ASX warns 'zombie' explorers

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    ASX warns 'zombie' explorers

    The ASX has launched a crackdown on so-called “zombie” junior explorers with dwindling cash balances and little ability to raise fresh equity.
    With more than 700 December quarter cashflow reports lodged by the troubled sector, the exchange is reviewing whether the poorest placed entities warrant ongoing listing.
    Under rule 12.2 of the ASX listing code, a company’s financial condition must be “be adequate to warrant the continued quotation of its securities and its continued listing’’.
    If concerned, the ASX fires off a query and the company’s response is released to the market.
    So far there’s only been a trickle of so-called 5 B queries, but 400 companies left it to the last allowable day — January 30 — to report.

    It was “not unreasonable to expect that there will be others (5B queries)’’, an ASX spokesman said.
    The Australian’sanalysis shows that as many as 35 per cent of the listed juniors are already “zombies”, or about to become so: they are so short of cash they have ceased exploring and are spruiking for fresh funding merely to pay their overheads.
    An average junior explorer needs close to $500,000 to cover its (mostly fixed) annual costs, and that’s before even thinking of drilling some holes.
    Some of the “zombies” are almost literally down to their last dollar. Many are trading at the minimum allowable share price of one-tenth of a cent, such as coal and gold explorer Wavenet International which reported a cash balance of $11,000.
    A standard corporate response is that management is confident of making a placement or engineering another type of raising.
    Even a vague reference to “discussions’’ with a potential new cornerstone investor can keep the ASX at bay.
    But the commodities price slump means there’s no likely end to the capital drought which started in early 2011.
    The swooning iron ore and oil prices aside, another problem is that so many juniors have descended to “microcap” level, which means an equity raising would result in massive dilution to existing holders.
    As many as 60 juniors have market caps of less than $1m — not even enough to buy an average family house in some locations.
    According to broker UBS, 14 junior explorers raised a little more than $20m in January.
    Angus Edgar, the head of corporate adviser Melbourne Capital, says in his 30 years’ involvement with the junior sector he has never seen investor appetite at such a low ebb.
    “If you have got a strong story, there is terrific long-term investor interest,’’ he says.
    “But if you are doing general greenfields exploration, it is very, very hard.
    “No one can recollect it being as flat as it is.’’
    Mr Edgar said a critical factor was the broadbased nature of the commodities downturn. “There is normally at least one cylinder firing to draw investors into the small end,’’ he said.
    Mr Edgar is a director of Regal Resources, which managed to attract international backing for its copper projects in the Democratic Republic of Congo. He said what money was available for grassroots exploration and emerging development projects was coming from investment funds prepared to look beyond the squeeze on commodity prices.
    But they are a demanding lot.
    “The days of sitting around a table at a long lunch, then passing the hat around to raise a million dollars, is gone,’’ he said.
    “The money is being led by technical analysis and involves lengthy due diligence across geological, legal and geopolitical issues. Only then will investment committees look to support exploration projects.’’
    He urged management at the moribund end to look for opportunities in more upbeat sectors such biotechnology, IT and healthcare.
    Already, dozens of resource shell stocks have transformed into tech plays, notably the Silicon Valley based 1-Page (formerly Intermet Resources), social media developer Migme (Latin Gold) and bitcoin trader Digital DCC (Macro Energy).
    “There is still good value in shells as long as managements aren’t arrogant and obsessed about maintaining control,’’ Mr Edgar said.
    This article first appeared in The Australian Business Review
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