Background to this Series of Posts

This is the 5th 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.

Mining Company Risk Assessment

The following assumes a ‘single project’ company. If a company has more than one project the considerations discussed that are ‘project specific’ need to be considered separately with respect to each project. From an investor perspective important timing issues, risk assessment, company information, and an appropriate ‘risk related rate of return’ ought to be include a large number of common factors. Posts #4 – #10 of this Post Series discuss many of these factors – in some cases followed by discussion shown in italics. On a cautionary note, ‘Risk Factors’ are fact and circumstance specific, and no list or broad discussion of ‘Risk Factors’ should or can be considered all-encompassing.

Corporate Governance

1. What are the company’s Corporate Governance policies and practice, and are they adequate?

Companies typically disclosure their Corporate Governance policies and practices in their annual documentation. In simple terms the greater the stated strength of those policies and practices, the more comfort shareholders should have in the context of the Board and Management meeting their statutory fiduciary responsibilities.

Management

1. What is the reputation of the members of the Board and each of the Executives for, and fact of, integrity?

The importance of this goes without saying. Without question, one of the most important factors to consider when assessing risk referable to a (particularly Small Cap) mining explorer or producer is the integrity, quality, knowledge base and experience of members of the Board and Senior Management.

2. Does critical mass exists within the company’s management team?. What plans are in place for management succession planning in the event of the departure or death of a key employee?

In circumstances where there is little or no ‘management team critical mass’ or ‘management succession plan’ it follows that there is increased dependency on specific individuals, and hence greater risk than where ‘management team critical mass’ and a documented management succession plan exists.

3. For exploration companies, what is the Director and Management prior successful ‘discoverer’ or ‘finding’ experience? Is there specific experience of, and related dependency on, one or more individuals for exploration and production success?

Where there is dependency on the experience of one or more specific individuals it follows that there is greater risk than is the case where such ‘dependency on specific individuals’ does not exist.

4. What is the Director and Management proven ‘mine development and operation success’ in the case of exploration companies that have a strategy of developing a mineral deposit through to production – importantly, distinguishing between open pit and underground mining experience?

5. Does the company have employment contracts with key executives and if so, what are the terms and conditions of those contracts?

6. What are the Directors and Management terms of reference, contracts, compensation, compensation policies, benefit plans and prescribed retirement age – and how does each of these things impact on Company risk?

In Small Cap companies in particular it is common to find Board and Senior Management compensation to be comprised of comparative low salaries and options that provide incentive to Senior Management to succeed. Having said that, it is particularly important to assess whether the Board and Senior Management has a reasoned and reasonable balance between their own self-interest and the economic interest of Company shareholders.

7. How many actual dollars has each Board member and Senior Executive invested in common shares of the company?

As a general rule, where Board members and Senior Executives have significant amounts of personal capital invested in shares of a Company, as contrasted to simply holding options on treasury shares, common sense dictates such a commitment is positive for company shareholders because those Board members and Senior Executives then have:

• demonstrated a willingness to invest their own capital beside that of external shareholders; and,

• a personal vested interest in ensuring a balance between the interests of the Board and Senior Management on one hand, and other company shareholders on the other, in the context of prospective granting of stock options to Board members and management.

8. What is the history of stock option grants to directors and officers. Are they reasonable or unreasonable in the context of such things as annual compensation, the relationship of aggregate outstanding director and officer options to each of:

• total undiluted and fully diluted common shares; and,

• current director and management option policies and practices.

9. What is the history of, and past practice with respect to, stock option replacement grants or stock option re-pricing?

Where there is a past practice of stock option replacement grants or stock option re-pricing that should be viewed with skepticism.

10. What is the extent of management’s banking, financial institution, and other important relationships?

11. Do the Board and management have a demonstrated ability to raise capital as necessary with time and circumstance appropriate (i.e. not excessive) dilution of existing shareholder equity interests?

This is particularly important in times of restraint in the lending and capital markets.

12. What is the Director and Officer history of insider trading?

Insider trading patterns need to be looked at carefully and with a ‘fair eye’. If there is a large amount of insider selling in any given period that may well be a cause for concern, just as a large amount of insider buying may signal a company worth seriously researching as a potential investment. However, if an insider with a substantial shareholding sells a comparatively few shares that may simply mean the vendor had an immediate personal need for some liquidity and a sale of those shares was the vendor’s best route to that liquidity.

13. Are any of the Directors or Officers directors or officers of any other Reporting Issuers?

14. If any of the Directors or Officers are directors or officers of any other Reporting Issuers:

• Are their involvements with those other reporting issuers such that they will be less likely to satisfy their responsibilities to the company because of dilution of their respective time and effort?

• Do any of these relationships or their other business involvements (if any) create or result in the possibility of conflicts of interest?

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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