By Andrew Willis
Here’s an upbeat take on Canadian capital markets, courtesy of a company you’ve probably never heard of: Gleichen Resources.
At a time when there’s much hand-wringing over Canada’s ability to nurture great businesses, there’s something to celebrate in the way this country backs emerging resource plays. There’s also a lesson that can be applied to other sectors, such as technology.
Gleichen dropped $150 million (U.S.) last week to buy a controlling stake in the Morelos gold project in Mexico from Teck Resources (TCK). This is all part of Teck’s ongoing and extremely successful yard sale: Odds and sods are being sold to help the mining company pay down debt taken on to buy coal play Fording (FDG).
Gleichen made this bid as a shell company, with a handful of proven executives, but no track record.
This is what’s encouraging about doing business in Canadian resources: Mining and energy executives who have shown they can turn moose pasture into productive properties get the benefit of the doubt when they ask for the capital needed to turn the trick again.
Top brass at Gleichen earned their spurs at other companies: CEO Fred Stanford was at Inco, board member Terry MacGibbon founded FNX Mining (OTC:FNXMF), and there are other directors from Anglo American and law firm Fraser Milner Casgrain.
Investors were willing to back this team on their new venture, despite considerable uncertainty around the project, as Gleichen pulled in $200 million with private placement of special warrants done in October, to fund the Morelos purchase. Macquarie Capital Markets Canada, BMO Nesbitt Burns and GMP Securities led that financing.
In other jurisdictions, even supposedly resource-friendly markets such as Australia, Gleichen could never have raised this much cash this early in development of a project, on terms this generous to the company and its existing shareholders, according to one of the bankers who worked on that October financing.
In Canada, long experience with resources translates into a deep pool of investors willing to back proven managers with promising properties.
Does this approach actually make money?
Let’s switch our attention to the oil patch, where Sayer Energy Advisors recently published a report on junior oil and gas company recapitalizations.
These are deals that see sick and weak energy plays culled. New management arrives at these failed public companies, injects new money, and shifts the focus to new properties. Sayer associate Crystal Holdershaw took apart 10 of these “recap” transactions over the past year - there were four in November alone - and found new blood translated into strong performance.
“The market has rewarded all of the recapitalized companies with an instantaneous increase in share price. The increases have ranged from 20% to 300% once the initial excitement of the news has settled down,” said Ms. Holdershaw.“ These recap companies are rewarded with higher trading multiples as investors continue to place bets that these management teams that have added shareholder value in the past will do it again.”
The conclusion to be drawn from these deals is that strong management teams at resource plays have no trouble accessing capital, and investors are rewarded for backing proven winners.
If that were the case in technology and other growth sectors in Canada, there would be far less concern about venture capital financing in this country.
For those interested in Sayer’s work, the oil and gas companies that Ms. Holdershaw tracked are:
- Regal Energy (renamed Novus Energy)
- Sabertooth Energy (reborn as Cequence Energy)
- Trafalgar Energy (recapitalized as Midway Energy)
- Glamis Resources (retooled as privately owned Medora Resources and Renegade Oil & Gas)
- Eagle Rock Exploration (named Wild Stream Exploration after a racap)
- COSTA Energy (renamed Artek Exploration)
- Exceed Energy
- Result Energy (it will become TOG Oil & Gas)
- Colonia Energy
- Aztek Energy