Micro-caps struggle to raise money before year-end cut off
It’s been a tough year for micro-cap stocks and for many the window has now closed to raise money before Christmas, leaving them high and dry until February.
If you haven’t raised the funds by now, be prepared for a cashless Christmas and January.
That’s the word from a range of micro-cap specialists who focus on companies with a market value of less than $70m that needed to raise money to make it through to February, when equity markets effectively reopen after a long Christmas break.
“It is difficult, especially in December,” said head of natural resources at Wilson’s Advisory, Craig Brown. “There are probably a number of companies leaving it too late to raise capital, and they’ll have to manage their expenditure throughout this period to ensure that they can survive.”
December 31 is the cut-off for the next quarterly reports, which come out from mid-January. These reports show a company’s cash balance and estimate how many quarters they have left of cash. For micro-caps, many of which are mining explorers yet to turn a dollar, this could be a problem.
“They need to keep spending money to either discover, drill or expand in order to get into production,” Mr Brown said. “There’s always going to be a funding requirement for companies that are pre-revenue generation (so they) get through until the end of January, when the capital markets open back up, and they can raise money again.” When markets do open, the sub-$50m companies have a dramatically smaller pool of institutional investors likely to take a look, with figures dropping from about 20 just three years ago to about four that are happy to invest in such illiquid stocks.
The problems at the micro-cap end of the stockmarket have been particularly stark in 2024 as many commodity prices, notably lithium, have shrunk from record highs and the much forecast interest rate cuts failed to eventuate.
Gold companies have been the exception to this rule, with gold prices reaching record highs on increased tension in the Middle East and growing uncertainty about the US under president-elect Donald Trump.
Gold explorer and emerging producer Brightstar Resources raised money two weeks ago, with investors tipping in $30m to the Western Australian company. The raising was considered a success given the difficult market conditions but managing director Alex Rovira said the figure could easily have been significantly higher if his firm hadn’t needed to wait until December to announce several key updates, including a takeover and development expansion plans.
“The capital markets still are really challenging for micros, even in the face of an all-time high gold price last week,” Mr Rovira said.
Brightstar raised money at a 10 per cent discount to the 15 day volume-weighted average price, which could have been narrowed, or a higher figure raised, if the company didn’t need to hold off on its timings.
“In theory, we could have done a lot more than that,” at the time of the raising, Mr Rovira said. “But I’ve got no doubt if we did do it six weeks ago, then it would have been a more supportive environment.”
Brightstar has three things going for it: Gold prices are strong, the company already makes money by selling its pre-processed gold to a neighbouring miner that already has production facilities, and its boss started corporate life in banking, so he understands that timing is everything.
“The reality for micros is you just got to be nimble,” Mr Rovira said. “If the capital markets are there and the window opens, you’ve just got to be ready to go through it. There might be a spike in the commodity price, or a drill hole nearby from another micro that’s putting that area in the spotlight and an investor interest, and you have just got to be ready to capitalise.”
Brightstar tapped the equity market after three takeovers this year – Alto Metals, Linden Gold and Gateway mining – which helped increase its resources from 400,000 ounces to three million ounces. Mr Rovira said that many resources micro-caps were run by people who were experts in drilling holes in the ground, but understanding listing rules, the Corporations Act, how brokers work, the institutions and liquidity were also critical.
“A lot of the guys and girls that run these micro capital organisations are geologists or engineers or geophysicists, and they’re technically very good at what they do, but quite often they don’t have a lot of capital markets experience or exposure,” he said.
“We have traditionally spent a bit of time on that market engagement front, because the reality is it’s your lifeblood in this market.”
Definitions of what is a micro-cap company vary, but in Australia there are 770 listed under the category of either metals and mining or energy.
Mining investor Hedley Widdup from Lion said many of them ended up raising money on the fly because they’ve held out on selling new shares in a timely fashion for fear of dilution.
“There are an awful lot of them which are living hand to mouth,” he said.
“A lot of them do hold off until the last minute. They definitely try to time it to periods when they think the proverbial ducks are quacking.
“The ducks are now quacking for gold and not lithium, he said, adding that he’s spoken to some micro-cap companies that have now realised they’ve left their run too late.
“There’s a boat which has probably left, and if they weren’t on it, then they’re going to have to wait.
“I’ve seen people raise money in January. But in a lot of cases, the larger pools of money and the people who are going to contribute to raisings are often on holiday until Australia Day, so it’s often a hollow endeavour to try and raise money until late January or early February.”
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