Capital crunch at the small end of the market

A capital raising crisis is engulfing Australia’s smaller listed companies.

Junior miners, explorers and biotech stocks have suffered from a rapidly deteriorating appetite from investors for capital raisings since Easter, (see: Is it iron curtains for small producers?) which has been exacerbated in recent weeks by the instability that has rocked global capital markets.

In the latter part of 2012, as the market rally moved into top gear, the ASX Small Ordinaries Index outperformed the general market by a significant margin.

The small end of the market moved into step with the ASX 200 during March but since then has significantly underperformed.

Capital raising plans by smaller companies hatched in the first few months of this year, many of them now priced a significant premium to current prices, have come under intense pressure.

Investors naturally have shunned them and underwriters have desperately looked for exit clauses to avoid being caught with overpriced stock.

Accounting firm Ernst & Young recently warned of a cash crunch facing junior miners, caught in a pincer movement between declining metal prices and falling stock values.

It warned that possibly hundreds of junior miners were facing a critical shortage of working capital as they weighed up the demands for shareholders  for increased returns against their requirements for long term investment.

Proxy solicitation firm GPS has been called in to help a number of smaller companies encountering capital raising difficulties.

According to GPS, investors are taking up only between 20 and 30 per cent of their entitlements, citing the example of one junior resources group, seeking $6 million, that manage to raise just  $100,000 before it sought help.

The combined market value of firms worth less than $50 million had fallen by 43 per cent in the year to the end of December which has accelerated in the past few months.

The difficulties are not confined to miners.  Medical technology companies OBJ and Invion both had to extend and revise capital raising plans.

Raya Group revised the pricing of a rights issue and then organised a placement that delivered a shortfall.  Laconia Resources twice extended an entitlement offer before cancelling and repricing it while Algae Tec has extended its shareholder purchase program three times in the past six weeks.

Many junior miners are quickly running short of working capital. Unless the market turns soon, things could get ugly.