Greenhill believes that ALT-X is very much suited to mining and exploration. “South African and African resource-based companies source their labour, technology and of course the resource itself in this region; there is no reason they should need to use entirely foreign capital. South Africa does have an investment environment where one is able to raise capital for listings and the ALT-X listing requirements are appropriate for start up exploration projects, late stage exploration or junior mining projects.”
That capital can be raised in South Africa was proven by the R200 million (US$28 million) raised by Eland Platinum, listed on the Main Board of the JSE, of which in excess of 80% was provided by South African investors.
One of the requirements for an ALT-X mining or exploration company listing is a competent person’s report essentially outlining that the business case for the company is viable, something that prior to 2006 was not required by AIM, but in general there is little difference between the type of requirements for listing on the ALT-X in comparison with those for AIM and similar markets.
ALT-X companies must also have designated advisers whose most important role is to assess the sustainability of the business and ensure that it meets with corporate governance and compliance requirements. In addition, every company director of a company listed on the ALT-X must attend a four-day induction programme that covers a variety of topics including SRP requirements, corporate governance, insider trading, financial management, etc.
The basic admissions criteria for a company to ALT-X are at least R2 million (US$0.3 million) of start up capital, at least 100 public shareholders with a spread of at least 10% of the shares, and the company has to have a financial director.
“Provided the company gets a decent competent person’s report by a reputable geological organisation and has solid management with experience and expertise and the quality of the resource is good, it does not matter where the company gets its capital from,” Greenhill says.
So why has ALT-X not attracted a major share of new mining and exploration projects taking place in Southern Africa? One of the reasons is that while it is possible to raise capital in South Africa, it is harder than doing so overseas, or as Greenhill would suggest, perceived to be harder. In addition companies listed overseas attract a higher rating. Greenhill says it is not a drastically higher rating, but in the order of a 20% premium.
However Greenhill says that this premium will not have any impact on earnings and that in fact the higher costs of doing a listing in London versus Johannesburg will dilute earnings.
The overall cost of a listing can range between R1 million and R2.5 million (US$0.1 to 0.3 million) depending on who the company engages to undertake the listing, with the big brand names engaged to undertake the listing likely to cost top dollar. The annual fees are then R350,000 to R600,000 (US$48,000 to 83,000) depending on who is engaged by the company. Greenhill notes that these numbers are not the fees paid to the JSE with the listing fees working on a sliding scale up to R20,000 and the annual fee fixed at R20,000 (US$3,000).
In comparison it will cost something like £350,000 (US$0.6 million) to get listed on AIM.
There are no exchange control restrictions for firms owning shares on the ALT-X and the JSE. Greenhill argues that a local listing makes sense for companies looking to do projects in South Africa, taking into account the government’s focus on empowerment, as the complexity of dealing with exchange control issues in an empowerment deal all disappear if the listing takes place in South Africa.
As to why list at all, other than to raise capital, the listing itself offers disclosure and transparency and provides a measure of credibility that reassures the providers of funding. The ALT-X in turn is looking for companies that are there for the long haul as it is, as opposed to staggers and speculators, in other words companies that when the cycle turns down still have a business. In terms of size, any company with a market capitalisation of less than R100 million (US$14 million) would be best advised to list on the ALT-X, with companies larger than that considering the main board of the JSE.
ALT-X as a destination for mining groups has to overcome the long memories that linger in South Africa on ventures that go bad, with for example the Amalia debacle dating back to 1997 still frequently noted by local investors. In comparison had Amalia taken place in Canada it would have long been forgotten in an industry where start-ups have a high rate of attrition. Exploration companies are high risk by nature – something that also unfortunately attracts fly-by-nighters who seek to take advantage of this – so investors who look to this class of asset typically buy into a large number in the hope that one or two out of say 50 or 100 companies will provide the exceptional returns that makes this whole investment policy very profitable.
In competing with exchanges such as AIM and the TSX, ALT-X faces the chicken and egg dilemma in that the mining shares will only get a following and have analysts and institutions looking at these companies if there are enough of them, and there will only be enough of them if they get the ratings that derive from being followed by many analysts and institutions. At the moment some 80% of the investors in ALT-X listings are retail investors.
However, the number of shares traded on ALT-X have doubled in the first quarter of 2006 compared with previously, and Greenhill says that liquidity is not a problem and investors can get in and out of stock holdings easily.
“It is a virtuous cycle. As perceptions about raising capital for listings in South Africa change more companies will come to the ALT-X. It is important to remember that the development of such an exchange is a process and that ALT-X is only two and a half years old.”
In general South Africa’s JSE-owned investment exchanges have been successful in terms of new mining listings, and by the middle of 2006 there had been some ten recent resources listings; TEAL, Miranda, Eland Platinum, Wesizwe, Oanda, Twana, West Wits, Westcoal, Chrometco and Aquarius Platinum.
Greenhill says that the JSE is working hard to attract more mining sector companies to the exchange, and it recently hosted a forum that gave mining companies an opportunity to showcase their businesses to investors. The ALT-X is talking to a lot of companies in all sectors and expects to see up to half a dozen new listings over the next few weeks.
What is the potential for ALT-X? There are some 500,000 registered closed corporations in South Africa, 300,000 proprietary companies and 10,000 limited companies. If one assumes that half of all these companies are shell companies, that leaves some 400,000 and then if one assumes that 90% of the remainder will never consider a public listing that leaves 40,000. Of these assume that only 10% are listable, that leaves 4,000 potentially listable companies out there.
Parallel markets are not a new concept and while it is unfair to compare Johannesburg with London and Greenhill says that the analysts demand three things, a fair number of companies to analyse, a good quality of management and ownership of the companies, and liquidity. “If we have all three of those ALT-X will be successful, if not it won’t.” MRA