Brexit decision and looming US Election help fuel interest in Australian gold stocks

Sherif Andrawes , Global Head of Natural Resources
Partner, Corporate Finance

22 September 2016

Latest research from global firm BDO has found that the impact of the Brexit decision and uncertainty around the outcome of the US presidential election fuelled interest in Australian gold stocks with investor appetite increasing in the second quarter of 2016.

Sherif Andrawes, National Leader, Natural Resources at BDO said pockets of rallying commodity prices had been the catalyst for an increase of $946 million in total net financing cash flows in the quarter.

“In particular, gold, oil & gas stocks received significant financing cash flows, with ten gold companies and six oil and gas companies raising in excess of $10 million during Q2 2016,” Mr Andrawes said.

“The interest in gold reflects the heightened economic uncertainty that arose due to the Brexit decision and looming US election.”

“It shows there’s still investor appetite for businesses demonstrating strong fundamentals and reasonable valuation levels.”

“The significant increase in financing cashflows illustrates that explorers are finding it easier to raise equity funds and so are loosening the purse strings now that they have some comfort over where their next dollar is coming from.”

The BDO Explorer Quarterly Cash Update is based on the cash position of Australian-listed explorers based on quarterly Appendix 5B reports lodged with the Australian Stock Exchange (ASX).

The report found that alongside the increase in investment activity was a marginal upward tick in exploration expenditure in the quarter.

“The average exploration expenditure increased for the first time in more than two years – up from $360,000 in the March 2016 quarter to $418,000 in the June quarter,” Mr Andrawes said.
By the quarter end, 713 companies lodged an Appendix 5B report, down by 3.37% compared to the previous quarter.

The declining number of companies reporting exploration activity is primarily attributable to technology companies using exploration companies as a means to list on the ASX via reverse takeovers, and companies being delisted or suspended from the ASX. 

“During the second quarter of 2016 the ASX proposed changes to the listing rules which are expected to reduce the attractiveness of reverse takeovers. Consequently, it is likely that we will see a dramatic decline in the number of reverse takeovers and increase in the number of IPOs going forward,” Mr Andrawes said.

“We’re also seeing an increase in M&A activities in the sector.  With the value of most assets other than gold being reduced, many companies are looking to acquire, restructure or consolidate so that they are ready for the next phase of what may be an increase in the commodity cycle.”

Key findings of the quarterly update reveal:

  • Reasons for the reduction in companies reporting include 14 companies being the subject of backdoor listings, 12 of which were technology related companies, and 13 companies being delisted or suspended. There was a significant increase in the number of companies with positive financing cash flows, with 50.9% of companies being able to raise funds via either capital raisings or through borrowings during the June quarter. This is an increase of almost 9% compared with the 42.3% of companies with positive net financing cash flows for the March 2016 quarter.
  • Total net financing cash flows increased by $946 million, with the average per company increasing from $0.56 million in the March 2016 quarter to $1.91 million in the June quarter.
  • The number of companies that raised in excess of $10 million in the June quarter was 33, up from the seven in the March 2016 quarter. In coming quarters we may see an increase in explorer development expenditure and potentially more companies transitioning into production.  
  • Average cash reserves increased from $4.82 million for the March quarter to $5.85 million for the June quarter. This signals a potential turnaround in the market, with explores being able to attract both debt and equity funding. 
  • The amount of explorers with a net investment in capital expenditure has remained consistent at approximately 33% between March 2016 and June 2016. However, total investment expenditure has more than tripled from $47 million during the March quarter to $149 million in the June quarter.
  • Six companies were delisted during the quarter, two exploration companies conducted an IPO and seven were suspended from the ASX.
  • Increased financing cash flows have strengthened company cash positions, with the average cash balance increasing by more than $1 million over the quarter. Total net investing cash flows have also increased, from $47 million during the March 2016 quarter to $149 million in the June quarter.
  • BDO’s paper ‘Brexit & Energy and Natural Resources’ provides some insight to the risks and opportunities stemming from Brexit.