Grass Shoots Emerge in a Beaten-Up Sector
In this post, we present the fifth BDO Explorer Quarterly Cash Update, a BDO Australia research report providing commentary on both the quarterly and annual cash flow data for Australian-listed mining, and oil and gas exploration entities (that have lodged Appendix 5B cash flow statements with the ASX). Our report continues to show challenging times for junior explorers. For the first time since we started this analysis in September 2013, more than 10 percent of exploration companies did not partake in any exploration activities in the June quarter of 2014.
This is the fourth quarter in a row that we have seen an increase in the number and percentage of exploration companies not exploring. Investing in exploration companies has always been a riskier use of capital than investing in more stable businesses, but for companies that are not exploring at all, there is no possibility of any reward to investors. Nevertheless, we are observing a few good omens for the industry. First, exploration expenditure for the year has totalled $3.27 billion thus far, indicating that plenty of activity is still under way despite the second quarter slowdown. There are also a few additional signals that the industry may be starting to turn the corner. One of the more interesting findings to come out of the latest report has been the number of backdoor listings involving explorers over the past 12 months. In the year to June 2014, a large portion of the companies that were the target of backdoor listings were mining and energy-related, with mergers proving to be an increasingly popular method for these companies to enter the public markets. Of the 26 mining and energy companies targeted for backdoor listings that we identified in our sample, half had merged with other mining-related companies, eight had merged with and became IT companies, and the remaining five had merged with other entity types. Fundraising also appears to be gaining momentum. For example, Wolf Minerals raised more than $100 million last quarter, a marked improvement on the highest net fundraising during the March quarter ($56 million). An additional 17 companies raised between $10 million and $100 million. Of note, 14 of the 19 companies with net fundraising greater than $10 million have major exploration projects outside Australia, while only eight had domestic projects. This continues a trend that we have been observing for some time now: Funding can still be found for good-quality projects being developed by well-run companies. The overall figures for capital raising are also heading cautiously in a positive direction. During this quarter, 42 percent of explorers had a net inflow of funds, up from 40 percent in the March quarter and 38 per cent in the June 2013 quarter. While uncertainty remains for the Australian natural resources industry, our latest analysis certainly suggests that things may be stabilising—if not starting to turn around. This guest post has been written by James Mooney, Partner with the Natural Resources team at BDO Australia. For more information, James can be reached at firstname.lastname@example.org.