A surge in the popularity of blank-check companies in the U.S. as a means to raise money and list on a stock exchange has carried over into the mining sector, with one mining investment expert lauding the capital-raising method as an overall positive for metals and mining.

"Any time you have another source of capital for the sector, it's a good thing," said Douglas Silver, a veteran in mining private equity who retired as portfolio manager at Orion Resource Partners in December 2020.

Blank-check companies, also known as special purpose acquisition companies, have become an increasingly popular type of IPO. As a percentage of traditional IPOs in the U.S., SPACs accounted for 56.3% of activity in the third quarter of 2020, according to a recent analysis by S&P Global Market Intelligence. The percentage grew from 35.3% of IPOs in the second quarter of 2020 and 26% of IPOs in the third quarter of 2019.

Traders on the floor of the New York Stock Exchange. Source: Thinkstock

SPACs, which allow a company to raise cash, list and then pursue transactions, have attracted high-profile mining entrepreneurs including Robert Friedland, executive co-chairman of Ivanhoe Mines Ltd. Earlier this year Ivanhoe Capital Acquisition Corp., with Friedland as CEO and chairman, completed a $240 million IPO in a blank-check company. While the company's plans are not set in stone, it has listed battery-related metals as a key focus.

"We intend to seek a target in industries related to the paradigm shift away from fossil fuels towards the electrification of industry and society," Ivanhoe Capital Acquisition said in a Jan. 6 prospectus.

In another recent SPAC, African Gold Acquisition Corp. raised $360 million to target gold-mining assets. And in late 2020, MP Materials Corp. listed in a reverse takeover of SPAC Fortress Value Acquisition Corp. in a $1.5 billion transaction. MP Materials, which mines rare earths at its Mountain Pass operation in California, raised $545 million through the reverse takeover to fund its plans "to restore the full rare earth materials supply chain to the U.S., closing a critical defense and economic security gap," the company said in a third-quarter 2020 report

Time-constrained cash

Silver, also the former CEO and chair of International Royalty Corp., which was acquired by Royal Gold Inc. in 2010, noted that SPACs may have drawbacks in targeting mining assets, especially in terms of timing. There is typically a time limit in the two-year range on how long a SPAC can hold the cash it raises. If it does not make a deal within the time frame, it must return funds to shareholders. But Silver noted that mining assets often take a long time to vet and secure.

Taking a heavily critical view of SPACs, Franco-Nevada Corp. Chairman David Harquail told Market Intelligence that the structure is a sign of overheated markets focused on short-term gains. "A good capital market would focus on allocating capital only to properly [assessed] projects with a good appreciation of the inherent risk-return," he said. "What we have instead is increasingly a capital-market casino focused on shorter-term trades leveraged with financial engineering."

Harquail singled out rewards to SPAC sponsors, which can get a 20% promote of blank-check IPOs, as an issue. "SPACs are a new way for their sponsors to financially engineer returns to themselves," he said. "It is a solution to a problem that doesn't exist." In his view, the market already has ample liquidity for higher-quality mineral assets and shell companies ready for reverse takeovers.

Quicker listings

Still, one other advantage of SPACs is they may offer quicker timelines for companies wanting to list. James Litinsky, chairman, president and CEO of MP Materials, noted in a 2020 interview with Yahoo Finance that the company had been pursuing a traditional IPO, but a listing through a SPAC reverse-takeover ended up being a faster way for it to get to market and gave greater certainty to investors on valuation.

"And I think when you look back at ... 2020, there's probably going to be some great success stories in SPACs," Litinsky said in the interview. "And then there'll be ... some failures."

As an investing mechanism, Silver also cast SPACs as potentially giving investors exposure to mining in areas where private equity has typically played a larger role. A SPAC allows for a pool of cash to go hunting for assets, much like a mining-specialized private equity fund, giving a listed vehicle flexibility in opportunistically securing assets.

"Some people are calling it the poor man's private equity," Silver said.