Web Exclusive: Taking your mining company public

By |  February 15, 2012

Are you wondering whether to take your mining company public and, if so, how to do it?

Management teams begin to ask themselves those questions as they approach the normal threshold for going public in terms of revenue and operating performance. Due to the expenses of going public, that threshold today generally suggests the company have at least $20 million annual revenue and at least $2 million in cash. The revenue number can be lower for mining companies with large reserves.

In order to properly attract the investing public, the company must also be operationally strong with robust prospects. The company should have a strong management team and a consistent history of double-digit growth that will continue into the foreseeable future.

Assuming the thresholds are met, a company’s management needs to weigh the pros and cons of going public.

Pros of going public

Today, there are many good reasons companies continue to go public. Chief among them is increased ability to raise capital. Mining companies often need capital to fund expansion, update equipment, pay for research and development, or even to pay off debt. Going public gives the company’s securities a “public” marketplace that far exceeds the size of private marketplaces. The company has greater access to capital markets as management now has the option of issuing additional stock through initial and secondary offerings. As the network of potential investors expands into the broad public arena, the likelihood of raising money expands.

Public companies often enjoy greater valuations and access to more favorable borrowing terms. The public company can offer its stock to the public at large, greatly increasing the pool of potential investors and generally leading to increased demand, which, in turn, yields a higher stock price and net worth. As banks use a company’s debt-to-equity ratio as an indicator of loan risk, the increased net worth should allow the public company to borrow money on more favorable terms.

Going public also makes the company’s stock a kind of currency, further increasing the company’s ability to fund operations and growth. A public company’s stock can be used to purchase other companies and services and be used to attract, retain and motivate key personnel.

Going public also provides an exit option to original investors. Normally the company’s stock becomes more liquid as the company goes public, offering original investors the opportunity to financially capture years of hard work by selling at least some of their stock. They may want or need to purchase a new car or home or at least diversify their investments to minimize portfolio risk.

Going public can actually help a company retain control when compared to raising capital through a venture capital firm. Often venture capital firms insist on a decision-making position, something typically avoided when going public.

Another reason to go public is that it can be an outward sign of credibility, achievement and prestige.

Cons of going public

The pros of going public are quite enticing, but are they enough to overcome the cons?

Being a public company is something akin to being in a fishbowl with the public looking in. Companies should be prepared to explain their decisions to shareholders. Companies will feel pressure to perform and increase share price from quarter to quarter. This can lead to short-term thinking and actions that are counterproductive to the long-reaching goals of the business.

Another con to going public is the large expenses involved. Depending on several variables, including the size of the offering and method of going public, expenses can exceed $1 million. Of course, proceeds raised during the go-public process can be used to pay for these costs. However, doing so will increase dilution.

Another form of dilution comes from selling shares to the public. When dilution occurs, original investors own a smaller percentage of the pie. They trade ownership percentage for the hope that selling shares yields a stronger company with increased prospects that essentially creates a much bigger pie for which their smaller percentage is worth more. While that’s the plan, companies that fail to deliver strong results can find their claim on the company to be worth less.

There are also ongoing costs and compliance burdens to consider. Complying with SEC disclosure and reporting requirements take time and money. In addition to running the business, management and accounting staff need to report each quarter, answer shareholder questions and prepare annual 10Ks and other filings. Management may find significant resources are diverted away from operations. Costs are also incurred by various third parties, including investor-relations firms, auditors, attorneys and filing agents. Third-party costs alone can exceed $300,000 per year, even for small companies.

How to go public

Assuming the pros outweigh the cons for your mining business, the next step is to consider how to go public. While there are a number of ways to go public, two of the most common are IPOs and reverse mergers, each having their place.

IPO – An IPO (Initial Public Offering), as the name implies, is the first public sale of stock by a company. In an IPO, an investment bank guides the company through filing regulatory paperwork, helps authorities review the deal and underwrites and issues shares. A traditional IPO necessarily combines the go-public process with raising capital.

There are various benefits to going public through a conventional IPO. IPOs generally raise more money, usually $20 million or more. Also, IPOs can make it easier to create market support for a stock, as most companies start out trading on a major exchange. And IPOs are the ultimate outward sign of credibility and achievement; they buy a lot of prestige.

On the downside, conventional IPOs are typically the most lengthy and costly way to go public, often taking a year to complete and costing $1 million or more. And IPOs can be risky for companies because the deal depends on market conditions. If the market is off when it’s finally time to go public, often a year or more after starting the process, the underwriter may pull the offering.

Reverse merger – A reverse merger, also known as a reverse takeover (RTO) or reverse IPO, takes place when the shareholders of a private company purchase control of a public shell company and then merge it with the private company.

Prior to the reverse merger, the public company is called a “shell” because no active business resides within it; all that remains of the original business is its organizational structure. Today it’s common that the private company receives at least 95 percent of the shares of the shell. The shell’s board of directors steps down and is replaced by the board of the private company. Assuming the shell is registered with the SEC, the private company avoids the time-consuming and expensive review by the SEC because that has already taken place with the original company. The net effect is that the formerly privately held company is transformed into a publicly held company.

A reverse merger can be an attractive strategic alternative to the IPO. Reverse mergers are less time-consuming and less costly than traditional IPOs. Reverse mergers can be accomplished in as little as 30 days. The price of shells varies widely today depending on its type and condition, where you get what you pay for. Today, a good, clean-reporting Over-the-Counter Bulletin Board (OTCBB) shell that’s at least 98 percent deliverable and comes with lots of original shareholders will probably cost in the $350,000 to $500,000 range. And some of the best shells have several hundred or even a thousand or more original shareholders, exceeding the minimum shareholder requirement to up-list to a major stock exchange such as the NASDAQ or AMEX.

In a reverse merger, the processes of going public and raising capital are separate. The two processes normally take place concurrently but can be separated if desired, avoiding the risk of market timing faced in an IPO. Reverse mergers are often chosen by companies raising between $5 million to $30 million.

On the downside, reverse mergers are viewed as less prestigious than an IPO. And you have to do your homework to make sure the shell you’re acquiring has good bookkeeping and is clean and not tainted by pending liabilities or lawsuits. Additionally, shells can come with angry shareholders who will dump their stock the first chance they get. However, finding a shell that has been a shell for the past 10 to 20 years can eliminate much of the risk of angry shareholders because shareholders will be delighted to finally merge with an operating company with strong prospects and potential share-price appreciation.


Operationally and financially strong, private mining companies with robust prospects have the ability to attract the investing public. For these companies, it makes sense to consider the pros and cons of going public and the method by which to do it.

If you’re considering going public, your next step is to find a good investment banker. Sit down and explain your business and goals with the banker. The banker will explain the various private and public options you have. He or she will offer his or her opinion on what fits your mining company best and leave you and your team to decide what course to take.

John Hickey is president and CEO of Valley High Mining Co. Valley High Mining is owned by Hickey Freihofner Capital (www.hfcap.com). The author invites questions at johnthickey@gmail.com.

This article is tagged with , , and posted in Web Exclusives

About the Author:

Comments are closed