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Investors to blame for supporting dithering juniors

20th January 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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VANCOUVER (miningweekly.com) – In the aftermath of several key mining-related indexes having dropped significantly since 2011, the mining industry as a whole, and particularly the junior explorers and project generators, have had to “reset” and undergo a paradigm shift from being project promoters to true value creators.

This was the message institutional investor adviser Jayant Bhandari relayed to affiliated investors attending the Cambridge House International Vancouver Resource Investment Conference 2015.

He pointed to several indexes, such as gold, gold exchange traded funds, the Market Vectors Junior Gold Miners ETF and the TSX, having each shown significant declines since 2011.

The fountainhead of the problem, Bhandari argued, was uneducated investors, who were supporting dithering companies that were not creating value.

He had found that investors were often influenced by passions and half-truths such as the myth of price leverage in a rising cost environment and fads, such as the axiom of “grade is king”, or the promise of a new geographic “flavour of the month”, such as Colombia or the Yukon, all while failing to look at the specific company’s financial and legal documents.

Bhandari explained, for instance, that the ‘grade is king’ fad was not always true. In the case of a 6 g/t deposit, 2 km below surface, a 0.8 g/t deposit near surface with easily leachable ores trumped the higher-grade prospect.

He added that too many investors relied excessively heavily on companies’ presentations for information, failing to take into account that these were not legal documents, but marketing material that did not necessarily disclose everything that an investor needed to know.

Bhandari noted that valuations were often based on myths rather than empirical measures, such as profitability, cash flow and discounted cash flows, which had in the past resulted in several projects, with no hope of success ever, trading for hundreds of millions of dollars.

He urged investors to take the time and do thorough due diligence before taking a position in a mining company. “Look at and use the technical disclosures that Canadian companies are forced to file regularly with securities regulators."

IRRATIONAL MARKET PARTICIPATION
Lifestyle companies were often given life by the irrational market participation of investors.

Bhandari said company valuations were unlinked to fundamentals. Royalty streaming firms and miners were oftentimes found to be trading at several times their net present value, while certain development projects were sold at outrageous prices. He highlighted that overvaluations and wealth destruction was affecting investors all the way from the senior miners down to the juniors.

In today’s mining ecology, miners were found to be aggressively trimming costs, while simultaneously lifting the grades in their mine plans. They were also lowering their capital budgets and had foregone exploration budgets as they were riding out the turbulent economic cycle.

“Miners across the board are in a survival mode and are not generating any value for investors. There is an entrenched culture of promotion, rather than value creation,” Bhandari stressed.

He argued that the mining industry as a whole needed a “reset” – a paradigm shift across the whole value chain, adding that the market had not bottomed out yet, as many juniors were still too expensively valued.

Bhandari said investors should focus on value by not investing in a company that did not provide an internal rate of return above 20% at conservative product prices.

Investors should also conduct thorough due diligence and risk/reward analysis before investing money in an explorer about to start a drilling campaign.

He noted that a lot of cash was available in today’s market for companies with valid projects, but investors had become skittish of the mining/exploration industry as they wanted returns and were not getting any.

“There is profit to be made from the expected volatility, turmoil and mergers and acquisitions still to come, but it will only come to investors with a solid mooring on the fundamentals,” Bhandari stated.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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