December quarter: investment & exploration spending surge, sector welcomes flurry of IPOs

December quarter: investment & exploration spending surge, sector welcomes flurry of IPOs

Latest research from business advisory firm BDO into the cash position of ASX listed explorers shows the strongest cash position since June 2013 (when BDO first commenced this analysis), with 78% of exploration companies reporting a cash balance of $1 million or more.

After hitting a two-year high of $2.02 billion in the September 2020 quarter, financing cash inflows continued to surge in the December quarter, increasing by 9% to $2.21 billion. In addition, net investing cash outflows increased by 325% from the last quarter to a two-year high of $536 million. Exploration spending followed suit with a 36% increase to $587 million.

Sherif Andrawes, BDO’s Global Head of Natural Resources, said the latest analysis delivers positive signals for Australia’s exploration sector, with investment and exploration expenditure finally reflecting the uptick BDO anticipated after the surge in financing inflows during the June and September quarters of 2020.

“The 325% growth in investment spending suggests that economic confidence is improving, with more companies acquiring new tenements and equipment during the December quarter. Although ongoing travel restrictions and lack of access to prospective sites may still pose a hindrance to further investment spending, the impact of this appears to have reduced significantly over the quarter,” Sherif said.

He added that investment expenditure also includes cash spent on the development of projects, which for this quarter was carried out mainly by gold and sulphate of potash (‘SOP’) companies.

The analysis also shows that cash from strong quarters of capital raisings in the June and September quarters was spent in the ground, with exploration expenditure increasing by 36% compared to the September quarter.

“We had anticipated a strong December quarter after observing that a number of explorers in the September quarterly activities reports had stated that drilling and exploration programmes were planned for the December 2020 quarter. It is positive news that these planned activities went ahead,” Sherif said.

In spite of the significant increase in spending across exploration and investment expenditure, financing cash inflows continued to grow and cash balances strengthened. BDO’s analysis shows that 43 companies (termed ‘Fund Finders’ in the report) raised funds of $10 million or more, and made up 61% of the $2.21 billion total funds raised. This $2.21 billion is the highest cash inflow that BDO has observed since commencing its analysis in 2013 and represents a 37% increase compared to the corresponding quarter of 2019. Equity markets continued to be the preferred source of funds, with ‘Fund Finders’ sourcing 80% of their funds through equity raisings.

BDO’s analysis also showed that 20 recently floated exploration companies contributed to the inflow of funds in the quarter.

“The December quarter saw 20 IPOs - which is the largest number we have seen in a quarter since we started our survey in 2013 - as many junior exploration companies capitalised on favourable equity markets and resource-friendly investor appetites, and listed on the ASX,” Sherif said.

He commented that this activity resulted in a sharp reversal of the decreasing trend in the number of companies lodging Appendix 5Bs, which had been ongoing for eight consecutive quarters since the December 2018 quarter.

“The ASX’s current list of upcoming floats, coupled with BDO’s own pipeline of IPOs in progress, suggests that this trend will continue into the coming quarters,” he said.

“One of the most interesting findings from the December quarter was that SOP surpassed the oil and gas sector to emerge as the commodity which raised the second highest amount of funds in the 2020 calendar year. This will be surprising to some given that SOP is not as well-understood as more traditional bulk commodities such as iron ore and coal.”

The quarter saw 656 companies lodge an Appendix 5B, an increase of 14 companies from the September quarter. Sherif said this was mainly driven by the 20 exploration companies that completed IPOs and lodged an Appendix 5B for the first time.

BDO’s quarterly analysis has reported a declining trend in the number of companies lodging an Appendix 5B since June 2013. In June 2013 (when the analysis commenced), there were 860 companies that lodged quarterly cash flow reports, with a peak of 865 companies in September 2013. A sharp decline took place from the March 2014 quarter to the December 2016 quarter, when BDO observed that many exploration companies were either being delisted or being used as listing vehicles for backdoor listings, primarily by technology and biotechnology companies.

“With the increasing number of junior explorer IPOs on the ASX, we expect to finally see a reversal of this trend, with the December quarter kick-starting the reversal. However, whether this brings the sector back to historically observed numbers of exploration companies remains uncertain,” Sherif said.

“The cash position of Australian explorers continues to go from strength to strength this financial year and we see no signs of this changing.  Exploration companies have confidence that the ability to raise capital will continue throughout 2021, and so they are comfortable to spend the cash that they have on exploration and acquiring projects in the knowledge that those funds can be easily replenished.”

Find the full Explorers Quarterly Cash Update here.

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