Should PLUS Go MINUS?
Published by MAC on 2012-05-29Source: Nostromo Research
London Calling says it must!
In February 2012, the PLUS Markets Group plc announced it would be selling its stock exchange, PLUS-SX.
Set up six years ago in London as a "halfway house for small companies between staying private and getting a quote on AIM", the exchange was at this point on the verge of collapse.
Indeed, some of its 156 originally-listed outfits had already called it a day, though most of the miners among them still tried staying the course.
Then, last week, British inter-dealer broker ICAP Plc announced it had reached an agreement to buy PLUS-SX, depending on approval by PLUS group shareholders.
Clearance for a deal must also be granted by UK financial regulator, the Financial Services Authority (FSA).
That's a clearance the Authority manifestly shouldn’t grant.
It had already taken three years before PLUS-SX was officially recognised by the FSA in 2007.
Shortly afterwards, the group slashed its execution fees for 7,500 UK and European shares so as to compete with Europe’s other exchanges; it also abolished membership fees.
Companies which didn’t pass the admission test for the London Stock Exchange's existing Alternative Investment Market (AIM) could now also benefit from PLUS' "less onerous listing requirements", as the Financial Times put it [15 May 2012].
Indeed (some might claim) PLUS had virtually no listing requirements at all.
Yes, it did attract a few grand players. Literally so, in the case of the Arsenal football club. Refreshingly so, in the case of the "Real Ale" brewers, Shepherd Neame and Adnams.
But it was a different story for the significant number of upstart mining ventures that the new exchange attracted under its wing.
In doubtful company
Take a brief look at some of these companies (in alphabetical order) and assess their value for yourself:
Agricola Resources in Kazakhstan has been negotiating with Kazakh Resources Ltd to enter sales agreements for two projects containing gold and tungsten. However, the government's Law of Subsoil and Subsoil Use defines these as 'strategic resources', giving it pre-emptive ownership. Whether the dictatorship will concede control is in doubt.
Ascot Mining plc has, since January 2012, been working on a new gold vein at its wholly-owned Chassoul project in Costa Rica, from which it expects to produce 1,500 ounces of gold per quarter later this year. However, citizen opposition to mining has been growing in recent years
Central Asian Minerals and Resources plc (CAMAR) is embedded in another central Asian state with an appalling record on human rights. It’s been granted a gold exploration licence for a prospect, lying 5 km west of its open-pit Burgunda deposit in Tajikistan.
Colombian Mineral Resources plc is aiming for the dark stuff . Incorporated in the British Virgin Islands tax refuge, its subsidiary is "currently engaged in the exploration of coal mining concessions in… the provinces of Cordoba and Santander".
DJ Consolidated Africa Mining Plc (CAM) disposed of its Sicamines project in Cameroon two years ago and recently announced it would take "small stakes in a range of junior mining projects…rather than choosing one company with which to complete a reverse takeover, thus putting all its eggs in one basket". Enough said, you might well think.
Equity Resources plc isn’t doing that well, either. Its portfolio of mining investments “has fallen in value significantly since December 2010 reflecting the challenging environment in the small cap mineral exploration market during that period”. Nonetheless, it wants to assure investors that "if we look at the underlying assets, we can see early signs that values may be about to strengthen" (Dream on, Equity?).
Equally over-optimistic is Guardia plc which launched on PLUS-SX just three weeks ago, intending to “invest primarily in mineral resource exploration companies which are quoted on the AIM market of the London Stock Exchange or the PLUS-quoted market". But, so far, it's raised hardly more than a third of a million pounds for the purpose.
IMC Exploration Group plc listed on PLUS in October 2011. Within two weeks, it started an 18 month drilling program on its 13 prospecting licences in Ireland, which included one in County Clare, and a gold prospect in County Wexford. The company enthuses that it’s "well funded" and looks forward to the forthcoming weeks and months "with enthusiasm and excitement".
Imperial Minerals plc isn't so sanguine. In March 2012 it regretted that its "principal activity…the identification of potential acquisition opportunities" had suffered a pre-tax loss by the end of 2010. And, while a small number of projects "initially held out the prospect of significant potential gains for shareholders … relative risk profiles or other factors led to all of them being passed over in favour of continuing our search" This sorry pattern continued until the end of last year.
It’s a similar story for British Virgin Islands-based Morano Mining Ltd, which admitted in September 2011 that its (lack of activities) "have required patience from shareholders and management in the face of frustrating delays, both in removing the remaining links to the Malawian subsidiary and in expanding the Company's project portfolio".
Morano closed its exploration camp at Chimimbe, leaving "significant outstanding liabilities"; and on 15 May 2012 said it could "no longer support" its Lisungwe Mineral Resources subsidiary.
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This isn’t to say that all other PLUS-SX listed mining companies are on the brink of failure or dissolution – specifically Mandarin Mining PLC, Marshall Lake Mining and All Star Minerals, operating in "developed" regions such as Australia and Canada.
Although running at a small loss, Red Rock Resources plc also tries to put a positive spin on a portfolio that’s probably the most diversified within the PLUS-SX "family".
This mineral exploration outfit has direct and indirect interests in Australia, Columbia, Greenland, Costa Rica, Kenya, Paraguay, Pakistan and Zambia, as well as an interest in Regency Mines plc that claims to be "a developer of a new technology for the extraction of Nickel" in Papua New Guinea.
All told, however, the early expectations of mining companies that PLUS could be used to raise substantial amounts of capital, in record time, and by applying only minimal "due diligence", have proved chimerical.
Now PLUS must go - for ever!
Philip Secrett, a corporate finance partner at leading financial advisory firm, Grant Thornton, recently told the Financial Times :
"PLUS…tried to short-circuit the [due diligence] process. If you want to attract money to your company, you've got to validate the business, which costs money".
Secrett might have also have pointed out that your business ought to show something for that money to prospective investors; not least being prepared to observe preconditions which AIM (belatedly) imposed on its own entrants - such as appointing a Nominated Advisor (NOMAD).
Indeed, from the outset, PLUS-SX was designed to attract companies which would build themselves – and their reputations – up, and then apply for an AIM listing.
Eight months ago, the CEO of PLUS-listed U3O8 Holdings plc – focused on uranium exploration in South America - reminded investors that it had “been the company's intention to move to the AIM Market for some considerable time.”
But, though he'd expected the move to take place by March this year, he's admitted U308 "did not initially presume [the process] would be so drawn out" while "market conditions have been more difficult than anticipated". U308 is still waiting for AIM to beckon.
Moreover, AIM itself is far from healthy. According to the FT's Jonathan Guthrie:
"AIM statistics are hardly reassuring. In 2011, shares worth £38.6 billion were raised on AIM, compared with £75 billion in 2007. The tally of AIM-quoted companies has dropped from 1,694 to 1,117 and small-cap shares remain more deeply under water than larger peers".
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The fundamental question we should now ask is not whether PLUS-SX can survive under different ownership.
Nor whether AIM will attract any of PLUS' corporate detritus in the near future – which seems unlikely anyway.
It’s whether this rogue market place (and a market place for some rogues?) should be rescued from what, until very recently, seemed its imminent demise.
That's a question the FSA must firmly answer “No!”
Source of FT quotes: Financial Times, 15 May 2012
[London Calling is published by Nostromo Research. Opinions expressed in this column do not necessariy represent those of any other group or person. Reproduction is welcomed under a Creative Commons Licence, provided full acknowledgment is given to sources].