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Australian mining IPOs to surge in 2018 as tech fuels metals demand

Australian mining floats are set to surge to levels not seen in 20 years, with some A$360 million in raisings already underway as small miners take advantage of demand for metals used in high-tech areas like mobile phones and electric car batteries, analysts say.

The mood was particularly buoyant at the RIU Explorers Conference in Fremantle, Western Australia, which wrapped up Feb. 22, with a record 1,150 registered delegates and organizers extending the event from two days to two and a half days for the first time.

Analysts from ANZ, Patersons Securities and BDO Australia who addressed the event all reinforced the prevailing sentiment, with Patersons senior resources analyst Simon Tonkin perhaps the most bullish, predicting between 30 to 60 new floats in 2018 after initial public offerings soared from seven in 2016 to 25 in 2017.

"The last time we saw the number of floats in the 20s was 2002 and 2009, and I think we will see 30 to 60 new floats in 2018," Tonkin told delegates Feb. 21, noting particularly strong demand for gold, cobalt and lithium floats.

"Investors are looking for the next big commodity. Cobalt has been the latest one but there are others like vanadium, as risk capital has returned to the small cap space."

Cobalt is used in mobile phone batteries -- with Apple Inc. reportedly in talks to buy the metal directly from suppliers --, while lithium powers electric cars and vanadium is used not only for batteries but also in high-strength steel alloys.

Tonkin noted that merger and acquisition activity was increasing in terms of size of deals, rising by 50% between 2016 to 2017, and the number of deals has remained "fairly steady," which is another positive for the resources market.

Patersons believes M&A will continue apace this year, perhaps more for the larger-cap space, with Primary Gold Ltd. shares surging 30% on the Australian Securities Exchange after China Hanking Holdings Ltd. subsidiary Hanking Australia made an all-cash A$37.5 million takeover offer for the company the very morning of Tonkin's address.

Tonkin also noted a significant increase in the size of deals of 216% from 2015 to 2016, and a 5% increase over 2016 and 2017, and Patersons — which has about A$14 billion in funds under management and advice, of which about A$4 billion is in the resources market — believes that trend will continue into 2018.

BDO corporate finance partner Adam Myers, who also addressed the Fremantle conference on Feb. 21, told S&P Global Market Intelligence that while it remains to be seen whether 2018 replicates 2008 to 2009 when mining was "absolutely through the roof," things were looking good so far.

He said Australia's mining sector raised just under A$3 billion last year, and already there were about A$360 million in raisings underway across about 38 companies this year, at a time when markets usually are not expected to start opening up until February to March.

The Australian investment scene is also different from 1999 when similar conditions prevailed, with the rise of technology stocks which took money away from resources, as the market is now "a lot better regulated" by the Australian Securities and Investment Commission and the ASX, Myers said.

He said investors, who were now often looking at a wider spread in their portfolio, were also starting to get "a bit nervous" about house pricing in Sydney, Australia's biggest city by population.

"We saw investment in east coast property taking off in the last few years; people are now questioning whether it's at the top," he said. "When you look at it, particularly from a west coast perspective, it does look pretty expensive, so I don't think we’ll see property taking as much away from resources as it could have done."

Other factors are also working in miners' favor.

ANZ senior commodity strategist Daniel Hynes told the conference on Feb. 21 that both the growth of the G4 nations — Brazil, Germany, India and Japan — and the Chinese economy were providing support for commodity markets.

This means that after an "incredibly long period of ultra-low rates" across most major economies, "we're now starting to see a lot of the central banks look at either tightening monetary conditions or even raising interest rates", he said.

This is particularly the case in the U.S., where ANZ expects to see another 75 basis points of rate hikes this year.

"Central banks are quite mindful of killing off this recovery in the global economy, and in the U.S. where we’ve seen rates particularly lower and they want to get them back to a more sustainable, stable level, the rate of hikes across the board won’t be so substantial," Hynes said.