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Capital Raising

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Why do companies raise capital?

Companies typically raise capital from investors for 3 primary purposes: growth, sustaining operations, and re-balancing the capital mix.

Companies typically raise capital from investors for 3 primary purposes: growth, sustaining operations, and re-balancing the capital mix.

Growth

Raising capital for growth is a common strategy for companies to enhance value to shareholders. This strategy either allowed companies to apply funds to enhance the value of an existing asset, or to acquire an external asset with benefit to the existing business.

For instance, a mining company may raise funds to support a drilling campaign and expand their resource inventory. Alternatively, the company may choose to purchase another deposit with the funds to supplement an existing resource or operation.

An example of this was Northern Star’s 50% purchase of Kalgoorlie Consolidated Gold Mines (owner of the Super Pit Gold Mine) from Barrick for US$775m in late 2019. This transaction was partially funded via a A$765m placement. Fresh clients successfully participated in this placement.

Sustaining operations

Companies may also require additional capital to sustaining existing operations and for working capital. This is common for companies undertaking projects with large upfront costs and long execution timelines.

Re-Balancing Capital Mix

Companies may also choose to raise capital to rebalance its capital mix. This is common for companies with outstanding liabilities who choose to use raise proceeds to pay off debt.

For instance, Peninsula Energy raised funds in mid 2020 to fully repay the company’s US$16.8m term debt which is expected to save shareholders ~US$2m per annum in interest costs. This has allowed the company to continue existing operations debt free. Fresh investors successfully participated in this transaction.

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