An unexpected surge in demand for Canadian resource financings is giving many miners and energy producers much-needed comfort – and reassuring their advisers that a recent dearth of deals is likely temporary.
On Wednesday, Enbridge Inc. announced a $2-billion equity offering, and investor demand outstripped that amount. Shares in the company closed up more than 5 per cent Thursday – despite a 5.6-per-cent discount on the share issue.
Investor appetite for new equity financings was dismal in January – owing to volatile markets and commodity prices – prompting worries that 2016 was shaping up to be rough for resource companies and their underwriters. If producers and developers can't raise fresh funds, it is tough to keep shelling out cash on capital expenditures that help their businesses grow.
But a recent spate of energy and gold financings is quickly eradicating this skepticism. Not only are these deals selling well – many are oversubscribed, meaning their demand surpasses the number of new shares available – a number have also been quite large. In early February, Franco-Nevada Corp. set out to raise $550-million (U.S.) to fund a new acquisition, but ultimately increased the deal to $920-million.
Smaller companies with trusted management teams have also been able to finance. Energy specialists such as Seven Generations Energy Ltd., Advantage Oil & Gas Ltd. and, most recently, Spartan Energy Corp. all raised money in February. Spartan's deal, announced Wednesday, has already been upsized by $10-million (Canadian) to $85-million. Many of these deals are also led by boutique dealers, which have struggled in the resource downturn.
The heavy demand suggests the burns investors suffered from buying into big deals in 2015 have faded. Cenovus Energy Inc. and Encana Corp. raised more than $1-billion each last February, and both companies are still trading well below those new issue prices.
In metals and mining, Yamana Gold Inc. raised $260-million by selling shares at $5.30 each in January, 2015, but the stock trades for only $3.70 today despite the recent gold price rally. Billion-dollar deals for Silver Wheaton Corp. and Tahoe Resources Inc. are also both trading below their new issue prices.
While time has helped those scars heal, the recent rise in the gold price to $1,230 (U.S.) an ounce, and a less volatile oil price, has also done wonders. Generalist funds – that is, those that invest in multiple sectors, not just resources – are finally wading back into commodities, according to Tyler Swan, a managing director in equity capital markets at CIBC World Markets. "There is very much a renewed interest," he said.
However, he cautioned that it is too early to call this a full-blown rebound for resources. Mr. Swan noted that most of the current buyers seem to be "early adopters" of the recent optimism. "This is still an emerging theme."
Multiple underwriters have also stressed that only select issuers can tap investors for fresh funds. Of the energy companies that have sold shares, all have management teams investors support and believe in long term. Whereas the deals for Cenovus and Encana last year were largely for restructuring purposes, the recent deals are driven by giving certain companies the cash they need to grow.
"There is always cash on hand for quality management teams," said Mark Mulroney, head of equity capital markets at National Bank Financial. Investors simply "haven't had a chance [to deploy it] given the volatility."
What no one knows is whether the current demand will be short-lived. "There have been some head fakes in the last two years," Mr. Swan said, referring to short-term pops in the gold price that ultimately did little for bullion in the long run. But he added that this time around gold isn't rising all on its own – bond yields have also fluctuated and there are growing fears of global deflation.
"There's a little more sincerity in the current rally," he said.