CHAPTER 2.3 Market Capitalization Fiona Perrott-HumphreyMarket capitalization is the value that the equity market places In addition to these factors, the prices of the commoditieson a company or a group of companies. Over the bulk of 2003 produced by mining companies can vary dramatically over anto 2008, the FTSE 350 Mining Index (the market capitaliza- economic cycle, affected as they are by movements in demand,tion of the world’s most important mining equity market) rose supply, and inventories. At differing points in the economicstrongly in relative terms against that of the FTSE Med 100 cycle, therefore, the multiple that the equity market places on(the top 100 companies listed in London) (see Figure 2.3-1). future projected earnings also varies. Figure 2.3-2 attempts toThis relative rise reflected a belief that the structural growth of encapsulate the influences on the market capitalization of theindustrial giant China had created a supercycle of demand for miners through an economic cycle.commodities to fuel its development that would last decades. The bulk of this chapter will expand on the factors thatThis investment thesis saw the risk premium of historically affect projected cash flows and the discount rate for miningcyclical mining companies reduced as they were treated more groups. However, it is worth noting at this point that stocklike growth stocks with strong underlying cash flows. markets contain a wide range of mining companies. The spec- Figure 2.3-1 also shows, however, that since mid-2008, trum includesthese same shares have seen a pullback of more than 50% • Junior exploration companies (ranging from owners of afrom their high point, based on fears that the turmoil in finan- resource that shows potential, but is still being proven bycial markets is feeding into the real economy and that even the drilling, to companies where a project is under construc-powerful growth engine of China would not offset demand tion and metal production proposed within a relativelyfalls for commodities elsewhere. short-term time period); These dramatic moves in market capitalization are no • Single commodity companies that nevertheless have amere lottery. The fundamental driver of valuation is the mul- range of both producing, developing, and explorationtiple the equity market places on the net present value (NPV) projects, and can spread across more than one geographicof future cash flows coming from mining projects. To arrive at region (e.g., Antofagasta plc; Impala Platinum Ltd.); andthe NPV, we need to understand factors affecting both • Large multinational diversified mining groups, spread • Projected cash flows and the discount rate applied to across the whole spectrum of project life cycles, but which them, and also produce a wide range of different commodities and • The multiple that the equity market places on that NPV. operate around the globe (e.g., Rio Tinto and BHP Billiton). By their very nature, mining companies cannot easily be Figure 2.3-3 shows a graphic representation of theoreti-valued on measures used in industrial and financial sectors— cal valuation of a single mining project. For the investor, histhat is, a straightforward price/earning ratio; EV/EBITDA investment risk (the y-axis) reduces as the knowledge of themultiples (equity plus debt divided by earnings before inter- mineral asset is expanded and as better data on the “modifyingest, tax, depreciation, and amortization); and cash flow mul- factors” that will affect the economic mining of the mineraltiple or dividend yield of current year’s results, because asset become more reliable (the x-axis). • In the early stages of development of a mining resource, VALUATION OF JUNIOR MINERS all potential earnings are in future years; Figure 2.3-3 certainly applies to the valuation of junior min- • Each single resource within a mining group’s portfolio ing groups, which are frequently listed on separate stock has a finite life and is a wasting asset; and exchanges (e.g., the Toronto Stock Exchange in Canada and • Variations of grade within each mineral deposit lead to a the Alternative Investment Market [AIM] in London). The volatile production profile over the life of the mine and regulatory requirements of these exchanges reflect the real- associated differing unit costs. ity that such start-up companies have no history of profit Fiona Perrott-Humphrey, Consultant to NM Rothschild (mining team), Director of AIM Mining Research & PURE P-H Strategic Consulting, London, UK 65
66 SME Mining Engineering Handbook 1,100 1,000 FTSE Med 100 Index FTSE 350 Mining Index 900 HSBC Global Mining Index (Diversified) 800 700 600 500 400 300 200 100 0 January October July April January October July April January October July 2001 2001 2002 2003 2004 2004 2005 2006 2007 2007 2008 Source: Bloomberg 2008. Figure 2.3-1 Performance of mining indices versus FTSE Med 100, 2001–2008or cash flows such as those required by the main boardexchanges. Because some are not yet producing cash flows Cyclicalor earnings, valuation methods applied to their theoretical Peakfuture earnings potential are different from those applied to Corporate Activityproducing miners. Capacity New Project Valuing exploration and development companies in the Restarts Announcement Multiplesresource sector is fraught with challenges because of the vari- Compressability of the information that becomes available through theexploration and development phases, and the fact that eachmineral deposit is in some ways unique in its characteristics. Rising Falling Metal MetalFor investors with relatively limited access to internal com- Demand Gross Gross Inventoriespany information and usually no opportunity for a site visit, Domestic Domestic Accelerates Spike Product Productthe process is made even more challenging. There is an oft quoted, slightly tongue-in-cheek maximfrom the mining world that says: “Why spoil a good deposit by Multiplesmining it?” The implication is that in many ways an explora- Expand Speculative Capacitytion junior is like a journey and the stock market believes it is Metal Rally Cutsbetter to travel hopefully than to arrive. When you arrive, afterall, and start producing an output that is sold at a fixed price, Cyclicalyour company can eventually be valued on the metrics applied Troughacross most other sectors of the stock market—that is, price/earning ratio; cash flow multiple, and dividend yield. And the Source: N M Rothschild 2008.eventual outcome may well be less exciting than the projectionsbuilt off limited data through the exploration and development Figure 2.3-2 Valuation drivers through the economic cyclephases (e.g., Figure 2.3-3 shows that the theoretical market cap-italization of a project is likely to take a dip when the project companies in particular, this can be a meaningless figure, foris commissioned), and probable disappointments occur in the in the early stages of exploration, it reflects no more than thetiming/scale of execution of the project versus targets in the fea- money already spent on the project. This could be overstatingsibility study (termed preproduction gap). This fall can then be its worth (if eventually no economically viable mineralizationreversed once revised production targets start to be met. is found) or severely understating it (if the deposit is proved In that sense, some commentators have compared anal- up according to early projections or even contains furtherysis of early-stage mining juniors to that of biotech compa- unexpected blue sky potential).nies—that is, not only are the data patchy in the early days ofthe companies’ undertakings, but there also exists a risk that Ore in the Groundthe final outcome could be a complete failure—either no eco- In the gold industry, a very basic guideline that is used for valu-nomic mineral body to exploit or no successful biotech prod- ations when little real data are available from the property is:uct. This is clearly a very different framework from valuation “gold in the ground.” This valuation will obviously shift alongof most other small companies, and the common methods with the ruling commodity price and average industry costsused to value juniors are listed next. (e.g., in 2007, analysts typically used US$30/oz of reserves for an exploration property but moved up to US$90–US$120 whenNet Asset Value the company proved that it could actually produce metal).In theory, the value of a company equates to the net asset value Companies can frequently trade at premia to the underlyingstated in its report and account. In practice, for junior mining value as calculated on this basis, if investors perceive upside in
Market Capitalization 67 Increasing Project Value Investment Risk Declining Production Potential Steady-State Production Project Construction Reserve Definition Preproduction Gap Production Gap Corporate Vision/Management Selection Commissioning Resource Definition Feasibility Prefeasibility Environmental Rehabilitation Target Definition Exploration Discovery Closure Stages of Project Development and Mining Source: Diamond Core Resources 2004. Figure 2.3-3 Value of mining project versus investment riskthe probability of resources being converted into reserves in the Probability-Weighted NPVfuture. There is thus a case for including some kind of weighted NPV is the most widespread valuation method for resourcevalue of measured resources as well as reserves, guided by the stocks and in theory is best suited to nonproducing resourceconversion ratio that the company provides. companies, given the nature of the development timeline— There are, of course, significant weaknesses with this that is, upfront exploration and development spending beforevaluation tool, primarily the following: the medium- or long-term benefits flow from producing metal from the mineral asset. The latest guidance note for mining, • The wide variances in the actual cost of extracting the oil, and gas companies listed on the AIM (London Stock metal from the wide range of different types of deposit. Exchange 2006), issued by the London Stock Exchange, states In addition to the mining costs, there are the logistical and that the Competent Persons Report should include (among political risk costs associated with operating in a number other things): “An estimate of net present value (post-tax) at a of far-flung emerging market regions. Finally, process- discount rate of 10% of reserves (or equivalent depending on ing costs vary dramatically according to the metallurgy Standard used) analysed separately and the principal assump- required, particularly in the case of platinum group met- tions (including costs assumptions, effective date, constant or als, which occur in a combination of five or six elements forecast prices, forex [foreign exchange] rates) on which valu- in differing ratios. ation is based together with a sensitivities analysis.” • The currency-adjusted cost, which can move significantly Because of the nature of commodity markets, the scope as the U.S. dollar moves against the so-called resource for variances around many of the items previously listed is currencies, such as the Australian dollar and the South significant even when the data available on the mineral asset African rand, and possibly even the Chilean peso. are becoming relatively well fleshed out. This is clearly so • The variance in regional categorization of resources much more the case in the early stages of development, when and reserves. On AIM, for example, a range of stand- the geological, and hence all the mining, parameters are prone ards is used to classify reserves and resources, with the to major revisions as more data become available. Russian gold producers and a number of companies in In the biotech industry, one of the analytical approaches the former Soviet Union using the Russian categories of is to develop a discounted cash flow based on the assumption reserves and resources. No formal publication has been that the products will be successfully developed and sold in released to enable investors to translate the more com- a way that is comparable to established industry peers, and plex Russian categories into the equivalents provided by then to weight that outcome based on the probabilities of dif- the Joint Ore Reserves Committee (Australia), the 43-101 ferent levels of success in order to come to a final valuation. system (Canada), or the South African Mineral Resource This approach is also being adopted in different formats in the Committee. junior mining sector. The argument for assigning weightings • The assumed operating margin obviously moves with sig- to the four key risk factors in the sector’s life cycle based on nificant shifts in the commodity prices.
68 SME Mining Engineering Handbookprobabilities is a compelling one. The risk factors represent Table 2.3-1 Price setting for metals and mineralsfour possible downsides: Category How Prices Are Set 1. Geological and exploration risk (versus early estimates of Base metals (Cu, Ni, Al, Zn) Terminal markets such as the London Metal the nature of the ore body) Exchange (LME) 2. Development risks Precious metals (Au, Pt, Pd, Terminal and bullion markets 3. Operational risks (versus feasibility study projections) Rh, Ag) 4. Financial risks Diamonds Influenced by the prices set by largest distributor, De Beers’ Diamond TradingOffset against these factors would be a weighting for a fifth Companyfactor—possible blue sky potential not included in an NPV Bulk minerals (iron ore, coal, Contract prices set by negotiations withbased only on proven reserves. bauxite, chrome, manganese, large consumers, either annually or more cobalt, uranium) frequently, while spot prices reflect more frequent fluctuations driven by short-termVALUATION OF PRODUCING MINING COMPANIES: demand and supply factors (and coalEXTERNAL FACTORS AFFECTING CASH FLOWS markets starting to reflect some of theTypically, investors looking at industrial companies have only features of terminal markets)one element to consider in interrogating management’s pro- Industrial minerals (titanium Influenced by individual contracts with majorjected revenue figures: projected sales volumes at a fixed price. dioxide, borax) consumersMining companies provide significantly more of a challengein this sphere in which, of the three key drivers of the revenueline, two are completely outside of management’s control.(Hedging does not allow one to control pricing, only to protect industry production (e.g., iron ore) or consumption amongagainst movements in them.) The three key drivers are that market’s players. To assist with the projection of future mining revenues, 1. Commodity prices; many of the major mining companies provide some kind of 2. Currency trends, which will determine the actual revenue earnings/NPV sensitivities with respect to possible moves in received in local currency terms translated from U.S. dol- either currencies or commodity prices. Rio Tinto, for exam- lar prices; and ple, in its investor presentations will state that, all other things 3. Production capacity (discussed in the “Valuation of being equal, a 10% move in the Cu price or in the Australian Producing Mining Companies: Internal Factors Affecting dollar would have a consequent percentage impact on net earn- Cash Flows” section). ings. These are key in running what-if scenarios on future cash flows at inflection points in the commodity cycles, in view ofCommodity Prices the scale of the moves in some commodity prices from theQuoted in U.S. dollars, commodity prices are typically bottom of the cycle to the peak (see Figure 2.3-4).determined on terminal markets, depending on cyclical sup-ply and demand factors. The latter were historically driven Spot or Long-Term Pricesby industrial consumers of the metals, but since the 1990s, Given the extent to which commodity prices can move over afinancial investors’ influence at the margin has been grow- cycle, revenue forecasts should be clear as to whether they areing. Table 2.3-1 shows the categories of metals and minerals based on spot or average long-term prices. At any juncture,and how their prices are set. The terminal markets provide the spot prices should be treated with some caution, as individualmost visibility on future price trends, whereas those not traded mining companies may have off-take agreements that are tiedon terminal markets tend to be relatively opaque. into contract prices (as well as volume parameters). This is In order to assess how realistic the management assump- particularly true of smaller, more opaque markets such as ura-tions are for future revenue streams, investors are unlikely to nium, cobalt, and molybdenum, where spot prices can varybecome experts in all of the commodity and currency markets, significantly from long-term contract prices at some points inbut there are numerous sources of external metal price and the cycle. In most commodity markets, there is also a slid-currency forecasts, including (but not limited to) most stock- ing scale of prices where premia to quoted benchmark pricesbroking research departments plus independent metal con- may be available for better-quality or more highly benefici-sultancies such as CRU, Bloomsbury Minerals Economics, ated products.and GFMS. The platinum group metals market is covered Finally, it is worth checking whether the theoretical priceby Johnson Matthey in a biannual publication, and diamond will always be available to a mining company operating in aprices for different ranges of gems are available from indus- new frontier region. Three particular issues which need to betry sources, the most well known of which are Rapaport and clarified in this regard areLenco (www.roughdiamondprices.com). These external sources are useful not only for the abso- 1. Whether there are restrictions on the potential buyerslute price forecasts that they may provide but also for their of the end product, which could influence the price paidinformation on key aspects of the structure of each spe- (e.g., gold in Zimbabwe);cific commodity market. That is, prices on terminal mar- 2. Whether revenue proceeds are able to be remitted freely outkets are influenced not only by overall supply and demand of the country where the mining operation is located; andfactors but by shorter-term levels of inventory metal held 3. Whether the company is being required by any of itseither by end consumers or in market warehouses. In bulk financiers to hedge (sell forward at a fixed price) any ele-and industrial minerals markets, on the other hand, pricing ment of its future production in order to mitigate politicalnegotiations are influenced by the level of concentration of risk considerations.
Market Capitalization 69 600 London Metal Exchange Copper London Bullion Market Silver 500 London Bullion Market Gold Bullion London Metal Exchange Platinum London Metal Exchange Nickel 400 Hamersley Iron Ore London Metal Exchange Zinc London Metal Exchange Aluminum 300 200 100 0 September September September September September September 2003 2004 2005 2006 2007 2008 Note: These are indexes, not prices. Source: Bloomberg 2009. Figure 2.3-4 Rebased commodity prices, 5-year viewVALUATION OF PRODUCING MINING COMPANIES: Table 2.3-2 Production cost standardINTERNAL FACTORS AFFECTING CASH FLOWS Guideline FeaturesThe graphic representation of the life cycle of a mining proj- Cash operating costs All direct and indirect operating cash costs relatedect (Figure 2.3-3) points to the factors that affect cash flows directly to the physical activities of producing metals,in a single‑project company. Any larger mining group would including mining, processing, and other plant costs;simply be a portfolio of such projects, often at very different third-party refining and marketing expense; on-sitestages of development. Those mining groups typically rated general and administrative costs; and net of by-productmost highly by the equity investors have the right balance revenues earned from all metals other than the primary metal produced at each unitof such projects to ensure that, as a major producing assetstarts to tail off in terms of grade and production life, oth- Total cash costs Same as cash operating costs plus royalties and mine production taxesers are waiting to replace it, thus achieving a relatively stableor growing production profile. This is the part of the revenue Total production costs Same as total cash costs plus depreciation, depletion, amortization, and accretion of asset retirementline that management teams are expected to influence, evenas sales and earnings remain vulnerable at another level to thevagaries of the commodity price cycle. Two key internal components will affect cash flows fromany mining project: Equity investors thus rate mining companies according to their relative position on the industry cost curve. Due to 1. The size and quality of the mineral deposit, which will deter- the lack of consistency across the industry in reporting cash mine the production potential. In the early stages of explora- costs of current production, it is worth clarifying what items tion, when confidence is low for geological information, the are included in various levels of cost categories. Table 2.3-2 potential is expressed as resources. At later stages, when drill- contains broad guidelines that are followed by conservative ing and geological modeling increases levels of confidence, investment analysts. the potential is expressed as reserves. The size of the eco- In addition to the cost items listed in Table 2.3-2, a num- nomic deposit will determine the life of the mine and the ber of other (sometimes indirect) expenses should be built into economies of scale to be achieved in mining it, whereas the any projections that cover the life of the mine: quality refers to the grade of metal found in the surrounding “waste” material (i.e., the higher the ratio of metal to waste in • Exploration and mine development expenses, which the deposit, the more economic the project). are typically capitalized. While not related to the cur- 2. The cost of extracting and treating the ore to turn it into rent production, hence the exclusion from the current cost a salable product (either an intermediate concentrate that per ounce, this expenditure needs to be incurred to ensure requires refining by an independent refiner or as a fully that there are ounces to mine in the future. A key element refined end product—for example, a gold bullion bar). of this is stripping. The correct measure of the minimum For a given commodity price, the cost of production can cash expenditure required should thus be “total cash costs differ substantially between projects (and sometimes plus the essential capital expenditure required for ongo- countries), thus affecting the profit margin earned. ing mining.”
70 SME Mining Engineering Handbook • Financing costs. Although not included in Table 2.3‑2, Cost of Capital these costs are a crucial element for junior miners in Although this should reflect a company’s weighted aver- particular (because they lack cash flow from produc- age cost of capital (equity and debt), estimates have histori- ing assets), both in ongoing total cash costs and in NPV cally varied between key resources markets, with the North terms. During the mining boom of 2003–2008, junior American analysts tending to use lower figures, ranging from miners had relatively easy access to equity financing, 0% to 5%, in contrast to their counterparts elsewhere who use usually at rising share prices each time, and this element numbers ranging from 5% to 10% (and interestingly AIM’s of costs could thus have been glossed over. Because of guideline number of 10% after tax). This whole spectrum of the cyclical nature of the industry, however, all aspects of cost of capital is likely to shift as the long period of easy and the company’s financing issues are also cyclical—access generally low-cost finance of 2003–2008 ends in a cyclical to debt financing alternatives; current cost of debt alter- economic downturn. Within these average statistics, however, natives and whether this is a fixed or variable element the capital structure of individual companies and the cost of of costs; nature of debt covenants; whether the lend- the financing available will also vary widely. ers demand an element of price hedging, which would cap the upside of the project in markets of rising prices; Political Risk whether the presence of quasi-government lenders on the These discount factors are even more subjective (usually book imposes any related constraints on the company biased by proximity), primarily because each company is (e.g., International Finance Corporation); whether the unique in its aggregate exposure to generic (or sovereign) company has fully covered the risks of borrowing heavily country risk (depending on where its many projects are and to from local banks in some of the emerging markets areas; what extent it can benefit from the portfolio effect of one type and whether companies have raised sufficient capital to of risk offsetting another) and to more specific project-related fund their projects to completion. risk (still within the context of political risk assessment). In • Cost escalation over life of mine. Because of the vari- addition, most investors will be pricing political risk in differ- able nature of each geological deposit, today’s snapshot ent contexts, depending on their own portfolio spreads, ability of a cost profile day is likely to be subject to significant to hedge, and even the requirement for a particular country change over the life of mine. Factors that can cause quan- exposure (where a mining company’s discount rate is then tum moves to the cost profile include shifts in grade or priced relative to other sectors in that country, rather than stripping ratios, or the need to move from open-pit to against other geographic regions). underground operations. In addition, the global mining industry is currently experiencing cyclical cost escalation Project Development Risk on the back of what has been (up to early 2008) the lon- The key elements that equity markets consider most important gest commodity price boom since World War II. It has in determining the success or failure of the vital development driven up both the cost and availability of energy, skills, phase—turning a geological resource into ounces of metal contractors, spares (e.g., tires), and materials. Longer sold—are the following: lead times combining with cost escalation in new projects • Security of tenure, given the need for most natural has seen capital expenditure estimates revised upward resource companies to operate in emerging market regions at almost every mining company reporting period, with • Key characteristics of the ore body, particularly grade implications for both NPV values and financing costs. • Operating parameters of open-pit versus underground • Smelting and refining costs. These can also vary signifi- mine development cantly over the cycle for a miner that does not have a fully • Plant and metallurgical efficiencies integrated operation (toll smelting agreements are fixed • Logistics, particularly when a mine is located in a remote or variable). The efficiency of the metallurgical process region in treating more complex metals such as platinum group • Management record in developing projects to production metals is a key competitive element among producers, as stage is the cost of energy in highly energy-intensive treatment • Environmental issues that demand increasing amounts processes such as aluminum smelting. of company time and resources, covering not only the • Royalties and taxes. Although in theory these should be physical environment (where actual legislation will gov- steady factors over the life of mine, in practice, commodity- ern company requirements) but also the socio-cultural related charges tend to be increased by governments as they component (where local communities are capable of watch the products’ prices rise through the cycle or as new stalling potentially viable ventures if their concerns are regimes take control in resource-rich nations. This trend of not addressed) so-called economic nationalism has been evident on almost every continent and resulted in a rise in the risk premium assigned to many companies operating in emerging markets MARKET CAPITALIZATION: THE FINAL ELEMENT some 6 months before concerns about a global economic Much of this chapter has covered the issues surrounding pro- downturn emerged. jected cash flows for mining companies and determination of the discount rate used to convert them into an NPV. The finalDISCOUNT RATES APPLIED TO PROJECTED element of a mining company’s market capitalization is theCASH FLOWS multiple which the equity market places on this theoreticalEven though this is a key factor in driving the end result of NPV. A number of factors affect it:the NPV, there are no guidelines that hold across the board. • Company profile in terms of the diversity of the assetThe major areas of difference rest on assessments of cost of portfolio by geography and by product. Typically,capital, political risk, and project development risk.
Market Capitalization 71 the large diversified groups such as Rio Tinto and BHP • Liquidity is lower than on the main stock exchange Billiton trade at a premium to their peers because of the boards, so when new information emerges or when a lower risk to cash flows if one commodity or region is small circle of original backers looks to take profits, the adversely affected. However, it is also true that at certain moves either way can be exacerbated. points in a rising commodity cycle, investors seek to play • Funds flowing into the sector in an up-cycle can exac- more highly geared or single-commodity companies that erbate price moves, due to the previous point, but when could see higher earnings growth from a lower base. At the cycle turns decisively or even has a short-term cor- these junctures, the diversifieds can be de-rated as “dull.” rection, lack of liquidity can also exacerbate downward • Growth potential. Although large producers may be less price adjustments. risky, investors also worry that it becomes increasingly • Political risk shocks have a much more powerful impact, harder for them to achieve earnings growth from a high given the exposure of many AIM mining companies to no base. In a world in which it is a challenge to find new, more than two or three major projects and their current large, low-cost resources to replace wasting assets, the propensity to explore in the new frontier regions without market will frequently rate small or mid-cap producers the portfolio insurance effect of the majors. more highly than their major peers. This can be particu- • Investment by a major in a junior can underpin the share larly true in the gold sector, where the shorter average life price, but that is not a guarantee that the share price will of mine means that wasting reserves need to be replaced be immune to either internal news flows or political risk more frequently than in other sectors. shocks. • Point in the economic-and-commodity cycle. Equity • Interest rate moves tend to affect those shares and sec- markets discount future earnings as far ahead as tors most reliant on future discounted cash flows for their 18 months to 2 years. Figure 2.3-2 illustrates that (counter- valuations (rather than more defensive sectors valued on intuitively) multiples compress as the economy heats up, near-term cash multiples). Exploration and development and commodity prices/earnings top out and expand in the mining companies fall into that category. depth of a recession as profitability declines. • Scarcity value can sustain juniors at what seem to be very • Merger and acquisition activity. Historically, major high underlying valuations, when there is a perceived upsurges in merger and acquisition activity have shortage of large new discoveries of a particular com- occurred at low points in the economic/commodity cycle. modity. This was the case with most diamond juniors dur- Companies with stronger balance sheets have sought to ing 2006–2007, given the dearth of new supply sources pick up assets at low prices from distressed sellers in announced in this sector for some years now. order to cut costs and undertake consolidation/capacity • Primary commodity exposure will also be key over time, closures. In the recent upturn, however, mining compa- as price rises across the spectrum have not been of the nies who believed in the supercycle were worried about same scale. In 2005, for example, iron ore price increases a shortage of new high-quality assets to fuel their future dwarfed those in any other commodities, seeing majors growth in supply. A rash of activity thus occurred at a Rio Tinto and BHP Billiton outperform peers for some time of historically high metal prices. Either way, a months. This was clearly a commodity in short supply belief that corporate buyers are seeking to add to their among the juniors at that time. asset portfolios can distort valuation multiples away from • Dividend distribution potential is in most cases a distant those based on fundamental analysis. prospect for most early-stage juniors, whereas substantial capital returns/special dividends have been a major driverMARKET CAPITALIZATION: DIFFERENCES of the main board mining sector during 2006–2008. WhenWITH JUNIORS the market is focusing on dividends and immediate cashAs indicated earlier in this chapter, there can be key differ- returns (usually in bear market phases), this becomesences in valuing early-stage mining companies and major another potential reason for the two markets to diverge inproducers. Equally, it is the case that at times during the com- their performance trends.modity cycle, indices of junior shares (such as those listedon AIM in London) can tend to show relatively high levels REFERENCESof volatility, not necessarily correlated to the performance Bloomberg. 2008. www.bloomberg.com. Accessed June 2008.of the FTSE Mining Sector Index. Reasons can include the Bloomberg. 2009. www.bloomberg.com. Accessed Januaryfollowing: 2009. Diamond Core Resources. 2004. www.mbendi.com/orgs/cjk7 • Internal flow of information is the primary share price .htm. Accessed 2004. driver for early-stage miners, as mispricing frequently London Stock Exchange. 2006. Guidance Note for Mining, Oil occurs on extrapolation of the earliest data. This is either and Gas Companies. AIM 16. www.londonstockexchange followed by disappointments (e.g., Tran-Siberian Gold, .com/companies-and-advisors/aim/advisers/aim-notices/ which in 2006 announced that one of its three key depos- aim-notice-16.pdf. Accessed December 2009. its would not be economically viable on the technology N M Rothschild. 2008. www.rothschild.com. Accessed originally assumed) or upgrades of blue sky potential September 2008. (e.g., Peter Hambro Mining, which acquired new licenses in auctions during 2006, and, as it met development and production targets on current assets, the market priced in the upside on a similar basis for newly acquired develop- ment assets over the following year).