Why/how miners keep raising and the slow return of growth capital: this week in capital markets

The week before last was one of the slowest of the year in capital markets, barely $100m was raised and the majority of volume was concentrated at the smaller end of the market. 

The powers at be must have seen something they liked last week as a much more normal ~$460m in fresh equity was issued across 26 raises. 

A lot of the activity remains in the small miners, so let's take a look at those in a bit more detail.

Why and how are small cap miners raising during a time when so many others are quiet?

For starters, a lot of them need to.

Once a small cap explorer finds an economically feasible ore deposit they either become a developer and their market cap increases commensurately beyond a small cap, or they sell the asset. Until one of these "exit" events, these companies will drill and hope, and continue to require regular injections of funding. An active explorer will be spending at least 10-20% of their market cap on drilling each year without considering corporate/admin costs. For those unfamiliar with junior explorers, or miners at all, think of them as startups that don't yet have a validated product, market, or revenue.

It's not easy to strike gold (or copper, lithium, silver, cobalt etc) - most of these companies will have to move between a few different tenements or commodities before they get some traction, and that's assuming that they're able to find something at all. In the meantime they will require constant and predictable injection of funding. Most explorers are out of cash in a 12 month period so even during a pandemic when it might not be the best time to ask for more money, they have to.

The necessity of funding aside, there's another big thing driving their hunger for fresh equity - commodities are sexy at the moment! Gold and silver in particular are up more than 30% each this year, and both now testing new all time highs. A lot of projects that weren't commercially feasible at the start of the year are attractive at current prices. You need much less Gold/Silver to make a mining project work, and that means more investors are willing to take the risk. To this end, we are seeing explorers all over the country scrambling to find a gold project they can acquire and raise for, or re-adjusting their powerpoint slides to prominently feature their back pocket gold tenement.

The return of growth capital?

Conventional capital markets wisdom says that when times are tough companies raise for balance sheet repair, this proved true post-GFC and also during the early weeks of the COVID pandemic. Another generally held belief is that in the aftermath of such crises companies that were able to weather the storm may raise capital to accelerate growth and/or acquire weaker peers. 

There was a bit of this activity at the start of June, but a resurgence of COVID and general feeling that the market was "overheated" put the brakes on most activity. This week we saw a few smaller prospects test the waters and return to the market for growth capital.

First up, City Chic is a women's fashion retailer which has been able to deftly navigate the challenges facing retail and re-focus on ecommerce sales. Last week the company announced an $80m capital raise which was pegged for funding the US acquisition of Catherines, a US based plus-size brand. This is a great example of a growth capital raise, a stronger market player is able to use their stability during COVID to tap the market and acquire a weaker peer. We have seen similar activity touted by Kogan and Template & Webster. The City Chic placement will be followed by a $10m SPP for smaller existing holders. 

You can't get a clearer example of a growth raise than Nuchev's $3m placement + $12m ANREO. The first slide of their investor presentation which came out this week says as much by proudly declaring an "Equity Raising to fund growth". The infant formula company has found itself in a strong industry during COVID, declaring with 98% revenue growth during FY20. Now, the plan is to take the $15m injection and hunt for more market share. The company's founder, Ben Dingle, will show his conviction with a $5.5m contribution to the entitlement offer.

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