Is the AIM market still a growth platform for natural resources companies?

The AIM market has been the world’s most successful growth market since its inception in 1995, enabling natural resources explorers, producers and services companies from around the world to raise billions of pounds. Indeed, AIM has been so attractive to resource issuers that well over a third of companies listed on the London Stock Exchange’s junior market come from the mining and oil and gas sector. 

IM’s success derives principally from the deep pools of capital traditionally available in London, the willingness for its institutional investors to back resource assets located in all corners of the globe, and the market’s flexible and principles-based approach to regulation. A key difference between AIM and other markets is that AIM companies are supervised by a nominated adviser (usually referred to as a “nomad”) rather than by a securities regulator (in the UK, this is the Financial Services Authority or “FSA”). Nomads are typically FSA-regulated financial advisers who act as quality controllers for the market, lending their reputation to the companies for which they act. 

However, like other small cap markets, AIM is feeling the pronounced effects of the current economic climate. A squeeze on available capital and a marked decrease in global demand for commodities have combined to wreak havoc on the share prices and bottom lines of AIM resource companies, as well as deter new entrants to the market. 

As a result, AIM has been shrinking, with just under 1,500 companies on the market at the end of March 2009, down from the peak of almost 1,700 at the end of 2007. There were only 115 new admissions in 2008, of which only 38 consisted of IPOs where new funds were raised, with the remainder consisting of introductions (24) and readmissions on reverse takeovers or transfers from the Main Market (53). This contrasts sharply with 284 new admissions (of which 182 were IPOs) and a record 462 in 2006 (of which 278 were IPOs). Resaca Exploitation and Indus Gas were among the few resources companies to successfully IPO on AIM in the past year with new funds raised, while other such San Leon Energy and Emerging Metals came to market as introductions.

A related trend is the significant increase in delisting from AIM, with close to 300 companies having left the market in the past year alone. Interestingly, it is the resignation of the nomad which was responsible for 70 of these delistings, as companies are automatically delisted where they are unable to find a replacement nomad within 30 days, a far from straightforward exercise when the company is question is in financial difficulty. Others will delist as their businesses have failed altogether – an unfortunate sign of the times. For those companies voluntarily choosing to delist, which requires 75% shareholder approval under the AIM Rules, a common explanation given is that the  perceived benefits of AIM no longer justify the costs of maintaining the listing. Tianshan Goldfields and Neptune Minerals are but two such companies to have delisted for cost reasons, estimated to be upwards of £100,000 annually, when fees of the nomad, broker, auditors, solicitors, PR and others are taken into account.  

Although delisting will make commercial sense for many companies, for many others, it may prove to be a short-sighted solution to the long-term survival and growth of the company if it is likely to have to raise funds in the near to medium term. De-listing can potentially also be prejudicial to minority shareholders, as institutions which cannot hold unquoted stock will be forced to sell, severely depressing the share price, which erodes value for shareholders if there is a possible takeover in the offing, or gifts the company on the cheap to its remaining controlling shareholders. 

Notwithstanding the recent downsizing of AIM, there are still a number of positives to take away from the current state of the AIM market.

Ironically, the departure of so many small cap companies on AIM is no bad thing for the AIM market as a whole. During the boom times of recent years a large number of companies were brought to the market which in hindsight should not have been. This “addition by subtraction” can be good news for the quality of the market as a whole and reinforce the need for nomads to be more selective as to which companies they bring to market in future.

While there has been far less appetite for bringing new ventures to market as IPOs, secondary fundraisings for proven companies are on the up, with over £3 billion raised in the past year, including substantial raises for gold miners Centamin Egypt  and Patagonia Gold, as well as Nighthawk Energy and Circle Oil, to name but a few. 

Moreover, although many resource companies have been hampered by the uncertainty around their debt facilities, both European Nickel and Max Petroleum  recently saw spectacular rises in their share prices after negotiating new loan arrangements.

Industry consolidation has also been a positive reason for the delisting of many companies, such as the takeovers of First Calgary and Anzon Energy. For other smaller resource companies, consolidation to gain sufficient size and asset spread should enhance the ability to obtain much needed capital and it is expected that this trend will increase over the next year.

The current evolution of AIM, with its emphasis on quality over quantity, has created an ideal opportunity for the Exchange to further review its regulatory regime in order to strengthen the market’s reputation and be a catalyst for growth as and when economic conditions improve. 

AIM has in the past been responsive in addressing concerns of companies and investors in adjusting its regulatory regime where required: in 2006, AIM published a “Guidance Note for Mining, Oil and Gas Companies” which set out requirements for the qualifications of competent persons and the form and content of their reports on resource assets, and in 2007 a separate rulebook was introduced for nomads, more comprehensively codifying their eligibility requirements, duties and responsibilities. This approach should be continued by addressing the issues set out below.

Liquidity Unlike the rules of most other markets, the AIM Rules do not stipulate minimum criteria in relation to a company’s size, track record or set number of shares in public hands for eligibility for admission. This is a key factor causing shares in AIM companies often being very illiquid. While it will not solve all of AIM’s liquidity issues, it is time to require AIM companies to have a specified minimum free float, which must be spread among a minimum number of shareholders each holding a minimum number of shares. It would also help to require either a minimum threshold of new funds to be raised on admission or a minimum market capitalisation.

Corporate Governance Contentious shareholder meetings and board disputes for AIM-listed resources companies are on the rise, many of which may have been prevented had better corporate governance practices been in place. The AIM Rules do not currently mandate specific corporate governance standards, leaving companies the freedom to comply insofar as is practicable with either the Combined Code (which is obligatory for Main Market companies) or the more AIM-specific Quoted Companies Alliance guidelines. The codification of a basic level of key requirements is desirable to ensure expectations of shareholders and boards are aligned. 

Insider Dealing Directors and significant shareholders subject to lock-in provisions are typically subject only to contractual undertakings as a means of enforcement, which are ineffective in preventing and remedying cases where they are observed in the breach. While the FSA’s increased focus on combating insider dealing will help, AIM could also be proactive and gain investor confidence by mandating an escrow-release mechanism for such shares.

Takeover protection  In a number of recent cases, including Highland Gold, Trans-Siberian Gold and the ongoing hostile takeover by Gemfields Resources of Tanzanite One, the absence of takeover protection provided by Rule 9 of the UK Takeover Code has enabled controlling stakes to be obtained by stealth. Rule 9 generally requires a mandatory bid for the remaining shares in a company to be made by a shareholder who reaches a 30% threshold holding, unless the approval of the UK Takeover Panel and the company’s shareholders is first obtained. Without the check on stakebuilding provided by Rule 9, minority shareholders can miss out on the premium they would normally expect to receive for their shares where someone gains control of a given AIM company. Just as last year’s update of the AIM Rules contained guidance that foreign companies amend their articles to reflect certain aspects of the FSA’s disclosure and transparency rules, AIM would be wise to take a similar line here, advising UK and foreign companies alike to consider adopting Rule 9 into their constitutional documents. 

Delisting requirements Consideration should be given as to whether only independent shareholders, i.e. those not connected with a company’s management, should be entitled to vote on a resolution to delist, to ensure that delisting is not used as a mechanism to prejudice minority shareholders.

With increased regulation comes increased costs so a balance will need to be struck, whilst still retaining the flexibility and principles-based approach to regulation which has been a trademark advantage for AIM over other markets where “box-ticking” compliance is the norm.

Given the phenomenal success AIM has enjoyed in recent years, its current problems have perhaps been more striking than other markets, but suggestions that this could ultimately threaten AIM’s future existence are greatly exaggerated. AIM retains a critical mass of quality companies and remains a dynamic market in spite of the current absence of IPOs. While conditions will remain challenging in the short term, AIM will be anything but dull in the coming months and will continue to be a valuable growth platform and gateway to capital for international resource companies. 

Richie Clark is a partner and head of capital markets at Fox Williams LLP, where he leads a team focused on pre-IPO finance, AIM admissions and placings, secondary fundraisings, M&A and takeover activity, and increasingly on activist shareholder and corporate governance issues, acting for both companies and nominated advisers/brokers. He specializes in the energy and natural resources sectors and the issues facing international companies listed on AIM. Fox Williams is an independent business law firm based in the City of London. The firm has a strong reputation for both contentious and non-contentious work in its core practice areas of corporate, partnership, employment & immigration, real estate, and commerce and technology.

By Richie Clark, Fox Williams LLP 
For further information please contact Richie Clark on +44 020 7614 2507, email rclark@foxwilliams.com or visit www.foxwilliams.com