FOOD FOR THOUGHT – JULY 2011
Never Let Your Kitty Run Dry
This topic is particularly relevant with the renewed and ongoing concerns about the debt contagion that continues to haunt the world share markets. And it’s always relevant. The junior resource company is different to perhaps any other kind of for-profit business in that it has no regular source of income. It is dependent on the share market to keep raising additional funds. As the share market is volatile, it seems obvious that juniors should never let their bank account get too low before accessing more funds.
Why then do so many of us do it so often?
Funds are typically raised at a discount of around 20% of the market price, and it costs around 5-6% of the funds raised to do it. Then there’s all your in-house costs associated with the capital raising, and the shareholder queries – they may be concerned about how you raised the money (eg they missed out and were diluted), that you raised too much or too little, or with perfect hindsight they question your timing of going to the market.
I don’t think it’s procrastination arising from these issues that are the primary cause, though. The average junior is focussed on their exploration programs, and they’re often running on an oily rag with limited resources. Raising capital is at best inconvenient, and there are always more pressing matters. Its only when the kitty does run dry that capital raising rises to the top of the heap, and that is NOT the time to do it.
The average explorer always believes that their shares are undervalued, and that their coming announcements will soon send their shares rocketing up. They reason that their capital raising should be delayed until their price is up. Good, solid, positive optimism and belief in your project and company is an essential ingredient for any successful explorer, but it’s a problem if it keeps delaying capital raising. You start to look and act more like a gambling addict rather than a professional, well organised company. In addition, when the kitty runs dry you run into real problems as investors get nervous about the company as a going concern, or at the very least they are worried about what price the company may be forced to raised funds at. All this drags the explorer’s share price down at the very time you’re trying hard to get it up. The result is less than optimal, raising funds too late can cause irreparable damage to an otherwise viable company.
It’s often said that banks will only lend you money when you don’t need it. It stands to reason that the markets do the same – its best to get money when you don’t really need it. An explorer should forecast its cash needs, and plan to raise cash long before it runs out of money. That way, to the extent it can and should, it does have some room to move when deciding the exact date that it goes back to the market.