The multitude of new investors in global stock markets may be more susceptible to the siren song spun by the influencers of an upcoming IPO. Key among the lures are the opportunity to “get in on the ground floor.” Sadly, for many investors that ground floor can collapse.
Investors are exposed to impressive price gains of prior IPO listings. That is one more Those gains use the offering or issue price as the base measure, while few if any average retail investors get in at that price. For them, the ground floor is the price range of the stocks first day of public trading on the ASX. In most cases that calculation method inflates the percentage gains.
In periods of high market volatility and uncertainty, retail investors are generally reluctant to take a chance on the future growth potential of a company untested by market competition and economic downturns.
Global markets began the trading year of 2022 on a high note, which remained until real concerns about the possibility of global recessions came on the scene beginning in April.
The IPO market followed the pattern. Twenty seven companies went public on the ASX in the first quarter of the trading year with thirty two listing in the second quarter. Nine listed in the third quarter and the fourth quarter is off to a slow start, with seven IPOs in October. The ASX list of upcoming IPO floats shows ten currently expected to begin trading on the ASX in November through December, with two companies withdrawing their applications.
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Despite the heavy dose of expert advice telling retail investors to beware of IPOs, there are a few who point to potential bargains in a down period for IPOs.
There is ample sound advice on what to look for in an IPO for those willing to take the time to do some digging into the prospective company’s history and growth potential
For the risk averse, a contrarian strategy would be to look for the hottest IPOs going into the downturn and maintaining some momentum. The underlying assumption behind the strategy, which may be wrong, is that investors bold enough to buy in an uncertain market believe there is something there for the long term.
The website ipowatch.com.au has a list of all fifty nine entries in the first half of 2022 with percentage gains from the issue price as of 27 October. Two are up in excess of 200%. WA1 Resources (WA1) is up 310% while Far East Gold (FEG) is up 240%.
Far East Gold has multiple gold/copper assets here in Australia and in Indonesia, in various stages of development.
WA1 Resources has three gold/copper/nickel/platinum assets here in Australia, with a self-described focus on “future-facing commodities” needed for clean energy.
These stocks took two very different paths to high performance. From the ASX website:
Far East listed at the end of March while WA1 listed at the beginning of February.
The Far East share price followed a relatively stable upward path while WA1 was treading water and falling under before rocketing upward on a burst of trading activity indicated by the volume uptick. Even without checking WA1 announcements, it seems obvious that kind of movement had to come from exceedingly positive news.
WA1 has three assets in Western Australia – West Arunta, Madura, and Hidden Valley. All three have previously been subject to a variety of geographical methods to assess the areas for gold and copper.
While all three are highly prospective, management has decided to focus on the Pachpadra Prospect within the area of the WA2 Project. The company has a total of three tenement explorations and two exploration licence applications. Tenements simply grant the holders the right to recover minerals for exploration and prospecting.
WA1 began its maiden drilling campaign in Pachpadra in early July, and the stock price failed to take note. On 18 August, the first market update was positive enough to send the stock price inching up. WA1 has submitted samples for analysis and interpretation with results expected “over the coming months.”
Early drilling samples and visual study have convinced WA1 management that a significant target area within the project will prove to be consistent with the company’s IOCG target model, meaning the early hematite findings indicate the probability the target will yield results consistent with iron ore, copper, and gold mining fields.
The company’s Annual Report released on 19 September announced the discovery of a “ minearalised carbonate system.” Mineralisation is a natural process that causes rocks exposed to carbon to develop into carbonate. The original rocks have elements within them, including iron, copper, manganese, zinc, and others.
WA1 went into a trading halt before an announcement, suspicion of which may have already started to fire up the stock price. On 26 September it came.
Within some of the mineralised carbonates, the company found a rare earth mineral – niobium. Carbonates have yielded niobium before, along with other rare earth minerals — phosphorus, tantalum, uranium, thorium, copper, iron, titanium, vanadium, barium, fluorine, and zirconium.
It is possible many retail investors have never heard of niobium, but it is recognised as a critical mineral. The 26 October announcement mentioned the current price of niobium ranges between USD$45,000 per tonne and USD$50,000 per tonne.
Niobium has substantial advantages as an additive metal for a wide range of applications. Niobium has a high melting point and has good superconductivity along with wear and corrosion resistance.
Niobium is used in aviation, atomic energy, consumer and commercial electronics, medical equipment, lighting, and optical lens.
WA1 will be submitting samples from a wider area for analysis and assessment.
Both the Madura Project and the Hidden Valley have seen little, if any, geological analysis for some time, but both are considered highly prospective for copper, nickel, and gold.
Far East Gold has six projects in late stages of development, with three in Australia — Hill 212, Blue Grass Creek, and Mount Clark West — and three in Indonesia – Trenggalek, Wonogori, and the company flagship Woyla. All six are exploring either copper and gold, or gold only.
The company’s stock prices seems to have ignored the carnage in the sector. Here is the FEG share price from its end of March listing to 26 October against two of the top gold miners on the ASX – Northern Star Resources (NST) and Evolution Mining (EVN). From the ASX website:
Company announcements to the market impact the share price, in most cases. There are announcements essentially containing little relevant information and then there are announcements providing highly relevant information for the investors.
Since listing in late March, Far East has released 18 updates on mining progress of four of the company’s projects. The latest was on the Woyla Project in an area of Indonesia with exploration history from Barrick Gold and Newcrest Mining at the close of the last century, but no drilling history since 1997.
Exploration at Woyla to date includes aeromagnetic and radiometric surveys. The Woyla Project has four targeted prospects within the project. The 13 October release announced the commencement of drilling at one of those prospects to join two other existing drilling programs.
The Indonesian Wonogori Project has obtained commercial rights for exploration and development in a largely underexplored area. Reserve estimates for the project potential are 99,500 ounces of gold and of million pounds of copper. The company has begun considering proposals for mine infrastructure and processing plant layouts
The last Indonesian asset is the Trenggalek Project, with a substantial history of drilling (81 holes over.) The company is assessing past exploration data and has the right to acquire 100% commercial interest in the project.
In Australia, Far East has 90% earn-in agreements for all three of its projects with exploration permits in place. Drilling has begun at the Hill 212 Project. The Blue Grass Creek Project adjoins Hill 212. Exploration activities at Blue Grass indicate to extend the gold deposits at Hill 212.
Previous geophysics and drilling at the Mount Clark Project indicate the presence of a porphyry (large and low to medium grade) copper and gold deposit.
Mining as it exists today is a complex and highly technical venture. The Far East announcements contain multiple charts and highly technical information. Mining savvy investors generally appreciate detailed information, but what the average retail investor wants to know is how long it will be before the cash register begins to ring.
The life cycle of mine development can be long and arduous. Drilling is generally followed by more drilling and extracted samples sent off for analysis and assessment to determine what and how much there is at the site. Feasibility studies need to be completed and assessed before a final investment decision is made. Site construction prior to mining operations commencing needs to be completed.
Along the way in this life cycle, the cash register rings again and again to cover the capital expenditures along the way. As cash reserves are depleted, miners will need to raise more cash, either by borrowing or issuing more stock.
Far East appears to have the money to proceed with its multi-prong development strategy. According to data on au.finance.yahoo.com the company the company has $9.1 million dollars in total cash as of the most recent quarter (mrq) and $71.5 thousand dollars in debt. Gearing is 0.28 and the current ratio is exceedingly high at 37.790, indicating Far East’s ability to meet its payables due within one year. The company has a market cap of and $146.75 million dollars and last traded at $0.66, with a 52 Week High of $0.765 and a 52 Week Low of $0.23.
WA1 also has no debt and its development strategy will be less costly than Far East’s. WA1 had $3.68 million dollars in total cash mrq. The company has a market cap of $36.5 million dollars and last traded at $0.84, with a 52 Week High of $0.99 and a 52 Week Low of $0.115.