Media Centre
31 May 2010
The New Frontiers in Mining: Pre-IPO Investment
With Australia being such a resource rich country this makes for some serious mining investment opportunities for both established and up and coming companies.
In this current resources boom investing in Australian resources companies has been very fruitful for many investors who have become quite skilled in this sector.
Australia’s Superannuation Fund Managers during this boom, have created back to back to back years of 25% plus returns, with the only dint being the GFC which we were not immune from.
BHP, Rio, Woodside, Fortescue – In the Australian Resources landscape these companies are household names, national powerhouses and are held directly and indirectly through funds by many Australians. The Bloke at the pub, Mums and Dads, Uni Students call these companies Blue chips.
Blue chips tend to steadily grow at a rate that is just above the All Ords index.
So if you have a healthy appetite for risk, and some cash to invest, what are the alternatives for those seeking higher returns who want to stick within the sector?
One investment option currently returning to favour post GFC is the Pre-IPO capital market. Many early stage resource companies are coming out of the woodwork to float companies that had been shelved during the GFC as finance channels had completely dried up during this time.
When the IPO market recovers so follows the Pre-IPO market. Investors can now see an exit (through IPO) and thus with the reduced liquidity risk investors who have an appetite for risk can get in at the ground floor with these types of investment opportunities (Pre-IPO) that have the ability to produce exceptional triple digit returns within a relatively short time period.
Pre-IPO capital is still at the Wholesale end of funding and the valuations at the Retail level (IPO) often track a lot higher. This reflects the risk/reward relationship that exists.
Pre-IPO offerings are generally priced at a discount to the eventual IPO offering price.
To give an example Pre-IPO capital in Australia is typically raised at around 8-13 cents, whilst IPO capital is raised around the 20-25 cent mark.
The increase in valuation at IPO from Pre-IPO is often referred to as the “uplift”.
This alone has the ability to give triple digit returns – The time taken to get from Pre-IPO to IPO can be as short as a 3 month period or can stretch out to 18 months to 2 years. As mentioned above, the main risk here is liquidity risk during this transitional period.
Further to this, once the company is listed many resources companies string together back to back announcements regarding exploration results which can continue the drive north for the share price.
For those trivia nuts out there, if you’re also interested to know how the term “Blue Chip” came about, the term was derived from Casinos where Blue Chips represent the greatest value among the many colours of chips. Who knows, by taking a risk and investing in a Pre-IPO opportunity you may end up with a Blue Chip of the future.
A SUCCESS STORY:
Apollo Gas Ltd (ASX:AZO) is a petroleum explorer with an interest in seven exploration licenses covering 23,600 square kilometres in the Sydney- Gunnedah Basin in NSW who raised $8 million through a Pre-IPO private placement of 60 million shares at 13.3 cents from investors in August 2009.
Four quick months later Apollo listed on the ASX on 15th December 2009 via an IPO raising a further $8 million at a 20 cent offer price.
Shares in the company opened at 36cents on debut and rose as high as 41.5 cents on opening day. Apollo has since gone on to reach a 52 week high of 87cents.
Investors were not only rewarded in the uplift to IPO from Pre-IPO they also saw significant upside post listing. The company also has strategic relationships with Arrow Energy and Santos so the company is well positioned to continue its run to date.
Note: The investment opinions contained in this article are general in nature. Seek investment advice before making financial decisions. It should be remembered that pre-IPO capital is considered high risk. Past performance is not necessarily a guide to the future and an investor may not get back the whole amount they originally invested.
