As the commodities rout makes it increasingly difficult for mining companies to tap capital markets, equity crowdfunding is emerging as an alternate financing mechanism.
Equity crowdfunding: the future of capital raising?
Prinesha Naidoo | 17 December 2015 10:54
JOHANNESBURG – As the commodities rout makes it increasingly difficult for mining companies to tap capital markets, equity crowdfunding is emerging as an alternate financing mechanism.
Traditionally considered the domain of technology startups, equity crowdfunding appears to be changing the way in which companies, irrespective of the sectors in which they operate, are raising funds. According to Oscar A. Jofre, President, CEO and Founder of KoreConX, $30bn dollars was raised via global equity crowdfunding platforms in the first quarter of the year.
Equity crowdfunding for companies in the mining sector, a relatively new concept whereby investors receive a stake in the companies in which they invest, appears to be gaining momentum. “There are more mining companies that would like to crowdfund through our platform than we can deal with at the moment,” said Cameron McLean, Managing Director of Mineral Intelligence, an Australian platform in which investors with as little as AU$500 can buy stakes in mining projects.
For Jofre, the relative success of equity crowdfunding, lies in the “democratisation of capital” and exposure to a wider investment pool. “Until now there has been no precedent for non-professional investors to invest in innovative ideas and potentially receive great returns,” he said. Speaking to Mineweb from Toronto, he added that only about 1% of potential investors have been able to participate in private placements over the past 10 years.
For companies, other benefits of crowdfunding include a faster process, free listing (on Mineral Intelligence) and less administrative rigour around listing rules, McLean said from Perth. Mineral Intelligence doesn’t list all the projects it receives for crowdfunding on its website but takes five to six to conduct independent assessments of companies that wish to raise funds via its platform as well as their projects before listing only the most promising ones, he said. As per the terms and conditions on its website, the company does not accept any liability which may arise from the use or reliance on any part of the site or its content.
“Equity portals are required to conduct full due diligence and if they fail that process not only can they be sued by investors but [they] also face regulatory enforcement,” Jofre said, noting that portals are required to be registered, bonded and carry insurance. “Securities commissions are charged by the local government to implement laws providing detailed regulations, monitor and provide oversight and intervene when necessary with fines, penalties and sanctions,” he said.
Like public companies, those raising funds via equity crowdfunding are also required to disclose material information to shareholders on a regular basis albeit at a lower cost. “The difference in equity crowdfunding globally [is] we do things voluntarily because it is good for everyone and we adopt technology to make us more efficient,” Jofre said.
According to McLean, equity crowdfunding is replacing the seed capital stage thereby allowing a broad range of shareholders to realise greater value. During the seed capital stage, only people who were very close to a company had chance to invest, usually at very low prices due to the high risk associated with stage of funding, he said. “Equity crowdfunding presents an opportunity to increase shareholder value between buying shares, without brokers or middlemen, when the company is unlisted and when the company is either listed or acquired by someone else,” he said.
Should investors wish to sell or buy additional shares prior to a company going public, Jofre said they can do so via secondary markets. He anticipates that there will be more secondary markets in the world than stock exchanges by 2017.
Depending on the country and jurisdiction of the crowdfunding platform, Jofre said companies typically have 30 to 90 days in which to raise funds. “If the minimum amount is not reached within the listing period, the funding round has not succeeded. In this case, nothing will happen, all funds in escrow are returned to investors,” he writes. Jofre added that the “golden rule” of crowding funding that companies should secure 30% of the amount they intend raising before going to the crowd as it proves the credibility of their offering. At the fundraising stage, companies are able to determine the rules around their offerings such as the minimum price at which equity investors can buy a stake, whether investors will gain voting rights and the percentage of dividends to which investors will be entitled.
Thus far, the most successful mining related crowdfunding campaign appears to be that of asteroid mining company Planetary Resources. Through a 33 day Kickstarter campaign in 2013, it raised more than $1.5m from over 17000 backers to fund the world’s first public space telescope.
Jofre maintains that equity crowdfunding is “the most disruptive thing to happen to the finance sector this century” and anticipates both its popularity and investor appetite to grow. “It is a multi-billion dollar sector that is just waiting to be tapped,” he said.
Shareholders are being asked to carry the can for others’ failures.
Warren Dick | 17 November 2015 23:05
Someone needs to put an end to this whole sorry state of affairs. Tomorrow. At the company’s general meeting in London that has been called to approve the transaction. We have written extensively on the reasons for Lonmin’s precarious position. Here I lay out five reasons for why the rights offer should be voted down.
1. The management team of Lonmin is on record stating that if the rights issue does not go ahead the company will have to close its doors. I personally don’t buy that for one second. If the rights issue doesn’t go ahead, it will force everyone back to the table to make the hard, tough concessions that will return the company to a sustainable path of profitability which should have been done years ago.
2. The loss of its empowerment status: Lonmin lent $304m to Cyril Ramaphosa’s Shanduka Resources in 2010 to fund the purchase of a 50.03% interest in Incwala, the company’s designated BEE vehicle (which owns stakes in Lonmin subsidiaries). The idea was that Shanduka would repay the loan with dividends received from its stake in Incwala.
Obviously the poor performance of the company meant that dividends were not forthcoming, so by the end of September 2014 (the company’s financial year-end), the loan amount owed by Shanduka vis-à-vis Incwala had increased to $399m. Lonmin then took the decision to impair the loan, writing off $297m to leave an outstanding amount of $102m as at the end of September 2015.
Shanduka has effectively decided to walk away from the obligations of the loan due to the implications of the rights issue. Incwala was still receiving R228m by way of advance dividends in the 2015 financial year alone. So it appears Lonmin was literally throwing money at its empowerment partner when shareholders hadn’t been paid a dividend, and then when the going got tough, Shanduka simply elected to walk away.
The company’s other empowerment partner are the Bapo ba Mogale tribe which represent an ownership stake of 2.4% in Lonmin and who have indicated they do not have the financial resources to follow their rights. So the company will be forced to issue 617.5m shares to them at a greatly reduced price of 0.000001 cents per share (for a total consideration of R617) to prevent the dilution of their ownership stake. Had there been clarity on the ‘once empowered, always empowered’ principle from the DMR, this might not be such an issue. But since this has not been forthcoming (the issue is headed to the courts) one must assume that the company needs to remain empowered to ensure it can retain the mining licences it requires to operate.
3. The rights issue is really being done at the behest of the banks – to mitigate their risk. Of the $407m in gross proceeds raised, only $369m will actually be for the use of the company. So Shareholders will pay half a billion rand ($38m) for the pleasure of the bankers being able to parlay their risk. That’s extortionate in my mind. Of the $369m the company will actually receive, $135m will go towards paying down debt facilities, leaving the company $234m it can actually apply to things like operating and capital expenses. Based on some analysts’ estimates, this is barely enough to sustain one-year’s worth of capital expenditure, even on the revised production profile of the company which has been reduced for each of the three financial years to 2018. On a side note: Has anyone wondered how we got to the point where Lonmin’s short-term revolving credit and long-term loan facilities matured within one month of each other (in May and June 2016)?
4. Protect the PIC from itself. How the Public Investment Corporation (PIC) got talked into being prepared to not only take up its rights, but extend its risk to underwrite another 18% of the proposed offer (taking its potential total exposure to 25%) is quite stunning. The only plausible non-commercial reason for its involvement is that it is doing this to protect jobs. But the PIC’s biggest client is the gigantic Government Employees Pension Fund (GEPF) whose average member earns less than R15 000 a month.
Lonmin’s assets are marginal at best. So while the PIC’s offer is charitable, should they really be gambling public servants’ pensions on a company whose future – even should the rights offer proceed – is uncertain, and almost entirely tied to the fortunes of the rand/platinum price? So the GEPF, and by implication the PIC, needs to make up their mind as to whether they are an instrument of Luthuli House or the guardian of the financial well-being of the country’s public servants. You can’t be both.
5. The appalling lack of respect implied in the rights offer. Can you really look shareholders in the eye and demand more money in the way that the rights offer has been framed? Let’s try for a moment and get into the mind of a Lonmin shareholder. Barely three years ago the company came cap in hand to shareholders for $767m. In those “heady” days the share price was north of R30/share. The price subsequently fell to R3.84/share just prior to the details of the rights offer being announced. By effectively telling shareholders to invest another R9.84/share or have their investment written down to zero smacked of sheer arrogance. The share price performance has inflicted capital losses of monumental proportions on shareholders and now they must go triple or quits?
So in summary then: The BEE shareholders are unable or unwilling to assist. This makes the rights issue risky from an empowerment status point of view partly because the state has not been prepared to clarify the ‘once empowered, always empowered principle’.
The banks – JP Morgan, HSBC and Standard Bank – hold all the cards, but are demanding compensation that is excessive. The unions are completely unprepared to budge, even to the detriment of 6 000 of their members. Instead of retrenching 20% of the workforce, why doesn’t everyone agree to a 20% salary reduction – from the Chairman down?
No-one from the executive team has been fired or asked to leave. And the one stakeholder that is prepared to help – the PIC – shouldn’t really be carrying the exposure. So why should shareholders put up with this? The expectation that shareholders should cough up for the failing and intransigence of everyone else is appalling.
So tell them to think again. Vote against allowing the rights offer to proceed.
The author does not own, nor has ever owned, shares in Lonmin.
How a BlackRock Bet on African Gold Lost Its Luster
Justin Scheck in Luhwindja, Congo, and Scott Patterson in London
Evy Hambro came to the 2013 Mining Jamboree hunting for more gold.
At the conference, featuring lingerie models strutting before a South African sunset, the BlackRock Inc. BLK 0.53 %
fund manager scouted for a mining company needing financing. His
search led him to double down on an earlier bet—a gold miner named Banro Corp. BAA 0.00 %
he knew had troubled operations in a troubled African country.
Mr. Hambro is discovering just how troubled.
Falling gold prices have battered Banro,
as have operational setbacks. It has faced sometimes-violent unrest
around its mines in the Democratic Republic of Congo and questions about
payments it made to entities controlled by a government official. Local
residents blame it for several deaths.
Mr. Hambro’s 2013 deal was
part of a largely overlooked facet of the commodities boom-turned-bust.
Eager for exposure to rising prices, conservative investors who once
shied away from large bets on small miners in volatile places piled in.
Those wagers sometimes came with risks that exacerbated the pain of falling markets.
Banro’s
biggest investor was BlackRock, through funds that London-based Mr.
Hambro managed. In exchange for a cash investment, the Canada-based
miner in 2013 agreed to pay a dividend to a BlackRock trust—separate
from the funds—which he co-managed and whose investors include Yale
University and the Ohio Public Employees Retirement System.
Two
weeks after Banro announced the deal, it ousted its chief executive, who
had raised corporate-governance concerns and suggested investigating
Banro’s finances, including payments Banro made to entities controlled
by a Congolese official, say people familiar with the episode.
Banro’s current CEO, John Clarke,
a board member now and at the time, wrote in a September email that
Banro can’t disclose why his predecessor left and that it is “complete
nonsense” that there were internal corporate-governance concerns. He
said Banro didn’t make any improper payments and wasn’t involved in the
deaths locals allege.
By early 2014, Banro was near insolvency,
said Richard Brissenden, who became its chairman last year, in a June
interview. “When I arrived I didn’t realize how bad the situation is,”
he said. “It was scary.”
BlackRock’s Mr. Hambro knew in 2013 Banro
routinely missed production forecasts because of operational missteps.
But he didn’t know, people familiar with BlackRock say, of deadly
accidents around its mines, of concerns over payments or of the extent
of local unrest.
BlackRock says it “has a rigorous investment
process and a strict set of criteria that is adhered to before any
investment is made,” adding: “These allegations, if found to be true,
would be entirely contrary to BlackRock’s values.”
Banro’s shares
fell 22% after its prior CEO left and are down about 90% since the 2013
deal, valuing BlackRock’s holdings at about $4.6 million, down from
$66.4 million at the end of 2011 when it owned fewer shares, according
to FactSet.
Political and operational risks have long been part of
investing in small mining companies. Until recently, those risks were
too great for many big fund managers. But as commodities boomed, small
miners became attractive.
“During the boom days, they were quite
aware of political risks, and had greater appetites to swallow them,”
says Daniel Litvin, managing director of Critical Resource, a London
firm researching on-the-ground risk for companies and investors. “Quite
often they made substantial mistakes.”
an oil company whose investors have included Vanguard Group and
Janus Capital Management LLC, according to FactSet, disclosed in 2013
that the U.S. Justice Department was investigating it on bribery
allegations in Angola dating back several years. Cobalt denies
wrongdoing, says it is cooperating with the investigation, and that the
U.S. Securities and Exchange Commission dropped a parallel
investigation. Vanguard, Janus, the SEC and the Justice Department
declined to comment.
The Kyrgyz government and several NGOs alleged over the past four years that Centerra Gold Inc., CAGDF -4.02 %
whose backers according to FactSet have included Franklin Templeton
Investments and USAA Investment Management Co., engaged in corrupt
dealings and polluted an area around a Kyrgyzstan glacier. Centerra says
the allegations “are unfounded and without merit.” USAA declined to
comment. Franklin fund managers didn’t respond to inquiries.
Warming to risk
Banro’s Congo operations show the kinds of risks investors can face in developing-world mining.
For
years, BlackRock avoided volatile stock investments. A 2006 deal with
Merrill Lynch & Co. brought risk-taking fund managers like Mr.
Hambro. He is a banking-family scion and son of an investor in Russian
gold mines.
Mr. Hambro, 43 years old, turned BlackRock into a
mining-investment powerhouse, becoming well-known for the publicly
listed BlackRock World Mining Trust. It did well during the commodities
boom but lost 61% in net asset value in the three years ended Sept. 30,
compared with the Euromoney Global Mining Index’s 54% loss. The trust,
while receiving dividends from Banro, doesn’t hold stock in the miner;
several BlackRock funds do, making the firm Banro’s largest investor.
BlackRock’s
Banro foray began 10 years after Banro entered Congo, then called
Zaire. Banro, under founder Arnie Kondrat, in 1996 acquired rights to
mine gold near the Rwanda border, a region that erupted into war soon
after. In 2006, Banro deployed exploration teams to the mountainous
Twangiza region, where violence continued even after the war ended in
2003. Mr. Kondrat didn’t respond to inquiries.
Banro had listed on
the Toronto Stock Exchange, and one of Mr. Hambro’s BlackRock funds
bought about $10 million of its stock, a 3% stake. Banro soon disclosed
big estimated reserves at Twangiza, and BlackRock’s stake gained about
50% in value over the next months.
Mr. Hambro was a commodities
evangelist. Chinese demand meant a sustained boom, he was cited as
saying in a 2007 interview, describing his due diligence: “I physically
go into mines and get my hands dirty.”
Tensions mounted around
Banro’s Congo operations. In 2006, an exploration team drilling near the
village of Katombwe dislodged a rock that killed a local pastor’s
mother, say the pastor and other local leaders.
Starting in 2010,
after the government approved Banro’s plan to mine near Katombwe, about
1,000 people were relocated from a fertile hillside where Banro would
build its mine to Cinjira, a barren mountaintop. Cinjira residents say
crops won’t grow well there.
Banro built homes, a market and a
water system for the displaced. It provided some with cash compensation.
Banro’s Mr. Clarke wrote that the relocation “was voluntary,” that
Banro didn’t choose the relocation spot and that “the Cinjira site was
chosen by the community.”
Cinjira residents say police came to
their homes and said they must leave. The local government leader,
Esperance Barahanyi, says an official from Congo’s capital made the site
decision. Attempts to reach Congo’s mining ministry weren’t successful.
Banro
says it follows “conflict-free gold standards” from the World Gold
Council trade group. Banro’s Mr. Clarke said in a July interview its
charitable foundation has spent millions of dollars helping communities
near its mines. The foundation this year reported spending more than $5
million on education, health care and other programs from 2004 through
2014. Last month, Banro won a Congo mining-industry award for social
investment.
A greater stake
In 2010, BlackRock increased its Banro stake to 7%.
In
2012, Mr. Hambro sent a deputy, say people familiar with the trip, who
met Banro officials including then-CEO Simon Village and helicoptered
in to inspect the mine site. That year, a bulldozer working on a Banro
waste pile dislodged a rock that struck 16-year-old Bukuze Kabalabala,
who died hours later, say locals. Villagers stormed Banro’s gate. “It
created an enormous animosity,” says Crispin Mutwedu, a Banro employee
in Congo who handles community relations. He says he offered Ms.
Kabalabala’s father two cows’ value and that they settled on $16,000,
about eight cows’ value.
In his email, Mr. Clarke wrote that “at
no time has Banro been directly or indirectly involved” in the deaths.
“Notwithstanding the mystery surrounding the death of the 16-year-old
girl, and indeed the lack of any connection to Banro,” he wrote, the
company “completely out of good faith, and most importantly, out of
sympathy for the family’s loss, agreed to compensate the family.”
Production
slowed during the rainy season when ore became too wet. An ore-crushing
mill broke. Banro told investors the rains were “unseasonably heavy.”
In the July interview, Mr. Clarke said Banro could have “implemented”
its equipment better. “They’re not excuses,” he said, “they’re just
embarrassing facts.”
A new Banro mine, in Namoya, was on a jungle
road that militia leader William Yakutumba says he controlled. Last
year, a United Nations committee reported, his militia attacked villages
and boats, stealing money and raping women. A Banro contractor agreed
to pay Mr. Yakutumba’s men to let their drivers pass, say people
involved in the convoys.
Mr. Clarke wrote: “At no time did Banro
ever pay money, or pay tolls, or provide any favour to ANY armed rebel,
to gain some sort of road access.”
Mr. Yakutumba says his group
helped Banro workers travel the route but “never taxed Banro.” He denies
the U.N. allegations, saying “we respect women and human rights.”
Banro
made payments to a company controlled by Ms. Barahanyi, the traditional
chief near the Twangiza mine, that provides services such as labor, and
made payments to her nonprofit company, Banro and Ms. Barahanyi say.
She goes by the title Mwamikazi.
“Traditional community
chiefs such as the Mwamikazi are recognized under DRC law but not,” Mr.
Clarke wrote in his email, “as some sort of elected government official
or civil servant appointed by Kinshasa or some sort of representative of
the central government, but rather as protectors of cultural identity
and traditional values.”
A Congolese-government
information-ministry official, asked about Ms. Barahanyi, says: “The
Mwamikazi is the local chief recognized by Kinshasa” and “takes orders
from Kinshasa” on governing the local area and is in charge of the local
apparatus of the Kinshasa-based government.
At the February 2013 Mining Jamboree, the mood was tense among
Banro
executives attending, say people familiar with the group. Operational
delays and gold’s falling price had crimped revenue; Banro needed cash.
Mr.
Hambro was looking to offer cash for a slice of a miner’s production. A
BlackRock analyst met Banro’s Mr. Village at the jamboree. Over the
next weeks, they discussed Banro’s potential and its operational
problems, say people familiar with the talks, and Mr. Village promised
stronger management.
On Feb. 21, 2013, Banro announced the
BlackRock trust would pay it $40 million for a dividend based on
production and gold price. The investment was later reduced to $30
million.
Mr. Village sent documents to Banro’s board outlining
corporate-governance concerns and actions to address them, say people
familiar with the matter. He suggested sidelining the founder, Mr.
Kondrat, who was still involved in management, and changing the board,
say people familiar with the documents. The documents raised concerns
about financial issues, including payments involving Ms. Barahanyi.
Mr. Village proposed an outside audit. Instead, Banro directors ousted him.
Mr.
Clarke in July said he wasn’t aware of the audit proposal. In his
September email, he wrote it is “complete nonsense” that “there were
internal conflicts about corporate governance at Banro in early 2013”
and it is “incorrect” that documents Mr. Village submitted to the board
raised corporate-governance concerns and outlined measures for improving
governance.
“Banro does NOT make, and never did make, any illegal or improper payments” to Ms. Barahanyi, Mr. Clarke wrote.
After
Mr. Village’s departure, members of Mr. Hambro’s team held a call with
Mr. Clarke, who succeeded Mr. Village as CEO, demanding to know what
happened. Mr. Clarke in July said he explained that Banro “closed out
the contract” of Mr. Village and that “we weren’t going to bad-mouth”
Mr. Village. Mr. Clarke said “it was a necessary time for change.”
In
Twangiza, tensions continued. On May 29, Ishara Chasinga, then 18, left
home and saw protesters blocking Banro’s gate. Villagers say a Banro
truck and mine police pulled up.
“They just got off the car and started shooting,” said Mr. Chasinga five days later at the hospital.
A
bullet pierced his leg, he said, showing his bandaged thigh. Protests
continued for two days. Mr. Clarke in July said the shot was a warning
and hit Mr. Chasinga accidentally, but was “inexcusable.”
In
August, Banro reported gold production was up but that it lost $48.7
million in the quarter ended June 30, versus a $3 million year-earlier
loss. In September, the New York Stock Exchange warned that, barring a
sustained increase in Banro’s share price, it would delist it from its
small-cap exchange. Mr. Clarke declined to comment on the NYSE notice.
The
BlackRock trust, which Mr. Hambro still co-manages—he also still
manages funds with Banro stakes—has written down its $30 million Banro
investment by 30% amid falling gold prices.
