-- Posted Thursday, 14 June 2007 | Digg This Article
By: Harold Leishman
The number and value of Initial Public Offerings (IPOs) on Canadian markets have increased dramatically in recent years, yet they remain an enigma to many investors, who aren’t sure how to participate in them or how to assess their potential risks and rewards.
These sentiments are understandable as IPOs aren’t what they used to be as little as five years ago. One constant is that an “Initial Public Offering” still refers to a company offering its shares to the public for the first time by qualifying for a listing on a stock exchange. “Going public” helps these companies reach a much larger pool of investors and raise enough money to pursue specific growth plans.
IPOs are typically done by smaller companies, but sometimes an existing publicly traded company will spin off a subsidiary through an IPO, with a high-profile example being Tim Hortons. Furthermore, the net proceeds of an IPO go to the company’s treasury and are used to advance its business plan. In contrast, when investors buy shares on the stock market, the money goes to the investor who sells the shares.
Defying the status quo, recent Canadian IPOs were not dominated by small companies, nor were they dominated by the 1,200 mining companies which range from early-stage explorers to senior producers. This occurred despite the fact that the mining sector has gone from a prolonged downtown, to a secular bull market for almost every mineral and commodity mined from Earth’s crust.
Mining companies on TSX exchanges were collectively valued at US$279.9 billion at year-end 2006 and raised US$11 billion in equity capital last year. This picture is also reflected on the TSX Venture Exchange, which accounted for only $250 million of the gross IPO value, up from $180 million in 2005.
A survey of Canadian capital markets by PricewaterhouseCoopers (PwC) shows that large companies dominated Canadian IPO activity in 2006, when 116 new issues worth $5.8 billion joined the ranks of publicly traded companies, down from 119 IPOs worth nearly $7 billion in 2005. More than 90% of the value in both years was from large IPOs on the TSX, which numbered 54 in 2006 (down from 74 in 2005). In our opinion, these numbers clearly indicate the dramatic rise of IPOs in the past is over.
The PwC survey also shows that Canadian IPOs fell in the first quarter of 2007 to 20 from 34 in the 2006 first quarter, while total proceeds of $300 million were 85% below the $2 billion raised a year earlier.
Ross Sinclair, national leader for PwC’s IPO and income trust services, says this sharp decline reflects the federal government’s policy to stop corporations from converting into income trusts.
“The Canadian IPO market has averaged about $6 billion in recent years, with income trusts accounting for about 60% of the total market,” he says. “Without any new income trusts in 2007 or any new equivalent, the 2007 IPO market could move down to less than $3 billion.”
While this trend may not be good news for large corporations that had hoped to convert into income trusts, mining companies stand to regain a stronger presence in the IPO capital markets in the years ahead, given the continued strength of most metals and commodities and the impressive returns of recent mining IPOs.
IPO shares are marketed by the underwriting brokerage firm, or a syndicate of several brokerage firms. Investors can register with their broker to be advised about new IPO issues, but this does not guarantee participation in popular IPOs that are often “oversubscribed.”
In such cases, investors may be allowed only part of their requested shares, if any, because the underwriters are allowed to set aside certain blocks for their long-standing, established and usually high-net-worth clients. While building a relationship with an established broker is generally considered the best way to participate in a high-profile IPO, it is much easier to get in on the “ground floor” of a smaller company.
We believe picking IPOs with strong underwriters behind them helps, because quality firms tend to bring quality companies public. Smaller brokerage firms specialize in smaller companies whose IPOs are easier to acquire. While the risks are higher, investors can reap huge rewards if a small company makes a large discovery.
IPOs of junior companies with experienced management and quality exploration projects can provide good returns for high risk-tolerant investors, even in the early stages of exploration.
Mining companies have an important advantage as their prospectuses must meet strict National Instrument 43-101 disclosure standards and are closely monitored by securities regulators. A potential investor can review historic and current exploration results, the credentials of the management team, and how the publicly raised money will be spent. A prospectus is a dry read, but a “must-read” for any IPO investor.
The Internet is another important tool to help IPO investors do their own due diligence of such companies, their principals and core assets, and about metals and commodities markets in general.
When in doubt, ask your broker or a respected mining analyst. When it comes to mining, we consider Canadian brokerage firms unparalleled in their knowledge and global reach. That’s why at least 60% of the world’s mining companies are listed on Canadian exchanges, and why 84% of the world’s recent mining-equity financings deals are done in Canada.
For more information, please contact the author, Harold Leishman at 604-643-7623. Although the author is a registered investment advisor at Canaccord Capital Corporation ("Canaccord Capital"), this is not an official publication of Canaccord Capital and the author is not a Canaccord Capital analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Capital, PO Box 10337, Pacific Centre, 1600 – 609 Granville Street, Vancouver, B.C. V7Y 1H2 Member CIPF.
-- Posted Thursday, 14 June 2007 | Digg This Article
