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May 2002 - Healthy IPO

Achieving A Healthy Exploration IPO (or at least trying to)

This article is drawn from a presentation that Keith Goode of State One Eagle Research made at AJM’s “Exploration Hotspots’ Conference” on 2 May 2002 in Sydney being “A broker’s view on bringing companies to market based on a perspective of recent exploration company floats”, and was designed to try and offer useful, practical advice.

Figure 1. A Healthy Exploration IPO – Independence GoldGDNmay02

There have been a number of exploration floats this year, to name just a few are Elkedra Diamonds, Independence Gold, Flinders Diamonds and Nugget Resources (Gold). Eagle Research wrote 4-page IPO summaries on 3 of them (namely Elkedra, Independence and Nugget) and State One was involved in two of them, underwriting Elkedra and being the lead supporting broker for Independence.

Firstly, Elkedra. Elkedra’s IPO was underwritten to A$3.5m by State One and closed oversubscribed at $3.55m worth of 25c shares. It listed on 8 January 2002 and traded between 29c and 25c before closing at 26c on trade of 550,000 shares. Since listing it has made 3 new information announcements and closed at 26.5c on 11 April.

Secondly, Independence Gold. State One was lead supporting broker to the Independence IPO which closed $0.5m oversubscribed at $4.0m worth of 20c shares. It listed on 17 January 2002 and traded up to 27.5c before closing at 25.5c on trade of 1.2m shares. Since listing it has made 12 new information announcements from 21 January to 9 April and closed at 36c on 11 April (having issued a 1-for-2 loyalty option, yet to trade, but worth possibly 7c per original IGO share).

Thirdly, Flinders Diamonds. Flinders Diamonds reduced its minimum subscriptions to $3m from $5m in its third attempt at listing at 20c per share. It also gave a free option per share subscribed with the listing, and although it was not clear how much was raised, there were 25.7m shares and 16.6m options which implies that possibly only $3.3m was raised. Flinders closed down 3.5c at 16.5c on its listing day of 20 February 2002, and had made only one new information announcement on 8 April since listing. FDL closed at 13.5c on 11 April.

And lastly, Nugget Resources. Nugget Resources reduced its share price from 50c to 20c in its second attempt at listing, and decided to go for the full $5m (with a minimum of $4m, previously $3m) backed by ABN AMRO Morgans. Its first attempt at listing using a corporate adviser instead of a broker, failed. It was supposed to list on the 4 April but that has been delayed to early May 2002.

A number of conclusions can be drawn from these 4 examples, namely there are 3 components to an IPO, (from a stockbroker’s viewpoint) being :

• Raising the Money

• What are you going to do with it ?

• Initiating and Maintaining Interest.

Raising the Money

In small company floats, there are three key issues associated with raising the money, namely :

Do you use a stockbroker or a corporate adviser ?. Answer use a stockbroker, because a stockbroker has a client database identifying the risk profile of each of their clients and knows who could be interested in the issue. They can telephone their clients to see if they are interested and then follow-up that interest with company results and announcements, whereas corporates are unlikely to have the size of client database lists or desk manpower to do the job required (for example : Nugget’s first attempt).

Size? Preferably $2.5m to $3.5m, because it is do-able. $5m is a tough ask as Flinders Diamonds found out and Nugget appear to be struggling with their revised $4m too. Larger issues are possible, but then you really need a “big brother” that can take a chunk of the issue. And Share Price ? Preferably 20c or 25c a share (this is a market perception thing. If it lists at 20c or 25c, then the share is perceived as more likely to get a 5c appreciation and rise by 20% or 25%, whereas if it lists at 50c, it is perceived as more likely to fall 10c or drop by 20%).

What are you going to do with it ?

So you have raised the money, then what ?. While we all know that there are the broad programmes, it is easier for a broker to “sell” a story if there is a comprehensive detailed plan, giving an indication of when and what reports could be issued post listing. Alternatively, if the plan is too woolly, investors become sceptical as to how much of the money is in fact going to be spent on exploration, or how much is going to be spent clearing debts and putting down carpets in the possibly new premises, or on remuneration.

Initiating and Maintaining the Interest

If you have ever looked at an IPO, you can understand that to the average investor they are daunting, packed with information, and need someone to translate it into something that does not require wading through to find out whether to apply or subscribe for it or not. Get an IPO summary written, say of about 4 pages. Eagle Research provides IPO summaries as do a number of other companies or individuals. Also in these days of colour and pdfs, make the summary interesting and put some life and colour in it.

The summary of the IPO starts the interest, but then you have to maintain it. This is where that comprehensive detailed programme comes in. There appears to be a correlation between the number of announcements made post listing providing new information and rising share prices. Independence Gold has kept a steady stream of announcements and its share price has almost doubled, Elkedra started well but has drifted off along with the regularity of its announcements, and Flinders is down by about 50% with one new information announcement being made about 6 weeks after it listed.

Making announcements cannot guarantee an increased share price, but it should give the share a greater chance of success, because the broker can phone back his clients and keep them interested with the “new information”. Then there is possibly the use of loyalty options and of course the Triple A. A way of maintaining interest is to use loyalty

options, where options are given to shareholders that are holding the stock say two months after it lists, which encourages them to hold the stock and keep a healthy post-listing after-market.

The Triple A (AAA) is also very significant to the success of your IPO. The three A’s stand for : Adviser – Lock-in an adviser at the stockbroker you choose. You want someone who is keen to promote your story, and can send clients follow-up emails as results and announcements are made that could affect your share price. Avoid – The sausage factories. There are plenty of brokers willing to list your IPO, however, do they have your interest at heart or is it yet another IPO producing a corporate return to them. If you use a sausage factory and they stag your stock, then you cannot be surprised.

For that matter : Ask – Are they (the broker you pick) going to support it ?. As part of this you should ask your friends and possibly even fellow directors how long they are going to support it and not “grab” a quick return. There is often nothing more frustrating from a broking viewpoint than to have lines of stock for sale from a company’s “friends”. Similarly from another broker’s viewpoint, it is very disappointing to see the listing broker dumping their stock for a “quick profit”.

To summarise bringing companies to market, requires a “Knowledge of the Market”. Aspects have been covered such as “Raising the Money”, what is the ideal scenario for a stockbroker, the size of the float say $2.5m to $3.5m, and the price say 20c to 25c, and ideally oversubscribed.

And it also requires “A Comprehensive Plan”. Start by summarising the IPO. Then appease investors as to what the money is being spent on. The need to ensure a list of announcements with “new additional information” post listing to “maintain the interest”. Possibly consider issuing loyalty options to aid the after-market post your listing. Also ensure you focus on the Triple A “AAA” and lock-in that adviser and ask if the broker is going to support it.

And this time I will be answering the questions.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, who has a Proper Authority with State One Equities, and with his associates, either has or expects to have interests in most of the stocks in this article, This e-mail address is being protected from spambots. You need JavaScript enabled to view it . The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Wednesday, 01 May 2002

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