We’re at a point now, where after two years of horrible markets, companies who delayed financings because conditions were so bad, and who have now had to recapitalize at any price because conditions are worse, are going to start falling off the game board.
The market is in the process of contraction. The time to be identifying and participating in companies is now, when everybody else is selling or abstaining. But, and it’s a huge but, the winners are going to be few and far between. Why? Because of the structural changes of the market place thanks to never-ending debt crises, central bank shenanigans, government folly and fiscal recklessness.
Here are the key items that have changed:
1. There are fewer investors
The last two years of bad performance have vaporized more than a few individual investors and plenty of investment funds. Even a few investment banks are history. Therefore, the lift one used to be able to expect from successes – a great drill hole, for example – is significantly diminished.
2. Average paid-in capital per share is way down
In other words, a company that used to arrive at 100 million shares outstanding did so with a much higher average price paid for share than is the case now, because so many companies have had to undertake financings on onerous and dilutive terms. So that means buyouts are going to occur at a much lower average premium to the average price paid per share.
3. There are an increasing ratio of companies that can’t raise money
Lots of companies out there are quickly running out of money and going on life-support, which is a condition you won’t glean from press releases. Read the financials.
4. Share structure is more important than ever
Starting with the founders round, make sure you know where every share has been sold or bought on the price curve. Take note of warrants, their strike prices and expiry dates. Too many financings at low prices are resulting in massive market overhangs. Exploration success has a much harder time driving a share price upward through cheap shares and warrants.
5. Takeovers aren’t necessarily big wins anymore
Because of all the cheap financings of the last couple of years, we have gone from an era where, from discovery to buyout by a major, a resource project would typically see valuation increases measure in the thousands of percent.
Recently, takeovers of companies – especially in the mining sector – while occurring at a premium of anywhere from 15%-40% over current market prices, are nonetheless at steep discounts to market highs prior to 2011. The bottom line here is that there are going to continue to be big winners throughout the small cap resource sector, but they’re number as a ratio to the companies that fail is going to go way down. That’s why conferences like the San Francisco Hard Assets conference are now, more than ever, an important part of the landscape for investors seeking insight into current investment trends.