led to a surge in popularity of US listed SPACS (we’ll get to the ‘why’ on that later).
Stockhead sat down with Jett Capital Advisors partner Matt Jurjevich to get the low down on SPACS and why European Lithium’s (ASX:EUR) upcoming transaction is on his radar.
“The equity bull market of 2020 and 2021 led to a surge in popularity of US listed SPACs as a preferred transaction structure to growth-stage consumer and technology companies that had long been hoarded by the private venture capital community,” Jurjevich says.
“In any frothy market, the quality of dealmaking and quality of assets tends to decline as investors are willing to trade fundamentals and value for growth and hype.
“But as US equity markets cooled in 2022, along with access to capital, most public issuers including the traditional IPOs as well as SPAC deals saw a large decline in market capitalisation.
“Given that a significant portion of these new issuances were conducted using SPAC vehicles, the market rightly associates this era of over-valued growth at any price dealmaking with the SPAC market.
“As with any period of austerity, markets adapt and over the last 18 months, US capital markets have become refocused on quality over quantity, with a preference for real assets and proven business models.”
“Over the last decade, metals and mining as a sector lost significant market share on US equities markets, both in percentage of average portfolio composition as well as size and diversity of available product,” Jurjevich says.
“Contrasting with Australia where there has been a consistent, growing base of publicly traded miners ranging in size from micro-cap explorers to de-risked developers and well managed producers for investors to own – until recently the primary US markets (NASDAQ and NYSE) have left investors with only a small selection of major producers to buy.
“This under-supply in product has resulted in opportunity for explorers and developers who up list or transition from a junior or foreign exchange.
“The benefits of being a US listed mining company are significant – if you look at listings of Sigma Lithium (NASDAQ:SGML), Atlas Lithium (NASDAQ:ATLX), Lithium Americas (NYSE:LAC), the co-listing of Piedmont Lithium (NASDAQ:PLL), or the De-SPAC of MP Materials (NYSE:MP), they have transformed into significantly better supported equities since listing in the United States,” he says.
“Increasing awareness and demand for critical minerals aside, it can be argued that a miner that lists on a primary US exchange most benefits from the lack of listed competitors and that can be evidenced from the increased trading volumes and relatively, improved shareholder registries and better valuations achieved over their foreign listed counter peers.”
“Values ascribed to miners listed on the major US exchanges seem to not only outperform, but sustain that performance better than their peers in Australia or Canada,” Jurjevich says.
“Obviously this depends on the performance of the asset and the ability of management teams to achieve their goals but a large factor in this outcome is the phenomenon of Exchange Traded Funds (ETFs) in US markets, and the institutionalisation of their shareholder registries.
“If you examine the holders of the stocks mentioned earlier before and after their up listing, they look like entirely different equities and are nearly all held by the same list of US mutual fund companies and asset managers.
“If you chart SGML, ATLX, LAC and PLL against their ASX listed peers – many of which are every bit as attractive from a mine-fundamentals perspective – the difference is immediately clear with the US listed lithium companies experiencing significantly less volatility and destruction of value.”
One ASX company looking to list its Austria-based lithium asset on the NASDAQ via a SPAC listing under the guise of Critical Metals Corp is European Lithium (ASX:EUR).
EUR entered into a business combination with Sizzle Acquisition Corp in 2023 to combine its wholly owned Wolfsberg lithium project with Sizzle via a newly formed exploration and development company called Critical Metals Corp.
Critical Metals Corp will list on the NASDAQ under the symbol CRML and EUR will be issued with US$750m worth of shares in CRML, granting EUR a major stake in the new company.
“When you look at mining equities, the three primary catalysts that consistently unlock value are project economics (feasibility studies), permitting, and strategic investment (and/or offtake),” Jurjevich says.
“You can usually map these fulcrum achievements, not necessarily in that order, along a valuation curve that goes up and to the right – and for good reason as each are validating accomplishments and are indicative of project success.
“European Lithium is one of the most interesting developers our firm has ever advised. In its Wolfsberg asset, you have a lithium developer that checks each of those three boxes.
“From a feasibility perspective, aside from re-commissioning a true brownfield mine, almost never does a company get the benefit of doing their exploration and development work on an underground mine that has already been built.
“In all our years of financing some of the world’s leading mine developers, we have just never come across a pre-production asset that has been tested to this degree prior to decisioning the mine.
“Binding offtake and strategic investment from the end customer remain the best stamp of approval a prospective miner can receive,” he says.
“After nearly four years of substantial due diligence, BMW Group made their first strategic investment into a lithium miner, committing to 100% of the end product offtake from Zone 1 of the Wolfsberg mine.
“Not only do we believe our global investor base will be very supportive of the company moving forward, but frankly having a project this advanced makes our work as bankers that much easier.”
“I am no research analyst, nor does our firm publish research or set price targets for public equities, however I can give a basic summary of the transaction,” Jurjevich says.
“In a nutshell, European Lithium is selling their Wolfsberg lithium mine and its accompanying contracts, rights and obligations to a SPAC called Sizzle Acquisition Corp (NASDAQ:SZZL) for US$750m in common stock.
“Following the SZZL shareholder vote, the company will begin trading on the NASDAQ stock exchange as Critical Metals Corp (NASDAQ:CMRL), and EUR shareholders will own US$750m of equity priced at US$10.00 per share.”
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