Background to this Series of Posts

This is the 2nd in a Series of 17 Posts that will be published on this Blog each Tuesday and Thursday from September 16 to November 11. All 17 Posts will be filed under the Blog Category ‘Valuation of Mining Companies’. For previously issued Posts in this Series click here. We hope you find this Post Series useful.

Investment Overview

Given recent and ongoing macro-economic change there has been increasing focus on the mining industry, and in particular on gold, silver, uranium, and base metal mining. This Series of Posts has been written to assist investors and investment advisors in their review and analysis of mining explorers and producers.

With respect to investment in publicly traded shares of mining companies, aside from company specific research and due diligence matters set out in these Posts, we believe investors who purchase or sell such shares should focus on at least the following things:

1. Current and prospective macro-economic conditions at the time they undertake their company research and make their investment decision.

2. It is critically important to understand the supply/demand and commodity cycle characteristics of the mineral(s) the company is exploring for or producing, and where the commodity price is in that cycle at any given point in time.

3. The fact that at any point in time both value and price are time specific, but in the case of public market shares at any point in time value and price might not coincide, particularly in periods of abnormal market conditions or unusually volatile markets, although over time they should converge.

4. In normal day over day stock market trading activity price is more important than ‘value’ to day-traders, whereas ‘value’ is more important to investors who hold for the long term.

5. Both value and price can change rapidly with positive announcements (e.g. a discovery), or negative announcements (e.g. an unexpected escalation in development or operating costs). In the context of stock market share price and trading patterns, value and price also can change rapidly in circumstances of abnormal stock market activity or volatility that has less to do with underlying value fundamentals and more to do with unusual near term market influences.

6. Many exploration companies are either not operationally successful or they financially fail.

7. Those exploration companies that find significant resources and reserves are an important source of prospective mineral supply, whether they sell them to an existing producer or themselves exploit them through to production.

8. Share liquidity (particularly in Small Cap) exploration companies can be poor depending on the size of a given company shareholding and the daily average trading volume of that company’s shares. In this regard, see details of average daily trading volumes, moving average trading volumes, and share price volatility in the ‘Comparators’ and ‘Company Details’ pages of www.StockResearchPortal.com. This is partially due to the fact that shares of many Small Cap exploration companies are not qualified or are otherwise unsuitable for many investment funds.

9. Where a significant minerals discovery is made there can be significant upside leverage in share price.

10. There are two fundamentally different types of exploration, being exploration in areas where previously few or no commercial resources have been found, and exploration where commercial deposits previously have been found and exploited. Broadly, one would expect the latter to be somewhat less risky than the former, although it far from certain or even probable that this will be true in the case of any given exploration play.

11. It is critically important when considering whether to invest in any given mining explorer or producer to assess the Board and Senior Management in the contexts of:

• integrity, avoidance of conflicts of interest, ability to access the capital markets on comparatively undilutive terms, and time and effort spent on the company. With respect to the latter, many (in particular Small Cap) mining executives spread their time and efforts among more that one company, and this is something that needs to be carefully considered in the context of whether this is potentially negative in a given company circumstance;

• the knowledge and experience of staff geologists, geophysicists and engineers, and whether they have worked successfully together in the past; and,

• the balance in the relationship between actual money invested by the Board and Management, option grants and terms, and the number of outstanding participating shares. Stated simply, how well are the Board and Management’s respective economic interests balanced and aligned with those of company shareholders.

12. Understanding a company’s property(ies) and project(s), including understanding:

• their physical location and comparative geo-political risk;

• the geology of the targeted deposit, discovery in progress, or deposit; and,

• the resources and reserves in the ground in the context of quantity, grade, and metallurgy.

13. Understanding what:

• available external infrastructure (roads, rail lines, water access, utilities access, ore processing facilities);

• trained labour;

• weather conditions in the context of whether year-round exploration and drilling is possible, thereby shortening exploration time, or whether weather conditions preclude that; and,

• access to assaying laboratories is available to the company’s projects, and the competence and ‘on time delivery’ of results from those laboratories.

13. When participating in a private placement understanding the:

• number, exercise price (measured against the private placement common share price), and the comparative price, terms, and investment ‘time window’ of warrants offered as incentive to participate;

• quantum of any ‘promote’ inherent in or made concurrent with the offering (i.e. a ‘promote’ being any special treasury share price, option, or special warrant arrangement made in the context of, or concurrent with, the private placement). With respect to ‘promotes’ they tend to be more a feature of private placements in the Oil & Gas industry, and less a feature of private placements in the Mining industry;

• compensation terms of the financing agent; and,

• importantly, whether a company (or affiliated or associated company) has a history of issuing unannounced Board or Management options shortly after closing a private placement. If this has occurred it may well be evidence of a Board and Management that places its self-interest ahead of external shareholder interest, and hence a negative factor to be considered when deciding to participate in a private placement – or for that matter to invest in that company at all.

Although simplistic, it follows that as a general rule the least risky companies (which might or might not have the most exploration upside) ought to be those companies:

• with experienced, balanced Boards and Senior Executives with strong interest in the well-being of external shareholders, combined with an appropriate balance of personal economic self-interest;

• complemented by strong geologists and engineers; and,

• with properties located in stable regulatory and political environments that have good historical mineral deposits with strong expansion potential.

For previously issued Posts in this Series click here.

Ian R. Campbell has for over 35 years been one of Canada’s best-recognized Business Valuation Experts – see biography on this Blog.

This Series of Posts is reproduced and supplemented in E-Books titled ‘The Valuation of Mining Companies’ and ‘Valuation Methodologies’. Those E-Books can be found under the E-Learning tab in the Main Navigation Bar of www.StockResearchPortal.com. They are reviewed and amended as market conditions change and our experience dictates. Accordingly, we recommend readers of this Blog Series periodically visit www.StockResearchPortal.com and review those E-Books.

For a comprehensive discussion of Share and Business Valuation see ‘The Valuation of Business Interests’, Ian R. Campbell and Howard E. Johnson, The Canadian Institute of Chartered Accountants, 2001, available through the websites of either Campbell Valuation Partners Limited www.cvpl.com, or The Canadian Institute of Chartered Accountants www.cica.ca.

The views expressed in this Post are those of the author. The value of shares of a given company is time and fact specific. The valuation theories, principles, methodologies, observations, comments and data inputs discussed in this Post are of a general nature, and are provided for information and general guidance only. They should not be taken to include all ‘value or price relevant factors’. Nothing in this Post is intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

© 2008, Stock Research DD Inc., all rights reserved.

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