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How To Strengthen the Investment Banking End of the Global Mining IndustryJoel Bainerman By far, the number one problem with the global mining industry is its reputation in the minds of most institutional and private investors. Despite the current bull market in mining stocks, once this cycle ends (and end it will because that is the nature of this business) everything will return to normal, and mining stocks will be largely ignored by the investment banking world. The damage this does to the industry, whereas every five-seven years it is thrown into a prolonged bear market, is what is killing the mining sector. That issue has to be addressed and corrected if the industry is to grow. Without a doubt, this lack of a "respectability" by the stock-buying public is the reason why in terms of market cap, the mining industry is minuscule compared to other industrial sectors. According to Mineweb, the entire market cap of precious metals is about $100-110 billion, less than half the size of Microsoft. Why some bulls out there may be rubbing their hands together and saying to themselves, "good, I like it that way, I'm in the stocks and it is in a bull market and they aren't yet" but that merely serves their personal interest. We all need to grow up a bit and concern ourselves with the long-term viability and strength of the global mining industry. There is more at stake in this issue than how much money some individual investors are able to make during the bull markets of the mining cycle. In order for this industry to mature and become a legitimate target of investment for institutions and private investors, a number of issues must be addressed. For instance, mining companies are extremely undervalued compared to many other industry sectors. Why is this so? Why do (did) high tech start ups receive such rich valuations at IPO when they show no more of a proof of "future earnings" than most junior mining explorers do? Why do entrepreneurs who run biotech start ups get such honor and respect due to their scientific background yet no such premium is given to the many highly educated and skilled geologists and explorers that run the juniors mining exploration companies? Why is there hundreds of millions of dollars of private equity for start ups and zilch for junior mining explorers? Something is not right here and we need to correct it if in ten years there are to be 100 blue chip companies in the mining sector and not 20. The basic problem is bad public relations. The problem is an intangible one: a perception in the minds of the investing public. Simply put, the investment banking side of the global mining business has a terrible image and lousy public relations. That needs to change if the fortunes of the industry are to grow and develop into a proper industrial sector that corporate and private investors deem worthy of investing in. A committee of the large, blue chip companies in the industry (all 20 of them) need to put their heads together and tackle this very issue as it is at the crux of the issue. The problem is the perception in the minds of the public that the purchase of stock in a mining company is not a valid investment option. The "speculative" aura of mining companies, and the volatility of cycles that afflict the industry, is why the mining industry doesn't get its fair share of private and institutional investors. If more people invested in the industry, market caps would rise and companies would have more financial options to carry out their long,term strategies, and be able to better cushion the downturns in the cycle. Instead of seeing growing companies who are actively mining worldwide, the public receives "high risk speculation" as a theme when it comes to publicly traded mining stocks. The positive side of the industry is never promoted. That is the task of the current leaders in the industry to see that this changes and that the public starts to get a more objective picture of the fortunes that can wait investors in mining stocks. It is important to strengthen the financial backbone of the existing blue chip companies because it may very well be a fact of life that can't be changed that the mining industry is plagued by cycles in its market, which may be natural and thus unavoidable. These cycles vary between 4-6 for base metals, and 7-10 for precious metals,and thus the "next downturn" is guaranteed. This is not the way other markets are structured. While other markets have their downturns on the volume side, and while this does have an affect on projected earnings and thus market cap, the problem in the mining industry is that it is so difficult (even for the blue chip companies) to raise capital during the bear stage of the cycle. Thus mining companies are at a definite disadvantage and hence they need to find a way to change the reputation amongst investors so that more investment in made in mining companies, their market caps are raised, and they can better deal with the inevitable down cycles. One of the major challenges for the world's mining industry is to overcome this dangerous cyclical aspect of the industry, and the impression in the investment community's eyes that mining is "risky" and "speculative." The only way to do this is to have the companies easier access to capital, at all times. This would happen if valuations in the industry rose to what they should be trading at. What needs
to be created is a "Friendship Society to encourage investment
in public mining stocks." If the size of the current investor
base in public mining stocks increased by just 20-25%, it would
probably create another 25-50 blue chip companies with multi-billion
dollar market caps as well as strengthen the capital base of
the existing companies. Another major
problem with the global mining industry is that it lacks access
to private equity. The problem for the junior mining explorer is that unlike high tech start ups, his exit has already occurred, and the struggle is to then issue the least number of shares as possible, yet because they are valued so cheaply, they wind up having hundreds of millions of shares in the public markets. Little wonder that so many of these companies have their stock selling for under a buck. It is the inevitable result of going public, and then doing ten dilutions, including warrants, just to see if the project will go anywhere. Now, compare that to what the well-financed, flashy high tech start ups have to work with. Why are geologists and miners who search or base and precious metals are as important to mankind's development as the start ups. Yet the playing field is not level. That is what needs to be corrected if the mining industry is to have a strong future. Think of it, for a junior mining company the "exit" comes at the start of their corporate history, instead of much later on. The company has already spent its nickel and there is no other way to succeed other than a higher stock price. If a buy-out does occur, it is relatively low in price compared to what some of these high tech start ups get sold for. Most mining companies, after having issued so much public stock, have a hard time getting a price of more than a few dollars, because there are hundreds of millions of shares and clearly, the company does not have the earnings to support so many shares. When you think through this process, you begin to realize that the low valuation of the mining stocks is a direct result of this condition whereby the only way to garner capital to grow, is to issue shares in the public market. While a "venture exchange" may sound great, the fact is by it being there, it is replacing the need for private equity, which may or may not flow to the industry had these companies not been able to go public so early on at such low valuations. In biotech, it assumed that no start up will actually put the drug they are developing on the market but will sell itself out to a multinational. Yet if that event doesn't happen for five years, there is plenty of private equity to support the start up until the exit. Yet during this time the junior explorers have had to do a public offerings, and then tiny private placements and pay a huge fee just to raise a few measly million while the start up picks up a phone to his venture capitalist and 90 days later another $5M in private equity is waiting for the company, as its valuation gets into the low hundreds of millions of dollars, and yet still private. What an unfair situation junior mining companies are in compared to these well-financed start ups. I would love to see the research which shows how many biotech starts ups actually developed a drug and then sold out to the multinational, or went public for hundreds of millions in market cap, and how many junior explorers actually brought a mine to market, either on their own or in partnership with a large producer? The numbers are probably the same. Yet compare the market cap of the junior mining company to that of the start up when the latter goes public or gets bought out? Whereas the start up has as its core assets, its intellectual properties, the early stage mining explorer doesn't receive the same respect when it comes to receiving a premium for its "accumulated brainpower" as does the biotech start up. Yet just as the start up "wins" by selling out to a major company in the field, or licensing the drug to a large company, so too does the junior explorer "win" when it gets acquired by the larger producers or another company decides to build a mine on its property. Yet to get to that same stage, the junior explorer has to go public immediately, whereas the start up can raise tens of millions of dollars of private equity. The amount a junior explorer can earn by discovering and then handing over the defined resource to a larger company for mine production and then just collect the royalties, is much, much less than what biotech start ups are worth when they go public or get sold off. Also, the junior will get paid the royalties over the life of the mine, which can be up to 20 years. Why is there plenty of private equity for biotech start ups and junior petroleum explorers, but not for junior mining exploration companies? This lack of private equity is the reason why the junior explorers have to go public so early on in their corporate life, sometimes a few months after establishing the company. Why are there literally billions of dollars in private equity available for biotech start ups but none for junior mining exploration companies? Why doesn't the investment banking community consider early-stage start ups as "risky" as they do junior mining explorers? Because mining companies that go public, and then have investment banks do research on them, are invariably previewing companies with no revenues, yet are already public. Early-stage high tech start ups don't have to contend with this label because they are still private. Because the junior mining explorers, for lack of private equity, are forced to go public very early in their corporate life, and then become the subject of research by investment banks which must always write how "speculative" the stock is, as the company has no revenue. That doesn't happen in early-stage start ups because there are no research analysts calling them "speculative" because they are awash in private equity and aren't forced to issue shares to the public in order to advance their R&D and product development. While there is nothing wrong with the Canadian venture exchange, and the Australian experience with public funding of junior mining companies, the function of stock exchanges is to fund later-stage companies, not early-stage start ups. It is clear that many junior mining companies would be much better off putting off their IPO until much later on in their corporate life so they don't have to deal with being a public company at too young of an age before they have the manpower to deal with the responsibility of being a public company. Even though the monthly expenses of junior explorers can be tiny, they still have to deal with the responsibility and cost of being public companies. If they were able to stay private longer, they would be able to focus strictly and solely on their exploration work, and be able to reach these discoveries quicker, thus enabling the large joint venture partners to come in sooner and thus the time lag between discovery and production will be shortened. It is interesting to note that while there are some junior explorers for natural gas and petroleum that are public in Toronto or Vancouver, there are also many that are owned by a "private trust" that was set up to invest in these companies, essentially private equity but not packaged as a fund, but as a pool of money. The market caps and image of many of these gas and petroleum juniors are much higher than for junior mining explorers. Many junior mining companies have hundreds of millions of shares in the market, and thus their shares sell for under a buck. That doesn't happen with the juniors in the natural gas and petroleum exploration, as there is money in the various "investment trusts" to provide an alternative to going public so early on. When there are hundreds of millions of shares outstanding, it is difficult to trade for more than a few bucks, and thus this keeps valuations low industry-wide. That type of "trust" investment doesn't exist for investors in mining companies, and thus with the lack of any private equity, most of the juniors are forced to go public too early in their corporate life This makes the entire sector less efficient in its use of capital and how much capital is required at any given time to allow the company to grow. If junior mining explorers are spending so much time on road shows, and with investment bankers, to raise a few million in a private placement, that is time spent away from the resource. Those in charge of the future destiny of the mining industry (ok, I know there isn't anyone like that, but there ought to be) should begin to think about how to correct this problem so that young companies have a longer period to grow, before they enter the public markets. Going public should not be the method in which to finance early stage exploration. Private equity is a much more efficient method with which to fund these companies. Solutions Someone needs to investigate this and find out why in the world of investment banks and private investors buying stock of public companies, one speculative company from one sector enjoys a form of private equity, while the other does not. A lobbying group needs to be established to convince the stock-buying public that investment in public mining stocks are a respectable and solid investment opportunity. Unless these two paths are embarked upon by some body of representatives of the global mining industry, ten years from now the situation will be the same as it is today. A group of the blue chip companies needs to sit down and form an umbrella lobbying arm to make sure that something is done to improve the image of mining companies as an investment target, and to find ways to encourage more private equity into the industry at the level of the junior explorers. Joel Bainerman ___________ |
