Brokers upbeat on raisings

Companies looking to raise fresh capital enjoyed a strong finish to 2020 and most brokers and advisers are confident that will continue this year.

For most dealmakers, 2020 ended up being a good year for equity capital markets (ECM) deals.

“The ECM floodgates opened in July,” Gilbert + Tobin partner Justin Mannolini said.

Mr Mannolini said 2020 had been a year in three parts, with the first two months being very positive before the onset of COVID caused a period of market wobbles.

Even then, most companies looking to raise capital during the second quarter, often to repair battered balance sheets, had been able to do so.

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Argonaut executive chairman Eddie Rigg, who spoke to Business News earlier this month, is confident the positive finish to 2020 would continue this year.

“I’ve never seen it so busy in the first week of January,” he said.

Like other market watchers, Mr Rigg said the main driver of global equity markets was last year’s massive central bank stimulus.

“Every time there is a major fiscal stimulus, there is a two to five-year period of outperformance for commodities,” he said.

“We’re in the early days of a long trend.”

Macquarie Capital director Stuart Owen said the support for capital raisings had predominantly come from Australian institutions.

With interest rates at record lows, they were chasing higher returns in equities.

“There is also the strong commodity outlook which leads to a strong risk appetite.”

Mr Owen said the market was also responding to the trends toward digitisation and energy transition, driving demand for exposure to the green economy, including battery minerals for battery storage, electric vehicles and renewables.

This underpinned a positive long-term outlook for battery metals such as lithium, nickel sulphate and copper.

Mr Rigg said there were about 10 so-called battery metals and the impact would be highly variable.

“The one I like best is copper,” he said.

He said the market for copper was already bigger than nearly all other battery metals combined and was set to grow, with electric vehicles using nearly four times as much copper as a petrol vehicle.

“The other one that everyone is strong on is nickel sulphate,” he said.

That’s because all battery types need nickel.

He is less positive on lithium.

“We don’t see lithium as a major driver because there is so much idle capacity,” he said.

Macquarie Capital director John Stanning is more bullish on lithium.

He said a big factor was the quality of the hard rock lithium deposits in Western Australia, which made them ideal for use in lithium hydroxide for higher energy-intensity batteries, compared with the ‘brine’ deposits that were abundant in other countries.

“Our research team have identified battery minerals, including lithium and nickel, as winners on a five-year view,” Mr Stanning said.

Mr Rigg expects the gold price will go back above $US2,000, from about $US1,850 currently, but the impact on local producers will be offset by a stronger Australian dollar.

Nonetheless, he emphasised that even at current prices, local miners were generating great margins.

“Even the crap producers are making good money,” he said.

Mr Rigg said WA was able to take advantage of the favourable global trends because it was a great place to explore and produce.

This opinion was backed up by Canada’s Fraser Institute, which ranked WA as the most favourable jurisdiction globally for mining.

The sector had also been bolstered by two spectacular discoveries in WA, first by De Grey Mining (at Hemi) and then by Chalice Gold Mines (at Julimar).

“They were just so positive for the sector, it’s been unbelievably important for improving sentiment,” he said.

Lead managers

Sydney-based Macquarie had a lead role on 10 WA-related ECM deals worth a total of $3.6 billion during 2020 (see table).

After adjusting for the role played by joint lead managers, Macquarie raised $2 billion.

Its ranking was boosted by Macquarie’s Perth office advising on some large national transactions, including a $1.1 billion block trade for Wesfarmers (of Coles group shares) and a $1 billion raising for Melbourne-based Newcrest Mining.

Its other key clients included Perth companies IGO, Pilbara Minerals, Emeco Holdings, Bellevue Gold, Dacian Gold and Chalice Mining.

Mr Owen said the investment bank had benefited from its long-term presence in WA.

“A lot of those transactions were the culmination of long-term relationships we have with local corporates over many years,” he said.

Canaccord Genuity was by far the busiest player in the market last year.

It had a lead role on 92 ECM deals worth $2.5 billion in aggregate. 

That followed 62 deals worth $1.4 billion in 2019.

This strong deal flow highlights the success of Canaccord Genuity’s $25 million acquisition of Perth-based Patersons Securities.

Canaccord led transactions for companies as diverse as Lynas Rare Earths, Resolute Mining, Galaxy Resources, Bellevue Gold, De Grey Mining and Salt Lake Potash. 

Canaccord’s WA deals included lead roles on four IPOs.

Global investment banks UBS and Goldman Sachs ranked high on the ECM league table, after having lead roles on a handful of large WA-related transactions.

Perth-based brokers Euroz and Hartleys merged during the year, having been market leaders in their own right in many previous years. 

Combining all deals led by the two firms during the year, they had a lead role on 74 transactions worth nearly $1.3 billion.

Perth-based Argonaut had a lead role on 24 transactions worth $491 million.

That placed it just ahead of national firm Bell Potter Securities, which was lead manager on 26 transactions worth $470 million.

Other firms that were busy during the year, mostly at the junior end of the market, included Taylor Collison and local broker CPS Capital Group.

Legal advisers

Among the law firms, HWL Ebsworth Lawyers was the market leader in 2020.

It topped the rankings for both number of transactions (80) and value ($1.2 billion).

This is a highly unusual outcome – typically the big international firms like Herbert Smith Freehills and King & Wood Mallesons top the league table for deal value while local firms such as Steinepreis Paganin top the list for deal number.

HWL’s top ranking capped off a period of rapid expansion for the national firm, helped by its 2019 acquisition of successful Perth boutique Bellanhouse Lawyers. 

The second ranked firm by deal value was Herbert Smith Freehills – it advised on six transactions worth $1.1 billion.

By number, the second ranked firm was Steinepreis Paganin, which advised on 61 transactions worth $422 million.

Perth-based Steinepreis Paganin had for many years been the most active law firm servicing small and mid-cap listed companies.

The combination of HWL and Bellanhouse bumped Steinepreis Paganin off its perch.

The ranking of law firms may change again this year, following the resignation of HWL partner (and Bellanhouse founder) Bryn Hardcastle.

He is due to start this year with Allens, which is looking to broaden its corporate practice.

Another big change last year was the defection of most of DLA Piper’s WA corporate law team.

Led by Michael Bowen, the 10-member team is now at Thomson Geer and will be looking to make their presence felt this year.

Future risks

Looking ahead, Katana Asset Management portfolio manager Romano Salla Tenna is one of the most bullish people in the market.

“Unlike many, we are not cautiously optimistic,” he said.

“We are, rather, outrightly bullish about the outlook for the coming year.”

His confidence is based on the successful intervention by global central banks.

“Central banks globally have ‘printed’ more money more rapidly than at any time in history,” he said.

With very low interest rates and relatively high yields on shares, he believes advisers and investors have no alternative but to increasingly allocate money to equities.

Mr Mannolini agrees the outlook is positive but cautions the window of opportunity for capital raisings could shut quickly.

He observed the market had run hard on the US election result and positive news about COVID vaccines.

In both cases, Mr Mannolini said there was a risk the market could be disappointed by the impact.

The final word goes to Cottesloe-based fund manager Packer & Co, which is extremely bearish.

“Never in our careers have the investment risks been greater,” the firm said in its latest newsletter.

“The world economy is a shambles, with escalating trade wars and severely overvalued investment markets,” Packer said. 

“Our primary goal is to survive what we believe is an incredibly turbulent investing environment with our capital intact.”