Leading private commodities producer and marketer Glencore raised $10 billion when it went public on the London Stock Exchange (LSE) in May this year with a market cap of $60 billion. The Swiss based mega-mining investment company was the largest international listing on the LSE and the first company to gain instant admission to the FTSE100 in 25 years. The hype surrounding the deal turned the spotlight well and truly onto commodities and in particular mining IPOs, with many arguing that Glencore’s IPO was as good as ringing the bell for the top of the mining boom.
And if the six months post-listing are anything to go by, it seems Glencore was ringing that bell loud and clear. All three major areas of its commodities business have been hit hard, with metals, food and energy all falling across the board (see charts below). Although energy has bounced recently, other commodities have continued to push lower.
Energy, down 5.29%
Food, down 11.51%
Metals, down 16.10%
Some commodities were hit even harder. Over the six months following Glencore’s IPO, cotton plummeted 33%, copper fell 17%, wheat dropped 18%, coconut oil dived 42% and lead fell 19%.
And Glencore shares have tanked. After listing at 530p on 19th May, today they trade at 395p, down 27%, while the FTSE is down 5% over the same period.
So what does this mean for the commodities boom and Australian mining IPOs? In short, it’s not good news. The Australian materials sector (XMJ) is down 22% since Glencore listed, with mining shares across the board experiencing sharp losses. Even the big miners have been hit, with BHP down 21%, while RIO is down 23% over the same period.
Recent IPOs have foundered, with brave investors copping it on the chin. Of the 63 listings in the Materials sector in 2011, just 12 are in positive territory – i.e., 81% of the time you would have been better off taking a wait and see approach (see table below). Worse still, 39 out of 63 – a whopping 62% – have lost more than 20% and a quarter of the IPOs are worth less than half their listing price.
In the table below you have to scroll down a long way until you spot a positive gain. Considering the risky nature of sinking money into an IPO, investors have been poorly rewarded.
The premise behind getting stock in an IPO is to get on board early and cheaply – before the rest of the market gets a shot at it. If this weren’t the case then investors would be better off waiting until the stock listed.
It raises a number of problems with investing in mining IPOs:
1. Performance speaks for itself. Let’s face it, mining IPOs were a terrible play in 2011 with an average 19% fall in value since listing. Aside from a four solid performances from Mining Group (up 250%), Ventnor Resources (up 145%), Red October (up 75%) and Western Manganese (up 130%) mining IPOs have been a disastrous investment. In the current macroeconomic environment, this is unlikely to change.
2. Commodities prices have been hit hard. Even if they stabilise, many projects proposed by junior explorers and miners may no longer be feasable at current prices. The listing process takes time and projections for the miners’ projects are likely to be based on higher commodities prices. If you are interested in a mining IPO, read the prospectus carefully to compare projected commodity prices to current levels, but whichever way you look at it, it’s quite a risk to invest in an unknown entity that produces nothing, has no idea what its costs will be, nor how much it will get for its end product. If it finds anything, that is.
3. Many commentators are already rining the bell of the mining boom. Even if it is merely slowing down, putting your money into a junior explorer or miner should only be done with money that you can lose, because the odds are that this will indeed eventuate.
4. China data suggests the economy is slowing across several areas, including manufacturing. Lower demand from China could translate into even more depressed commodities price, a death knell for up and coming miners.
On top of all this is the Glencore factor. When a profitable private company decides to go public, are they ringing a bell at the top of the market? Historically, large IPOs and mergers have coincided with the top of the market in question. From the peak, there’s nowhere to go but down and management want to get their hands on the money before it all goes south.
You’ve just got to make sure it’s not your money they get their hands on.
|Company||IPO date||Issue price||Current price||YTD|
|CENTIUS GOLD LIMITED (CNS)||28th Jan||$0.20||$0.045||-77.50%|
|METAL BANK LIMITED (MBK)||2nd Mar||$0.20||$0.049||-75.50%|
|EXTERRA RESOURCES LIMITED (EXC)||26th May||$0.20||$0.06||-70%|
|CORE EXPLORATION LIMITED (CXO)||11th Feb||$0.20||$0.06||-70%|
|NAVAHO GOLD LIMITED (NVG)||11th Apr||$0.20||$0.065||-67.50%|
|INVICTUS GOLD LIMITED (IVG)||27th Jan||$0.20||$0.07||-65%|
|KIMBERLEY RARE EARTHS LIMITED (KRE)||18th May||$0.20||$0.08||-60%|
|TIMPETRA RESOURCES LIMITED (TPR)||30th Mar||$0.20||$0.08||-60%|
|COMMISSIONERS GOLD LIMITED (CGU)||2nd Sep||$0.20||$0.081||-59.50%|
|ALTIUS MINING LIMITED (AYM)||19th Sep||$0.20||$0.085||-57.50%|
|BROKEN HILL PROSPECTING LIMITED (BPL)||17th Feb||$0.20||$0.085||-57.50%|
|ANTIPA MINERALS LIMITED (AZY)||20th Apr||$0.20||$0.092||-54%|
|CONDOR BLANCO MINES LIMITED (CDB)||25th Feb||$0.20||$0.10||-50%|
|RIFT VALLEY RESOURCES LIMITED (RFV)||19th May||$0.20||$0.10||-50%|
|OCTAGONAL RESOURCES LIMITED (ORS)||5th Jan||$0.25||$0.13||-48%|
|EPIC RESOURCES LIMITED (EPC)||14th Feb||$0.20||$0.105||-47.50%|
|ARGENTINA MINING LIMITED (AVK)||9th Mar||$0.20||$0.105||-47.50%|
|WINMAR RESOURCES LIMITED (WFE)||28th Feb||$0.20||$0.11||-45%|
|MUSGRAVE MINERALS LIMITED (MGV)||29th Apr||$0.25||$0.11||-45%|
|TIGERS REALM COAL LIMITED (TIG)||29th Aug||$0.50||$0.30||-40%|
|LITHEX RESOURCES LIMITED (LTX)||17th May||$0.20||$0.12||-40%|
|TELLUS RESOURCES LTD (TLU)||11th May||$0.25||$0.15||-40%|
|CREDO RESOURCES LIMITED (CRQ)||7th Apr||$0.20||$0.12||-40%|
|RIEDEL RESOURCES LIMITED (RIE)||31st Jan||$0.20||$0.125||-37.50%|
|RIDGE RESOURCES LTD (RID)||17th Aug||$0.20||$0.14||-30%|
|POLYMETALS MINING LIMITED (PLY)||4th May||$1.00||$0.70||-30%|
|SILVER STONE RESOURCES LIMITED (SSZ)||4th Aug||$0.20||$0.14||-30%|
|PLYMOUTH MINERALS LIMITED (PLH)||15th Apr||$0.20||$0.135||-28.25%|
|CONTO RESOURCES LIMITED (CNO)||23rd Jun||$0.20||$0.145||-27.50%|
|EXALT RESOURCES LIMITED (ERD)||26th May||$0.20||$0.15||-25%|
|AZIANA LIMITED (AZK)||9th Nov||$0.25||$0.15||-25%|
|NARACOOTA RESOURCES LIMITED (NRR)||24th Jun||$0.20||$0.15||-25%|
|COVE RESOURCES LIMITED (CVE)||27th Jan||$0.20||$0.15||-25%|
|ARK MINES LIMITED (AHK)||9th May||$0.20||$0.15||-25%|
|NEMEX RESOURCES LIMITED (NXR)||2nd May||$0.20||$0.155||-22.50%|
|FIRESTRIKE RESOURCES LIMITED (FIE)||26th Jul||$0.20||$0.16||-20%|
|RED MOUNTAIN MINING LIMITED (RMX)||1st Sep||$0.20||$0.16||-20%|
|VOLTA MINING LIMITED (VTM)||19th Oct||$0.20||$0.16||-20%|
|SUNSEEKER MINERALS LIMITED (SKM)||5th Jul||$0.20||$0.165||-17.50%|
|DEMPSEY MINERALS LIMITED (DMI)||8th Jun||$0.20||$0.18||-10%|
|MINREX RESOURCES NL (MRR)||11th Nov||$0.20||$0.18||-10%|
|STRATUM METALS LIMITED (SXT)||11th Oct||$0.20||$0.18||-10%|
|STRICKLAND RESOURCES LIMITED (STK)||5th Sep||$0.20||$0.185||-7.50%|
|POTASH WEST NL (PWN)||13th May||$0.20||$0.19||-5%|
|BLIGH RESOURCES LIMITED (BGH)||1st Dec||$0.25||$0.24||-4%|
|GGG RESOURCES PLC (GGB)||19th May||$0.40||$0.195||-2.50%|
|CRADLE RESOURCES LIMITED (CXX)||16th Sep||$0.20||$0.195||-2.50%|
|AUDALIA RESOURCES LIMITED (ACP)||6th Jul||$0.20||$0.20||0%|
|RUMBLE RESOURCES LIMITED (RTR)||1st Jul||$0.20||$0.20||0%|
|GLORY RESOURCES LIMITED (GLY)||21st Jan||$0.20||$0.20||0%|
|QUINTESSENTIAL RESOURCES LIMITED (QRL)||10th Aug||$0.20||$0.215||7.50%|
|DATON GROUP AUSTRALIA LTD (DTG)||7th Jan||$0.25||$0.27||8%|
|BLACK MOUNTAIN RESOURCES LIMITED (BMZ)||17th Feb||$0.20||$0.22||10%|
|MRG METALS LIMITED (MRQ)||8th Jun||$0.20||$0.23||15%|
|KIDMAN RESOURCES LIMITED (KDR)||18th Jan||$0.20||$0.24||20%|
|PARKER RESOURCES NL (PKR)||23rd Sep||$0.20||$0.24||20%|
|TERRANOVA MINERALS NL (TNV)||1st Sep||$0.20||$0.26||30%|
|NAVARRE MINERALS LIMITED (NML)||31st Mar||$0.20||$0.26||30%|
|FORTE CONSOLIDATED LIMITED (FRC)||14th Apr||$0.20||$0.265||32.5%|
|RED OCTOBER RESOURCES LIMITED (ROS)||9th May||$0.20||$0.35||75%|
|WESTERN MANGANESE LIMITED (WMN)||4th Mar||$0.20||$0.46||130%|
|VENTNOR RESOURCES LTD (VRX)||24th Feb||$0.20||$0.49||145%|
|MINING GROUP LIMITED (MNE)||1st Jul||$0.20||$0.70||250%|
Correction: Ventnor (VRX) was listed with a share price of $0.049, when it was in fact $0.49 as at the time of writing. This typo was corrected the same day. Ventnor was one of the best performing IPOs of 2011.
More articles from this week’s newsletter