Paying with scrip? Key considerations for junior ASX-listed mining companies

The past year has undoubtedly been challenging for companies in the lithium, rare earth and critical minerals sectors. To provide some context, lithium carbonate, lithium hydroxide and spodumene concentrate (6 per cent) prices have plummeted approximately 70-75 per cent from their 2023 averages.

These significant price drops, combined with tight capital markets, have made it difficult for some ASX-listed entities who operate in this space to raise capital. On the flip side, depressed commodity prices can present potential buying opportunities for those looking to invest now and expand their presence in the sector while asset prices remain low.

Boards of ASX-listed juniors must carefully consider how best to fund potential growth plans while conserving cash.

In the current market, we have observed some ASX-listed junior mining companies shifting towards scrip as the primary form of consideration for asset purchases and M&A activity, including in option and earn-in type arrangements. The use of scrip by an ASX-listed company can offer several advantages when cash is limited or capital markets are stretched, making equity raisings for acquisitions less viable. However, it is important to be mindful of the ASX Listing Rules and relevant guidance when using scrip.

Below is a brief list of key considerations when deploying scrip as a form of consideration in M&A activities:

1. 15 per cent placement capacity: In general, companies are permitted to issue new securities representing up to 15 per cent of their fully paid ordinary issued capital under ASX Listing Rule 7.1 without requiring shareholder approval, unless an exception applies. This capacity is automatically refreshed on a rolling 12-month basis, with no restrictions on the type of securities that can be issued or the issue price. Companies may also seek to ratify prior issues to refresh their capacity sooner. This affords companies a degree of flexibility to utilise their ‘placement capacity’ for smaller transactions or as partial consideration in pursuing larger transactions without requiring shareholder approval. Capacity considerations are also pertinent when a transaction involves the issue of securities as ‘deferred consideration’.
    
2. Additional 10 per cent capacity offers limited utility: Companies with a market capitalisation of less than $300 million and which are not included in the S&P/ASX 300 Index may seek an additional 10 per cent of placement capacity from shareholders at their AGM each year. However, securities issued under this additional 10 per cent capacity can only be issued for cash and, therefore, this additional capacity is of limited utility in M&A transactions (unless raising funds to pay cash consideration).
    
3. No capacity = shareholder approval requirement: If placement capacity is constrained or the number of securities proposed to be issued exceeds the company’s available placement capacity, shareholder approval will be required. ASX has reminded companies in a Compliance Update (ASX Compliance Update 09/23) that the time to determine whether an agreement to issue securities falls within a company’s placement capacity is the time at which the agreement is entered into. On the date of the agreement, the issue must either fall within the company’s placement capacity at that time or the agreement must be conditional on obtaining shareholder approval, in which case the company must not issue the securities until after shareholder approval is obtained.
    
4. Keep in mind floor prices: Should a company wish to base the issue price of securities being issued under its placement capacity on a variable metric – such as a VWAP over a period of time – it is prudent to include a floor price. This ensures that the maximum number of securities that could be issued under the transaction is always known. Setting a variable issue price without a floor could have unintended consequences for a company’s placement capacity in the future.
    
5. Utilisation of incentive securities: Performance-based incentive securities may be employed as part of the consideration package for a vendor and can be particularly useful where the target asset is speculative in nature, by tying the ultimate issue of shares to the performance of the acquired asset. ASX will permit the issue of incentive securities without their prior approval if the securities fit within the definition of ‘ordinary course of business acquisition securities’, as outlined in Guidance Note 19 (basically where a company issues securities to a vendor in connection with the purchase of an asset).
    
6. Change of nature/scale considerations: As part of the planning process, companies will need to consider whether the proposed transaction will involve a ‘change of nature’ or a ‘change of scale’. For ordinary M&A transactions by mining companies that involve the acquisition of mining tenements, it is unlikely that ‘change of nature’ issues will be relevant. However, the ‘scale’ of the transaction may require prior ASX clearance under Chapter 11 of the ASX Listing Rules before the transaction is announced (and generally ASX will look back 12 months to determine if, in aggregate, a change of scale has occurred). Seeking ASX clearance (if required) should be factored into any deal timetable.
    

Once a transaction has been finalised and is ready to be announced, companies should keep in mind that ASX will carefully monitor and scrutinise disclosures in the ASX announcement for the transaction to ensure it aligns with the ASX Listing Rules, Guidance Notes and Compliance Updates. Announcements which do not have regard to applicable ASX guidance can result in a need to provide supplementary disclosure (or, at worst, the ASX may require that the transaction be subject to shareholder approval even if the binding transaction documents did not contemplate this).

When it comes to announcing a deal, based on our recent experiences, ASX seems to be paying close attention to the following types of disclosures that are sometimes included in announcements of M&A transactions:

1. Peer comparisons: Peer comparisons (which can show relative size/potential compared to comparator entities) are evaluated on a case-by-case basis and ASX is likely to object to comparisons where the company is not at a comparable stage of development to the selected peers. Careful selection of peers is crucial, as ASX will not hesitate to demand the retraction or withdrawal of objectionable material. ASX has also flagged in a recent Compliance Update (ASX Compliance Update 08/24) that the easiest way for a listed company to avoid this situation occurring is to not publish peer comparisons.
    
2. Visual results: While it might be tempting to include images of geological samples in market announcements to highlight the prospectivity of a newly acquired asset, ASX strongly advises against reporting estimates of mineralisation based solely on visual observations. If companies nevertheless decide to report visual results, such disclosures are treated as estimates of mineralisation and must include (among other things) a full JORC Table 1, commentary on when assay results will be available and a proximate cautionary statement warning readers about the limitations of visual estimates.
    
3. Reporting the vendor’s prior results: It is permissible to report the exploration results of a mining tenement’s former owner, but care needs to be taken to ensure that all relevant disclosures are included in the market announcement. These disclosures should contain a proximate cautionary statement, commentary on the reliability of the exploration results, the proposed timing of any evaluation or exploration work that the acquirer intends to undertake and how the acquirer intends to fund that work. Reporting prior results is only allowed once; and any subsequent references to the former owner’s exploration results must comply with the ASX Listing Rules and the JORC Code.

If you have any questions about deploying scrip in M&A, please contact Andrew Ricciardi, Tom Barrett and Luke Paganin.