As of yesterday, there were 40 share issuances pending or completed on the Toronto Stock Exchange in June. Over half, or 24, involve resource companies — a fact that would have left most experienced market participants slack jawed in amazement just three months ago.
Something’s in the air. Resource companies punished for cash in the last five years have found they are suddenly open for business. They are issuing new shares as fast as they can get them out the door.
From Suncor Energy’s $2.5-billion equity offering earlier this month to Marathon Gold’s $3-million share offering last month, resource plays large and small that could barely give their stock away are suddenly issuing equities again and institutions are buying them.
Does this mean the market believes commodity prices have found a bottom and the cycle is staring to turn up? With so many of Canada’s corporate law firms built to handle extensive resource company client work, there is a lot invested in the answer.
Alan Lane of Haywood Securities Inc. isn’t convinced that’s what’s going on.
“It’s always impossible to guess but the fundamentals suggest it’s just a bounce,” says Lane, a one-time executive director of CIBC World Markets. “There still seems to be lots of supply out there of everything you can think of from base metals to oil and gas. It got so egregiously oversold that it was due for a bounce.
“Investors, especially institutional investors, were grossly underweight in this sector so a lot of money’s flowing back into it. A lot of guys are chasing performance now. So what happens is you get a buying spree.”
With no one entirely sure how long it will last, underwriters are rushing to get deals done in case the window closes.
“Underwriters are out there marketing like mad,” says Sander Grieve
, head of mining at Bennett Jones LLP
. “I think lots of people are having underwriters knocking on their doors.”
While Grieve and others say they haven’t heard of underwriters offering discounts, what they have noticed is they are they knocking on doors of smaller companies they wouldn’t have approached two or three years ago.
“Yes, definitely,” says Grieve. “It used to be big capital raisings but now, when you look at it, you also see things like Noront Resources, which closed a $6 million offering in March, and Freegold Ventures, which closed a $7-million private placement in May.”
Large and mid-sized producers like Suncor may be cashing up for potential acquisitions and to pay down their bank line but where offerings are small, says Grieve, “for some of these guys that might be their drilling program for the next 16 months.
“Cash is scarce, that’s an important part of the trend. Underwriters are certainly more aggressive this year than they’ve been for two years in terms or pursuing transactions. I think there have been a number of cash transactions where the underwriters are setting up financings — that’s where I see the biggest change year over year.
“There is an equity market again in this stuff. We’ve had three or four prospectuses that are live in the last few weeks, which is a sea change. A big part of this is there is a lot of action in small and mid-sized companies, some in the $7-million or $10-million range, that would be unremarkable at any other time except that there are actually financings happening again.”
As to whether this is bounce or a turning point in the cycle, put Grieve in the latter category.
“I think that’s what’s really going on. Public markets have been closed for mining companies, the private-market equity piece has been non-existent for two years other than brief flurries. But that’s started to change.”
WHAT ABOUT OIL?
The resource resurgence – for however long it lasts – is not just metals and minerals.
The price of oil has recovered about 80 per cent since February when it dipped below US$30 a barrel, “so confidence is building that it’s reached a new higher low,” says Noralee Bradley
, a partner at Osler, Hoskin & Harcourt LLP
in Calgary. “When capital starts to see some stability indicators, they’ll start making some capital available.”
The last few years were so tough on traditional oil and gas companies that production was pulled back and many just stopped spending.
“We’ve had several rounds of capital cuts by energy companies, they’ve have to adjust to this new reality of their revenue being dramatically cut,” she says. “What’s happened is they’ve found ways to make their operations more efficient so the cost of operations in this last year have adjusted.”
With prices stabilizing around US$50 a barrel for a month or more, “costs have come down such that they can tell a story now that they can make money at these prices, which is making funding available for operations.
“There’s also funding for acquisitions because distressed companies are having to sell assets — and better assets coming on-stream for sale now because lenders to companies with balance sheet issues are forcing them to put better assets on the block.”
The big banks definitely play a huge role in what and how much goes on the block.
That’s because oil and gas companies often use bank debt to fund their operating line.
The banks, for their part, do an annual re-evaluation of each company’s reserves to see whether the size of the operating line is still in line with the company’s value at current resource prices.
While the banks are mostly willing to hold their noses and blend-and-extend for a couple of years, they’re becoming less interested in doing so out of fear it will hit their own balance sheets.
“There are a whole bunch of redeterminations going on right now because while reserve reports are done at year end, they get produced for banks to start looking at toward the end of March.
“So what’s happened over April and May is the banks have been looking at those reserve reports and when the borrowing base is against the asset value – instead of having $200-million of bank line available on which you have drawn $175-million – they might come back and say we’re only making $150 million available so pay us back some money.
“The lenders are smart, they give the producers a lot of time to understand that’s coming and an opportunity to raise equity or sell assets – which is what we’ve been seeing in the last six to eight weeks.”
Is Bradley in the category of brief window of opportunity, or comeback? Well, both.
“The July-August time frame is much more difficult to get deals done, a lot of the i-bankers are off, so if there’s a window companies are going to hit it now and not risk waiting until September.”
In other words, September should tell the tale.