The goose lays the golden egg. Be careful not to slaughter it.

A few days ago, I had a chat with Power Metal Resources CEO Sean Wade — listen here — where he makes it clear that he’s had enough of the inability of the London market to properly value companies, or to offer finance on terms which find a balance between fairly rewarding new potential investors for taking on the risk, while also leaving current shareholders and the company itself with a large enough piece of the pie.


I am, of course, paraphrasing — but that is the gist of it. It’s worth noting that POW (and spin-off GMET) are two of the only companies to have managed to raise capital at a premium this year. And if they have had enough, it’s not hard to see how others might be feeling.

On a professional level, I have an FCA-registered research note out on the company with a 3.3p price target. I can’t say much more on this, other than that the company is keeping its promises and should therefore see a price target increase later this year. The UEE IPO, which is seeing considerably more interest than expected — alongside the GSA acquisition and recent Power Arabia news — are new developments not even considered.

One quick thing on POW, before you get too excited about the 1,600% share price rise today — this was the result of a consolidation to get onto the USA OTC market.

The macro factor

Let’s take a quick gander at other recent placings:

Baron Oil — 0.14p a year ago, raised at 0.05p.

ARC Minerals — 3.9p in November 2023, raised at 1.8p (with warrants)

Avacta — 154p in October 2023, raised at 50p.

Tekcapital — 17p a fortnight before due to successful MicroSalt IPO, raised at 10p.

Mkango — 12.25p in mid-December 2023, raised at 5p.

Cizzle — 2.6p the day before, raised at 2p.

There’s many more you can name, and presumably will be more to come. Now, of course, there are some macroeconomic factors to consider.

The base rate remains at 5.25%, and while markets are pricing in multiple rate cuts this year, they are basing this on following the US; the UK has arguably stickier inflation, a black swan could come at any time, and MPC member (admittedly the most hawkish) Catherine Mann just vocally warned investors they are being too optimistic.

The AI bubble which continues to supercharge the ‘magnificent seven’ tech stocks, dragging all excess capital into the large caps, is not helping either. When analysts continue to send Nvidia’s price target skywards every other Tuesday, it’s hard to convince the average investor to pile into a high-risk exploratory mining or early-stage biotech stock.

That’s facts. This, so far, is not a condemnation. The reality is that you have two kinds of investors on the market: the risk averse and the risk avaricious. The risk averse is getting above 5% in a savings account, and the risk avaricious have the top picks of the S&P 500, or whatever hit AI start-up of the week to jump into.

And then there’s the lure of cryptocurrency — the AIM market has to share the pool of funds set aside for high risk investing with a whole new asset class.

I do think that as rates come down (hopefully to about 3%), and the AI bubble bursts (though I understand many believe the fundamentals justify the valuations — spoiler, they don’t), that money will flood into undervalued small caps as the improved risk-reward ratio and just basic balance sheet fundamentals as a result of this sustained downturn come into play.

But for this to happen, something needs to change.

The broken market

One of my most popular articles from last year was on the constant baloney that companies are being allowed to get away with. I rechristened them to avoid the typical litigious nonsense, but we are coming to an inflection point.

The shenanigans at AskUnpile are nothing short of criminal. Investors piled millions into the company and the CEO has effectively stolen this money. While investors may not get their cash back, Jack Curtainer will have to look over his proverbial shoulder for years to come.

It smacks of the £1 million bonus the CEO of Tim’s Tributary took before the market cap of the company collapsed as he exited stage sideways.

Or perhaps the DPQM board mischief with lender Anavio. Cut it any way you want, these bonds were at best an extremely poor deal — and at worst, something legally prosecutable.

I think it’s also worth touching on Verticante Minerals once again — capex for its nickel project was initially said to be ‘at least 35%’ higher than previously promised. Based on a 35% figure, this seemed to be a fixable problem (if not great), but after the CEO exited with his millions, this figure ballooned to $1 billion of capex. There is literally no way this level of financial incorrectness was simple incompetence.

Then there’s the previous lender for TM2 — now out of the picture, and unable to raise the promised funds — who (and this cannot be proven) was potentially shorting the company and forward selling shares.

I’m sure there are many more examples I am not paying attention to — there are over 800 companies on AIM alone.

But the first organization I am going to point my finger at is the FCA.

They can at the very least name and shame these charlatans. They can go after CEOs and fine them their ill-gotten gains. There is a huge difference between a high-risk company folding after everybody tried their best (and this also happens all the time, the clue is in the ‘high-risk’ name), and a company raising funds from investors, and then tanking as management escape with sacks of cash.

Now, I do understand that the AIM market is NOMAD-regulated. I get that there is a trade-off to be had, as going after companies for minor infractions is going to demotivate private companies from listing when they are already a bit dubious.

But at some point, this argument is not acceptable. The NOMADs and the management need to be held to account. This is the purpose of a regulator, and having an adviser, and a big part of the reason why companies need to spend hundreds of thousands of pounds on prospectuses, IPOs, and annual fees.

Do your job. Regulate the market, or companies are not going to list.

And the rest

Here’s the deal. Market makers, brokers, family firms — I’m talking to you.

Stop destroying the market.

I know it’s easy to manipulate share prices and trades. To put such a large spread on an illiquid stock that nobody will invest in it. To make some listed companies effectively illiquid.

It’s easy to only offer finance to small cap companies running out of money on terrible terms, destroying shareholder value. To demand significant discounts, and warrants, alongside the CEO’s first-born child, but you are killing the market.

I will not speak to your sense of ethics as money rules the world. I want you all to consider why brokers are continuing to close or consolidate — and why more and more investors continue to completely ignore AIM, or small caps in general.

Retail, at least, is getting wiser. Before investing in a company, an investor looks for the most recent results. Calculates monthly cash burn. Accounts for any funding raised since, and then figures out when the company next needs to place shares.

The problem is that investors should instead just be investing in good opportunities, and not worrying too much about when the next placing comes. Because that cash, while dilutive, should be on fair terms and be used to advance the company — increasing the share price to above the pre-placing price before the next one comes along.

But the terms of each placing are now so horrendous that brokers are creating a sell-fulfilling negative feedback loop of epic proportions. And while brokers are meant to keep a company’s confidence, this is very clearly not happening. A CEO must simultaneously either keep quiet or deny a placing is coming, while brokers continue to leak the fact they are being approached for capital.

Then there’s the tell-tale forward selling, forcing the proposed placing price to fall by a corresponding amount — meaning less cash for the same dilution, and more placings needed, and sooner in the future.

Placees with warrants can just flip the shares for a free ride. Those without warrants still get a giant chunk of the company at a considerable advantage compared to long-term holders and simply wait for a spike before selling. Brokers refuse to keep any shares themselves.

POW may have said they have had enough, and the company does have other options. But today one company went even further.

C4XD’s RNS is absolutely damning — the proposed voluntary delisting, in the words of CEO Dr Clive Dix, is being conducted because it has concluded that becoming a private company is ‘the most effective way to maximise Shareholder value in the longer term and increase the potential for the long-term success of the Company.’

Dix goes on to say — and I am sure other CEOs can empathise — that:

‘Despite delivering on our strategy including three major deals with leading pharmaceutical companies demonstrating our scientific expertise and deal making capabilities, the recent downturn in the financial markets has adversely impacted our share price, and with it, our future ability to raise funds in the public markets. The Board believes the current public market valuation does not reflect the underlying potential of our business or our achievements to date and that this is unlikely to change in the short-to-medium term. We believe that we can potentially access a larger quantum of future funding required to accelerate our strategy as a private company.’

HNWs are leaving AIM to invest all their spare cash in EIS-qualifying companies (and the AIM companies they do invest in, are more and more the few that remain EIS-qualifying). The tax advantages are exceptional, and perhaps there needs to be some kind of government incentive to invest in listed small caps beyond the current ISA inheritance tax advantages.

But here’s the bottom line.

If the FCA will not regulate, and the market makers will not make a market, and the brokers will not offer finance on reasonable terms — then investors will not invest.

And if rates stay higher for longer than expected, or the AI bubble is actually sustainable, the small cap market could collapse.

Good luck getting eggs out of a rotting goose.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Charles Archer is an experienced financial writer specialising in monetary law. With a background in stock market and private equity analysis, he’s worked for many years as a freelance investment author,...

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