IPOs Regain Favour as Resources Boom

28 April 2010 (Last Updated April 28th, 2010 18:30)

Asia's insatiable demand for resources has helped reinvigorate the sector in the wake of the global financial crisis. David Binning reports.

IPOs Regain Favour as Resources Boom

As the resources sector settles back into warp speed after the turbulence caused by last year's global financial crisis, it seems that investors' appetites for IPOs are returning, especially for those start-ups with pipelines into Asia.

According to Tim Goldsmith, PricewaterhouseCoopers (PWC) global mining leader, the growth of Asian countries such as India and China continues to drive optimism in the resources sector. "Investors see mining as a proxy for China and India's growth," Goldsmith says.

Asian IPOs

The Hong Kong Stock Exchange has realised a sharp increase in the number of mining companies on its books, helping it to become the world's largest exchange ahead of London and New York and setting it on track to becoming the world's leading bourse for miners. The main reason is, of course, that for many miners it makes perfect sense to list on the bourse that is closest to their biggest customer.

The Hong Kong Stock Exchange, however, is also actively wooing them. Last year for instance, it adjusted its reporting guidelines for resources companies to bring them more into line with rival exchanges such as London, Australia and Toronto, in a move calculated to attract wider investment support, especially from Western financial institutions. According to Goldsmith, this means that in "five to ten years time we'll see HK as a very active mining exchange".

"Investors' appetites for IPOs are returning, especially for those start-ups with pipelines into Asia."

Australian IPOs

It faces stiff competition from Australia as the mining boom down-under continues to set new highs, prompting a sharp increase in the number of juniors seeking to join the party and go public.

Of the 14 companies launching IPOs on the ASX in April / May 2010, ten are from the mining and resources sector. The trend is expected to continue throughout the year as more and more smaller players acquire mining licences for which they will need capital to develop.

In West Australia (WA) for instance, the uranium industry is moving into top gear, 18 months after a long-standing ban on mining was lifted in the state. The current surge of support for nuclear energy has analysts making rather bullish projections for the long-term price of yellowcake, and start-ups with uranium assets are likely to be viewed favourably.

WA-based gold and uranium miner Siburan Resources has extended the deadline for its IPO to the end of April 2010, but director Noel Ong is confident that the float will be a success with the company presenting good value for shareholders. The company is looking to raise $5m to develop six separate projects, including one in the vicinity of the renowned Kalgoorlie area as well as in nearby Mt Pleasant.

Canadian IPOs

Elsewhere, on Toronto's stock exchanges, Q1 2010 marked a major improvement in sentiment towards IPOs.

The TSX Venture Exchange is the home of listed resources companies in Toronto. About 30% of the 12 IPOs launched during Q1 were for resources companies. Combined, all of the IPOs raised $21.9m, compared with the same period last year when only three IPOs were launched, raising just $2.4m.

PWC forecasts a solid recovery for the Canadian IPO market this year. Confidence in IPOs from the resources sector was given a major boost in early April following the $1.35bn IPO by Athabasca Oil Sands, which pushed the proceeds from new issues to approximately $1.8bn, matching the amount of IPO dollars raised for the whole of 2009 on all of Canada's senior exchanges.

UK IPOs

Over in the recession-battered UK, African Barrick Gold pulled off the largest IPO on the London Stock Exchange since 2008 in March when it successfully raised £581m towards the development of four gold mines in Tanzania. The company intends to seek a future listing on the Dar es Salaam Stock Exchange in Tanzania. ABG has sold approximately 101 million ordinary shares in its initial public offering, or about 25% of its equity, and parent Barrick retains an interest in approximately 303 million ordinary shares, or about 75% of the equity of ABG.

African Barrick Gold has four producing gold mines in north-west Tanzania – North Mara, Bulyanhulu, Tulawaka and Buzwagi — in addition to a suite of exploration properties. At year-end 2009, it had 16.8 million ounces of proven and probable gold reserves. Production in 2009 was 716,000oz of gold at total cash costs of $545 a cubic ounce (100% basis).

African IPOs

Of all the key mining regions, Africa is thought to possess the greatest untapped potential. Not surprisingly it has seen large numbers of junior miners making speculative asset purchases over the years, however, it has really only been the Chinese that have had the means to actually carry new projects through to production.

That may all be about to change. Rising commodity prices are expected to increase the determination of juniors to reach the production stage, while new and emerging mining technologies and techniques are empowering their efforts to do so, while also opening the possibility of reinvigorating discontinued operations. "Africa has always been somewhere where juniors have owned assets," Goldsmith says. And with the continued tightness within international debt markets, most of these companies will find equities markets a better option for raising capital.

"Rising commodity prices are expected to increase the determination of juniors to reach the production stage."

Another Australian company soon to list on the ASX, Vantage Goldfields, is looking to raise $30m, part of which will go towards the development of its gold assets in the Barberton Greenstone Belt, the second largest goldfield in South Africa after the Witwatersrand Basin, the world's richest source of gold. Vantage Goldfields is the parent company of South African corporation Eastern Goldfields SA (proprietary) Ltd (EGSA).

Vantage's mineral assets include prospecting rights covering some 16,000ha of highly prospective terrain the Barberton region. The properties contain many dormant mines, known gold deposits and other geologically favourable prospects that the company says are yet to be examined using modern exploration and mining techniques.

Company executive Wayne Kernigan says he feels the timing for the company's IPO is right. "We expect it to be very successful," he says.

China eyes bargain buys

Meanwhile in the resources sector, M&A activity continues to increase as buyers swoop on the many bargains still around after last-year's global financial crisis-driven sell-off of mining shares. While many miners were loath to enter into agreements last year, Chinese-owned entities stepped into the breach. China is expected to drive further increases in M&A activity throughout this year and into the next as it seeks access to more resources to support its growth. At the same time, high commodity prices along with rising production costs are expected to make M&As more appealing throughout the sector generally.