ASX Reforms To Boost Capital Raisings In Listed Small to Mid Cap & Resource Sectors

The Australian Securities Exchange (ASX) is continuing to promote itself as a hub for global resource investment.  It is proposing several reforms to address the capital-intensive needs of small to mid cap energy and resources companies.  These include changes to the current capital raising and admission requirements.  The ASX has also provided useful advance warning of likely reforms to the disclosure rules affecting listed mining and oil & gas companies.

Whilst small to mid cap companies (i.e. for ASX purposes, those with a market capitalisation less than A$300m) account for only 6% of total market capitalisation, they represent 76% of the number of listed entities on the ASX.  Of these, over half are active in the energy and resources sectors.  Without any significant cash-flow, these prospecting, exploration and early stage producers have difficulties accessing debt markets and venture capital and are increasingly cash-strapped.  Placements are therefore a crucial source of capital – in 2011, placements accounted for close to 70% of the secondary capital needs for mid to small caps. 

More Flexibility In Capital Raisings

The ASX's basic rule for equity issues, under which a listed company can only issue up to 15% of its issued capital in a 12 month period without shareholder approval, will remain in place.  However, the new proposal will allow small to mid cap companies to seek shareholder approval to issue a further 10% of their issued capital over a 12 month period, at a maximum 25% discount to market price.  So, in effect, small to mid cap companies will have the flexibility to easily (and more cheaply) raise equity finance at up to 25% of their market cap.  There are certain requirements for disclosures to shareholders both pre and post issue of the additional 10%.  These focus largely around the dilutive effect for existing shareholders.
The proposals would make the ASX's capital raising framework for mid to small cap companies similar to, and competitive with, other exchanges, such as Toronto, London, Hong Kong and Singapore.

Admission Criteria

The ASX also seeks to update its admission requirements by proposing changes to the requirements for shareholder spread and net tangible assets on listing.

In respect of shareholder spread, the ASX has proposed to relax the shareholder spread requirements such that companies applying for listing would be required to have one of the following:

• at least 400 (currently 500) shareholders each with shares of at least A$2,000
• at least 350 (currently 400) shareholders each with shares of at least A$2,000 and 25% of shares are held by non-related parties
• at least 300 shareholders each with shares of at least A$2,000 and 50% held by non-related parties (this is a new proposal).

The ASX also proposes an increase to the net tangible assets on listing requirement from A$2 million to A$4 million.  Whilst this may have the effect of limiting the listing possibilities for companies with no real asset base, the A$10 million market capitalisation admission test remains available and unchanged. 

Enhanced Disclosure Requirements

ASX is also proposing to enhance its disclosure requirements for resources companies to better align with international best practice, promote investor confidence and further attract global capital investment. 
Such enhancements include:

• Expanding the use of cautionary statements and including appropriate qualifications when reporting exploration targets.
• Requiring greater information to support resource and reserve estimates (eg.  geology, sampling/drilling techniques, lab tests, mining and metallurgical factors or assumptions and costs and revenue factors).
• The need for pre-feasibility studies to support ore reserve declarations. 
• Providing additional disclosure of key assumptions, contingencies and risks regarding production targets and the forecast financial information derived from them.
• Prohibiting the disclosure of production targets which are based solely on exploration targets.  This is ASX's preferred option.  However, the Australian companies regulator (Australian Securities and Investment Commission) has taken a stricter view and has submitted that even with cautionary statements, production target disclosure based on either exploration targets or inferred mineral resources may mislead the market and should be prohibited given the low level of geological confidence associated with inferred resource estimates and the conceptual nature of an exploration target.
• Expanding the scope of annual reporting and reconciliation of current and prior year resources and reserves estimates
• Implementing a common classification and reporting framework for oil and gas companies similar to the current JORC Code regime for hard-rock mineral companies.

Middletons notes that whilst there will likely be increased compliance costs, the transparency and consistency enhancements in the reporting of resources and reserves will assist ASX-listed entities to better promote themselves to international mining and oil & gas capital investors.

Other Initiatives

Some other initiatives proposed by the ASX include:

• A 12 month trial of an Equity Research Scheme primarily designed to fund the production of high-quality independent research for ASX-Listed entities with a market capitalisation of less than A$1bn which may not have been covered by research before, improving their ability to communicate to and raise capital from a broader set of investors.
• The staging of the Australian Resources Conference and Trade Show in Perth in November 2012 to hopefully rival Canada's PDAC Trade Show and South Africa's Indaba Mining Conference
• Extended trading hours and other measures (eg.  additional intra-day auctions, introducing equity market makers on certain conditions) to support price formation and liquidity for mid to small cap companies

Next Steps

The consultation process on the capital raising reforms closed on 14 May 2012.  There has already been some spirited opposition from shareholder advocates concerned with the dilutive effects on existing shareholders and the risk of increased control of related parties, major shareholders and others with significant influence.

This package is the first phase of a number of listing initiatives that ASX is planning to roll out in 2012 to strengthen Australia’s equity capital markets.
ASX is preparing draft amendments to the ASX listing rules to reflect the positive feedback on its enhanced disclosure proposals.  An exposure draft of such amendments is due for public release and comment in mid-2012. 
 

Clive Cachia is a special counsel in the Energy & Resources and Corporate Advisory Groups. He has more than 12 years experience advising on all facets of corporate matters, with extensive experience in major energy and resources projects.

Clive is predominantly focused on the mining and petroleum industries and his experience includes the equity capital markets, mergers & acquisitions, exploration and mining joint venture agreements, in-bound and out-bound investment arrangements, farm-in agreements, tenement sales and acquisitions, offtake agreements, drilling agreements and other service and operational arrangements.

He is an affiliate of the Law Society of NSW, the Law Council of Australia, the Australian Institute of Company Directors, the Australian Mining and Petroleum Law Association, the Young Energy Professionals – a division of the Australian Institute of Energy and the Financial Services Institute of Australia.  Clive can be contacted on +61 (02) 9513 2515 o r by email at clive.cachia@middletons.com.