"Mining Companies Go Public On The AIM," Crowell & Moring Mining Law Monitor, Vol. 22, Issue 2
Co-Authors: Paul Finlan, Mitchell Rabinowitz and Neil Sitron.
There is an emerging trend in the world financial markets – the growth of non-U.S. marketplaces catering to small capitalization (“small-cap”) companies. These markets have been established specifically to provide small-cap companies with access to the large capital markets and industrial investors previously only available through major markets such as the New York Stock Exchange and the London Stock Exchange. Listing on such a marketplace allows a company to raise capital, create an objective market value for its business, raise its international profile, gain credibility as a “publicly traded corporation,” and obtain currency in the form of traded shares which may be used to make acquisitions or reward employees (through share incentive plans). Further, listing in a small-cap marketplace can prepare a company, or signal its readiness, for future entrance into a major stock market. One such small-cap marketplace is the London Stock Exchange's Alternative Investment Market (“AIM”). AIM has grown dramatically over the past several years and is being used increasingly by mining companies worldwide.
Alternative Investment Market
AIM was established in 1995 by the London Stock Exchange as an international growth market tailored to small-cap companies. Its mission is to provide a market for smaller companies without forcing such companies to overcome the regulatory and financial hurdles imposed by the major markets. AIM provides these companies with access to international investors who may not ordinarily invest in a non-exchange traded corporation. Nearly 1,400 companies are currently listed on AIM, including 220 international (non-UK) companies from 18 countries. In 2005, 519 companies were admitted into AIM and companies, both newly listed and established, raised total gross proceeds of $16 billion. International companies have raised over $2 billion since AIM's inception in 1995. Companies listing on AIM have an average market capitalization of $500 million, which is also the average market capitalization for companies listing on the American Stock Exchange. Continued growth in trading of AIM listed securities was recently given a boost by the introduction in May 2005 of a new FTSE AIM Index Series.
AIM has been structured so as to minimize the financial and regulatory hurdles companies would otherwise face in the major stock markets. Unlike major markets, AIM does not require certain minimum criteria for listing corporations, such as company size, trading track record, market capitalization or number of shares that will be publicly traded. Further, the regulatory environment is structured to favor small-cap companies. Rather than approval and oversight by a third party regulatory body, such as the U.S. Securities and Exchange Commission, regulation is handled directly by AIM through the listed company's nominated advisor (its “Nomad”). Further, shareholder approval is not required by AIM for most transactions effected by listed companies.
Listing on AIM
AIM, through its London Stock Exchange member firms, will guide companies which are listing their shares publicly for the first time, through the admission and listing process. This procedure may take two to four months from appointment of advisors to public trading. For those companies which already have publicly held shares that have been listed on a major market for at least eighteen months, AIM offers an expedited entrance process called the “Designated Markets Route.” The Designated Markets Route allows such companies to gain entrance into AIM solely through the submission of their current annual reports and accounts.
Upon making a decision to move forward with the listing process, a company must select advisors to assist it in its admission to AIM. The company must first appoint a Nomad, whose duty to AIM requires it to judge the appropriateness of the company's admission application and ensure that the company complies with all AIM regulations both during the admission process and while it is listed on AIM. Upon approving a company's application to list on AIM, the Nomad will guide the company through the admission process, meeting with the company's board of directors, explaining AIM's rules, and informing the board of its responsibilities and obligations. The company must also select a “nominated broker,” a member of the London Stock Exchange who will aid the company in identifying potential investors for the company's initial flotation and bring together buyers and sellers once the company's shares have been listed. During this period, the company must prepare an admission document which provides all financial and corporate governance information relevant to prospective investors. Because in most circumstances there is no review by an outside governing body, the “going public” process is less formal and deadlines may be scheduled according to the requirements and convenience of the parties involved. The reduced formality of the process and the lack of a third party regulating body allows listing companies to reduce their costs drastically as compared to an initial public offering on a major market.
The reduced formality of the AIM listing process is not accompanied by a lack of rigorousness. Legal and audit due diligence is extremely detailed and comprehensive. Further, as with any public listing, the company must be prepared for the increased scrutiny of outside investors, accountability of officers and directors, disclosure of financial information and corporate activities, and susceptibility to the vagaries of an open market. AIM also requires companies to issue reports of major corporate developments, half-year unaudited interim accounts, and year-end audited annual accounts.
Total fees of admission to AIM, including commissions to brokers and legal and audit fees, may be approximately 5 to 12% of the total capital raised by the listing company.
Once the listing process is complete, the company's shares begin trading via London Stock Exchange member brokers and share prices will be visible across the London Stock Exchange's worldwide network of 90,000 information terminals.
AIM and the Mining Industry
Mining companies make up one of the largest sectors in AIM. The mining sector includes over 140 companies and accounted for approximately 15% of AIM's total capitalization in 2005. The sector is split primarily between UK (56%), Australian (14%) and Canadian companies (13%). However, the AIM mining sector is dominated by four companies (First Quantum Minerals, Bema Gold Corporation, Peter Hambro Mining, and Highland Gold Mining), which account for a third of the sector's market capitalization. Further, the top five companies, by revenue, accounted for over 70% of the AIM mining sector's total revenue in 2004.
Mining companies listed on AIM had a market capitalization of $9.5 billion in 2004, an increase of 47% from the previous year. This increase was due partly to increased commodity prices. However, the market capitalization growth rate of AIM-listed mining companies has outpaced the industry as a whole due to AIM's ability to attract new investment in the mining industry. In 2004, companies within the AIM mining sector raised nearly $1 billion in net cash proceeds through the issuance of shares on AIM, a 300% increase from the previous year. Further, several of these capital raising events individually netted greater than $50 million. Share issue costs for mining company transactions were approximately 5% of the gross proceeds raised.
Although stocks of AIM mining companies dropped significantly in the first quarter of 2005 amid fears of the bubble bursting in the natural resources sector and a perceived glut of new mining companies that had entered AIM, entrance into AIM and investment in shares of AIM companies continued. In 2005, a total of 66 mining companies entered AIM, raising approximately $460 million, and companies within the AIM mining sector raised nearly $1 billion in further issuances. The mining sector was the ninth largest AIM sector in terms of total money raised through new issuances in 2005 and the largest sector in terms of total money raised through further issuances. Of the top fifty largest AIM companies in 2005, measured by market capitalization, seven were mining companies (six were in the top twenty-five largest AIM companies).
Although listing on a small-cap market such as AIM provides numerous benefits for companies, the decision to go public should not be taken lightly. Along with the increased ability to raise capital and the advantages of having listed shares comes the challenges and responsibilities which accompany public ownership. As is evidenced above, however, numerous mining companies have found such a listing beneficial and well worth the effort.
[Editors' Note: The source of the 2004 data in this article is Junior Mine, December 2005, PricewaterhouseCoopers ; the 2005 data are drawn from AIM's publicly available information.]