September quarter: explorers locked and loaded with cash, but trigger on spending yet to be pulled

30 November 2020

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 74% of exploration companies reporting a cash balance of $1 million or more.

In addition, access to funding peaked at a two-year high, with total financing inflows reaching $2.02 billion in the September quarter - a 51% increase from the $1.34 billion recorded in June. These figures represent a dramatic 142% increase since the four-year low of $834 million recorded in March this year.

The new data also reveals no shortage of funds in equity markets for the quarter, with the number of companies raising funds of $10 million or more increasing from 28 companies in the June quarter to 46 companies, comfortably exceeding the 2-year average prior to the June 2020 quarter of 24 companies.

Sherif Andrawes, BDO’s Global Head of Natural Resources, said the cash position of Australian explorers has gone from strength to strength this financial year.

“Interestingly, 95% of the funds raised by our explorers were through equity raisings and only 5% through debt. Once again gold stocks dominated this category, but to an even larger extent than seen in previous quarters,” Sherif said.

“On the other hand, oil and gas companies seem to have fallen out of favour with equity markets, and only comprised 3% of the funds raised, after previously being a consistent top three commodity in this category in the past,” he said.

Sherif added that lithium companies have also been challenged over recent months with pricing and supply issues.

However, Sherif said that while explorers are locked and loaded with cash (the average cash balance increased by 30% to $8.16 million), the trigger on spending is yet to be pulled.

“The recent growth in funding has not yet translated to an increase in spending over the September 2020 quarter, particularly on investment. We believe this is due to the prevailing economic uncertainty, travel restrictions and limited supply of drilling and other exploration support services in the sector,” Sherif said.

“The Australian economy is not out of the woods yet and exploration companies are still mindful to maintain a sufficient cash position in the event of a major outbreak or economic event. We predict that slowly but surely investment expenditure will recover in line with growing investor confidence. In fact, we have started to see an uptick in the number of companies recording net investing cash outflows, albeit in small doses,” he said.

The latest data reveals a gradual recovery in exploration expenditure driven by increased spending in the mid-market (in the $0.5 million to $1.0 million range). Furthermore, average exploration expenditure in the quarter has matched the two-year average of $0.67 million, indicating that exploration spending is returning to its historical levels. There is an expectation that this will continue in the coming quarters, mainly driven by gold companies that have managed to raise a significant amount of funds in the last two quarters, and have plans to embark on accelerated exploration and drilling programmes to expand their current resource and improve the value of their projects.

Sherif commented that a key highlight from the September quarter is the growing level of IPO activity in the sector.

“This trend is also reflected in BDO’s own pipeline of IPO activity across the sector, and we expect this to increase over the coming quarters,” Sherif said

The September quarter saw 642 companies lodge an Appendix 5B, which is a reduction of four companies from the June quarter. However, it should be noted that there are 17 exploration companies that had either just completed an IPO or are about to complete an IPO as an upcoming float on the ASX. Due to this timing, these 17 companies had not lodged Appendix 5Bs for the September quarter but are expected to lodge them in the December quarter.

Since June 2013, BDO has continually noted a declining trend in the number of companies lodging an Appendix 5B.

“The September 2020 quarter can certainly be considered a hallmark for the exploration sector, with an unprecedented cash position. A lot has changed since the March 2020 quarter when it was questionable whether explorers’ cash balances would last them through the pandemic and general industry outlook was uncertain,” Sherif said.

“The data clearly shows that there is money to be raised, and explorers know it.”

Find the full Explorers Quarterly Cash Update here: