June quarter: 60% increase in cash inflows into ASX listed explorers, exceeding sector’s five-year average

31 August 2020

Latest research from business advisory firm BDO into the cash position of ASX listed explorers reveals a 60% increase in cash inflows in the June quarter, with financing inflows at $1.34 billion exceeding the five-year average of $1.22 billion per quarter.

The 60% increase in financing cash inflows in the June quarter has offset the four-year low of $834 million observed in the March 2020 quarter. This also represents a 12% increase from the $1.20 billion financing inflows recorded in the June 2019 quarter.

The quarter saw 28 companies raise funds of $10 million or more - up from 12 companies in the March 2020 quarter - with gold companies leading the field.

Sherif Andrawes, BDO’s Global Head of Natural Resources, said it is great news to see the cash position of Australian explorers strengthen so significantly in the June quarter.

“In these last three months we have seen the sector really bounce back from the four-year low experienced during the March 2020 quarter. This upturn will positively impact the sector as a whole, as it’ll provide the impetus for future exploration, spending and investment,” Sherif said.

“The financing inflows recorded this quarter not only indicates a recovery of financial markets but possible growth in the ability for exploration companies to raise funds, with financing inflows this quarter exceeding the five-year average of $1.22 billion per quarter,” he said.

Sherif said it comes as no surprise that the 28 companies raising funds of $10 million or more has been led by the gold sector, which has historically performed well during periods of global economic uncertainty, and particularly so in recent quarters due to the strong performance of the gold price.

Oil and gas companies, however, appear to have fallen out of favour in the June quarter, reporting a lower-than-usual level of funds raised due to the low level of demand experienced by the sector resulting from COVID-19.

Consistent with the overall rise in financing is the improved cash position of the exploration sector with 62% of companies reporting a cash balance of $1 million or more at 30 June 2020, up from 57% in the March quarter.

However, the new research shows that this upturn has not translated to an increase in spending by exploration companies, with net investing cash outflows decreasing by 21%, net operating cash flows decreasing by 27% and exploration expenditure decreasing by 17%.

“We know many exploration companies are still in cash preservation mode, conserving capital and only carrying out exploration that is required to keep operations running in the short term,” Sherif said.

“With COVID measures and travel restrictions still in place across the country, restricted access to sites and supply constraints on contract mining services and equipment will continue to limit the ability of companies to spend on investment and exploration. But we do anticipate this trend to reverse in the next quarter with explorers moving to invest newly available capital into the ground. However, this may still be limited with ongoing travel restrictions as well as the limited availability of drilling contractors and equipment,” he said.

The number of companies that lodged Appendix 5B reports for the June 2020 quarter was 646 - four less than the 650 in the March 2020 quarter. BDO observed only one successful IPO during the quarter (that lodged an Appendix 5B), which was by gold company Manuka Resources Limited.

“We expect the number of IPOs to increase in the next two quarters based on the number of upcoming listings we have already observed on the ASX, BDO’s own strong pipeline of IPOs, and the current favourable market conditions,” Sherif said.

“In the absence of another disruption to financial markets, the favourable financing conditions for exploration companies should continue into the next quarter and we anticipate this will create a surge in IPO activity and capital raises,” he said.

“While other sectors are still struggling to get back on their feet after the impact of the COVID pandemic, the exploration sector appears to have benefited from the influx of funds on the ASX, experiencing an upturn in cash inflows that has exceeded the sector’s five-year average. We expect to see this translate into the growth of the exploration sector in coming quarters, with the increasingly well-funded explorers able to advance exploration programmes and project development.”

Download the full Explorers Quarterly Cash Update below: