Article:

BDO IER Breakfast: 2021 demand for ILARs and Valuing Performance Securities

21 July 2021

Sherif Andrawes, Global Head of Natural Resources
Partner, Corporate Finance
|
Jane Gouvernet, Associate Director, Corporate Finance |

BDO held its annual Independent Experts Report Breakfast seminar in Perth recently and to adjust to the changing market conditions in Australia we included discussion on the IPO market and the changing regulatory landscape.

BDO is the leading adviser in Australia in providing both Independent Expert Reports (‘IER’) and Independent Limited Assurance Reports (‘ILAR’). We therefore have first-hand insight into changing trends in the Western Australian merger, acquisition, and IPO markets.

Significant increase in IPOs

Each year our corporate valuation experts are regularly engaged to provide IERs for a fair and reasonable opinion on schemes of arrangement, takeovers and related party transactions, predominately undertaken by stock exchange-listed companies. 

We have seen over the last 12 months a significant increase in the demand for ILAR’s and decreasing demand for IER’s.

The strength in the Australian, and in particular the WA, economy and interest in the market by national and international investors, including private equity and superannuation funds, has meant that available capital that may otherwise have been gained through merger opportunities is flowing into fundraising.

 

 

Industry recognition

Verified by Thomson Reuters’ data, BDO is one of Australia’s most prominent advisory firms having undertaken, on average, 49 public company transactions a year for the last 16 years. This is compared to our large competitors who have, on average only completed 16 transactions each a year for the same period.

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Forecasts in ILARs

The volatility created by COVID has, over the past 12 months, made the inclusion of forecasts within a prospectus for an IPO challenging. This is because of the uncertainty in demonstrating the basis for the forecasts over an unpredictable future.

The forecasts we have seen are generally for 12 months although we expect this to increase over the coming year, particularly for Western Australian mining services operations, and the industrial and technology sectors.

IERs for ‘Performance Securities’ in the Mining and Resources sector

The issue of Performance Securities, depending on the percentage of capital on current conversion, may require (under ASX Guidance Note 19 ‘Performance Securities’) an IER for inclusion within an IPO prospectus or notice of meeting.

Performance securities, rights, options, appreciation rights, gained momentum post GFC and as a remuneration practice came under pressure to be clearly aligned with performance.

Performance securities as remuneration are now commonplace and we have seen an increased prevalence of their use as a form of deferred consideration. They are a useful mechanism for a vendor to participate in the upside of an asset. 

Both ASX and ASIC have said that they are suitable instruments however, it is clear there are still concerns around:

  • Potential dilutionary effect, and 
  • Value alignment between performance securities and the milestone  

In the mining and resources industry performance milestones are usually tied to a future project hurdle e.g. the achievement of a stated JORC 2021 classification, pre or bankable feasibility studies or production. The valuation of these future events requires all valuation inputs and assumptions to have a reasonable basis so that the value of a share prior to meeting a milestone and the impact of a milestone on value can be determined. This may mean that an expert hasn’t sufficient grounds to value the impact of a milestone on share value and is therefore unable to opine on whether the issue of the performance securities is fair. This means that, by default, the fair opinion is required to be not fair and the reasonableness of the Performance Securities becomes the better assessment.

Example of key assumptions that may be required to value pre and post milestone achievement events:

  • Mineral Resource results and classifications sufficient to meet each Milestone;
  • Pre-feasibility study results;
  • Life-of-mine plan;
  • Forecast base gold and base metals prices;
  • The availability and application of funding; and
  • Environmental and regulatory approvals. 

A not fair opinion is not fatal to the success of a transaction. Many transactions continue to be approved if they are reasonable and the reasons for why a not fair opinion has been fully explained. That is, the best way to manage a not fair opinion is to provide full and balanced disclosure so that shareholders can feel confident that they can make an informed decision. 

Experienced Experts

We also reinforced the need to seek experts who are experienced in the level and type of disclosure that regulators expect. Regulatory intervention can be time consuming and delays increase risk. Experienced experts may not be the cheapest up front however are more likely to understand the importance of providing sufficient and balanced disclosure resulting in reducing the likelihood of regulatory intervention. 

Conclusion

If you’d like to get in touch to discuss any of the information contained here or have further questions around how we can help your business, please contact us.