Cash-starved junior explorers tempted by 'dubious' offers

Cash-starved junior explorers tempted by 'dubious' offers

Firms dressing themselves up as private equity are targeting vulnerable Australian junior explorers with funding offers too good to refuse.

It is understood a new breed of firm, which claims to specialise in natural resources, has been active in the Australian market since last year and targets cash-starved junior explorers with good projects in the pipeline.

Financing for the junior explorer sector was thrown into the spotlight after the $67 million iron ore tiddler Padbury said on Friday it had secured $6 billion in financing from a mystery funder to resurrect the failed Oakajee port and rail project.

The share price more than doubled after the release, before the company entered a trading halt, saying it could need until Tuesday to reveal the funder's identity and terms of the financing deal.

Mike Young, a director and former managing director of iron ore miner BC Iron, said the ASX had dropped the ball a little by allowing Padbury to make an announcement without transparency.

''You have a so-called mystery buyer who is apparently going to put this money up, which creates an uninformed market. Investors are then making uninformed decisions, ramping up the share price by speculating,'' he said.


''There's a lot of disclosure to do. Not knowing who the backer is may represent counter-party risk for investors and customers.''

Ric Ronge, head of global resources at fund manager Pengana Capital, said the Padbury deal looked ''dubious'', given the dollar value and the absence of detail.

Industry insiders say the key targets of the self-styled private equity firms targeting Australia are companies with small market capitalisations relative to their project funding needs, particularly those in commodities that are on the nose with investors.

Management of the micro-cap companies are often drawn to an initial meeting by the hundreds of millions of dollars on offer, despite believing the offer appears too good to be true.

The private equity firms are vague about their backers, but often say they represent a ''very high net-worth Australian investor''.

Despite these new firms working the market hard - after some success with the same strategy in other markets - the take-up rate has been dismal.

Curiously, the meetings are held in cafes or the client's offices, as opposed to the private equity firms' offices.

Industry players are questioning the firms' motives, and suggest the broader strategy is to buy shares in the target and then convince them to announce an attractive financing package, subject to conditions, which then sends the stock on a big run.

Ultimately, the conditions of the deal are not met and it falls over but the ''private equity'' firm has made its money.

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