The equity capital markets have long been a source of funding for mining companies whether to raise funds for a project at initial public offering (IPO) stage or in a secondary/follow on fundraising. In this article we summarise the different types of equity financing within the mining industry, and cover some of the key differences between them.
Initial public offers
In terms of press coverage, a number of articles reported difficult markets in 2012 resulting in low market activity and a number of high profile IPO transactions which did not proceed. On AIM there were 32 IPOs and on the Main Market there were four IPOs which were the lowest totals since 2009.
An initial public offering on any market is a time consuming and a significant cost commitment. As a result of lower activity and market uncertainty, almost universally across the global markets, most IPO processes will now start with test marketing to a small number of institutional investors. This test marketing occurs ahead of preparing the IPO documentation.
The test marketing is also usually ahead of the investment bank preparing investment research on the company which it distributes to a wider pool of its clients and at which point the financial community becomes aware that the company is considering listing and through which investment bank.
In addition, it has now become quite common to have more than one investment bank appointed on all but small fundraisings in an effort by the corporates to attract additional investors, to try to enhance the chances of a successful IPO.
This dynamic of multiple investment banks also often changes the traditional bargaining power as between the investment bank and the company, as it introduces competitive tension between the investment banks.
Where initial feedback from any test marketing is positive, companies will start the IPO process by preparing for a listing in advance. This would typically involve appointing the investment banks, lawyers, accountants, competent persons and other advisers and preparing and keeping up to date accounting information, technical reports and the IPO documentation. This preparation work is undertaken so that the Company is ready to launch the initial public offering relatively quickly, should a listing become viable. This has led to the IPO process being extended beyond the typical three month period which also adds to the costs, which can be further exacerbated if any updating to accounting or technical information becomes necessary.
Secondary fundraising activity was also reduced although there was some more activity as compared to IPOs. Secondary market activity was also subdued in 2012, although it is unclear as to whether this was reluctance on the part of investors or on the part of the companies given the relatively weak market price and the dilutive effect that any new issue of shares would have, or a combination of these and other factors.
Given this weakness, with secondary fundraisings there is also a trend to appoint more than one investment bank which again introduces competitive tension in an effort to try to promote the success of the fundraising.
Secondary fundraisings can take many forms including: Rights Issues – pre-emptive offers to existing shareholders, typically at a significant discount to the prevailing price; Institutional Placings – where shares are offered to a limited number of institutional investors; and Placings and Open Offers which involve an institutional element as well as a pre-emptive portion.
The key difference between a rights issue and a placing and open offer is that on a rights issue the right to subscribe is itself a tradable security and has a value given that the right to subscribe is normally exercisable at a deep discount to the prevailing market price. This is not the case on an open offer where the right is a personal one. In addition, because the right to subscribe on a rights issue has a value, if there is sufficient demand, the investment bank may sell the right on behalf of a shareholder who does not take up his right and instead pay the shareholder a cash sum.
A rights issue is a pre-emptive offering to existing shareholders although it may be underwritten by a third party (typically the investment banks which commonly pass other their underwriting risk to other institutions through sub-underwriting). Rights issues are typically associated with periods where companies are under financial pressure and often involve significant discounts to the prevailing market price. However, 2012 saw few rights issues as companies have been more conservative in their expenditure and have looked to conserve cash or find alternative sources of financing. The pre-emptive element means that rights issues require a prospectus to be published unless the amount to be raised is less than €5m. The publication of a prospectus is a time consuming process and needs to be approved by the UKLA which adds additional time and expense.
An institutional placing is structured so as to fall within an exemption to the prospectus requirements. For AIM traded companies, this means limiting those who can participate to institutional investors and possibly a handful of other investors. For companies listed on the Main Market of the London Stock Exchange this means also restricting the size of the issue to less than 10% of the current issued share capital. Provided that these conditions are satisfied and the company has the necessary authority to allot the shares, the placing can be carried out with limited documentation which often comprises an investor presentation, the appointment of the investment bank or banks and a subscription document.
Whilst some placings involve the placees signing and returning a placing letter, some institutional placings use an accelerated book build process to speed up the placing process. An accelerated book build involves the announcement of a proposed fundraising and the investment banks contracting with potential investors over the telephone incorporating the terms and conditions of the placing which are appended to the announcement. Once the fundraising is closed which is usually on the same day as it is announced, an announcement is put out stating what amount has been raised and at what price.
Given the market uncertainty, some fundraisings may even involve a hybrid process with some written commitment form the investors, particularly if there is an extended settlement period, for example to allow a company to seek additional shareholder approval to issue shares.
Placings and open offers
As these are a mixture of an institutional placing and a pre-emptive offer, they will usually require the publication of a prospectus which can be expensive and time consuming. However, these can be popular where the portion offered on a pre-emptive basis is limited to less than €5m as this then does not require a prospectus, although it will require a short document to be sent to the shareholders