Investment Matters

Putting capital to work

Capital raises (where a company seeks funding through the issuance of new equity) have been frequent and large over the past year. Companies have looked to bolster their balance sheet in the face of the uncertainty that has gripped the global economy.

Investors can be wary of capital raises, and companies that may need to raise capital often trade poorly.

Indeed, capital raises sometimes provide an ability for other investors to purchase shares at a discount to the last traded price and can be dilutive to existing owners.
However, capital raises are not very dilutive if you can participate in them.

Furthermore, they can provide an opportunity to purchase additional shares at a steeply discounted price, if the option is taken to take up any excess shares (effectively agreeing to take up any shares not taken up by other holders).

As a reminder, at First Samuel:

1. Even though our clients’ accounts are in their own names and managed individually, we are seen as an institution in the market and by investee companies. This means we can commit to deals on behalf of our clients and fight for any stock not taken up by other shareholders in issues.

2. We do not have a mandate to remain “fully invested” and can hold cash. This allows us to be ready for opportunities like this when they come along.

First Samuel’s clients were able to take advantage of this as two of your companies raised capital over the past week.

Aurelia ‘went for gold’ with a strategic gold acquisition, while MMA Offshore ‘cleared the decks’ with a significant debt restructure and recapitalisation.

We outline the rationale for these raisings and our participation.

 

Aurelia Metals: Going for gold

Late last week, Aurelia Metals announced a large capital raise of A$130m to facilitate a strategic gold acquisition. The A$130m equity raise is transformational for the company – which has a market capitalisation of around $400m.

Aurelia will acquire 100% ownership of the Dargues Gold Mine, located South East of Canberra for a consideration of A$205m (A$176m in cash plus $24m in Aurelia shares).

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The Dargues Gold Mine is a newly producing asset, with a processing facility that has seen approximately A$90m investment to date. The mine is expected to produce between 45 and 55 thousand ounces (oz) of gold per annum over its life, at an average All-In-Sustaining Cost (ASIC) of A$1150-1350 per oz over 5 years and an All in Cost of $1250-1450 per oz.

We see the price paid as fair based on existing production. The rough math: assuming a A$2000-$2,300 gold price and average production of 50koz per year, the mine should produce approximately $165-$230m in cash over its life.

The upside is Aurelia sees potential for further extension of the resources at depth (which is well within Aurelia’s domain of expertise: given success seen at Peak) and surrounding tenements as well as potential to improve processing throughput.

The acquisition also bolsters the company’s near-term gold production profile, which is declining, as gold reserves are exhausted at its southern mine: Hera. Aurelia previously sat on the smaller end of mid-cap gold producers and has seen volatility in its share price that is linked to produced gold grades.

It will therefore help firmly establish Aurelia as a mid-tier gold producer, increasing its size and scale.

We participated in the equity raising, which was conducted at a 14.9% discount to the previously traded price on Thursday.

MMA Offshore: Clearing the decks

As mentioned briefly last week, MMA Offshore conducted an equity raising as part of the restructure of its debt.

The restructure is a significant turning point for the company and will put the company on much firmer financial footing during the current downturn in oil and gas capital expenditure.
The company has looked to raise approximately $80m in equity, with a majority of the proceeds used to pay down debt.

As part of the restructure, the company has obtained a $15.1m concession from its lenders (with this debt to be ‘forgiven’), a reset of its covenants, alteration to its interest payment schedule and an extension to the term of the facility to January of 2025 (previously September of 2021).

The transaction will result in a total reduction in company debt of $93.7m, with gross debt reduced from $172.9m to $86.5m.

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As clients are aware, the size and impending maturity of this debt has weighed on the company’s share price over the past year. We did not see its size in the portfolio as proportional to these risks and responded by reducing your holding over the year - at significantly higher prices than its current share price, which continued to trend lower over the period (particularly after COVID first hit).

With MMA Offshore now a smaller position in the portfolio and a ‘clearing of the decks’ in terms of its debt - we see the company as much better placed to ride out the current downturn in oil and gas spending and a much less risky investment proposition. It is now carrying a more reasonable level of debt relative to its asset backing and earnings.

The recapitalised company trades at a comfortable discount to what we see as the potential sale value of its vessels, as well as the value of its operations based on future earnings potential (supporting both offshore oil and gas projects and wind farms).

We participated in the raise on behalf of clients, which was conducted at a 53% discount to its previously traded share price. We were able to take up additional shares above our allocation, given the attractive price.