From: Ray Soper
Subject: Exploration Action Agenda
Date: Thu, 21 Aug 2003 10:51:25 +1000
I went to the ASEG meeting last night(1) re the Exploration Action Agenda. I wanted to pass the following on to Mike Smith at ASEG, but I couldn’t find his e:mail address on their website. Can you pass this spray on to Mike?
I didn’t say anything at the meeting, but I really feel that we in the industry have to get real. The whole theme last night was that the industry is in strife, we need the government and the majors to help us. But actually, there is no sense of the industry taking responsibility for its problems. For example, everyone bemoaned the fact that it is hard to raise finance for exploration, but there is no examination of the question as to why that is so.
I can’t see the government simply allowing flow-through without the industry proposing some changes to lift its game. To answer my question as to why is it hard to raise funds – there are many answers. Here are some:
* The introduction of the 9% superannuation levy has created major distortions in the capital markets. The savings of the nation are concentrated in the hands of a few fund managers who are bound by stringent trustee and gatekeeper requirements to invest only in companies that exceed a certain market cap, and which are mature and offer earnings and dividends. The discretionary punting dollar is much diminished. * The majors are pulling out of exploration. Reasons: It hasn’t really been a good investment for them. Further, management incentivated by the share price performance now understand that every $1 they spend on exploration costs them $30 or so in market capitalisation. They conclude that the smarter thing to do is to get their stock price up and use the market premium to acquire discoveries that do emerge. Hard to argue with that. * The performance of the junior exploration industry in responsible stewardship of shareholders funds has generally been appalling. A University of Qld study showed that only 28% of funds raised by juniors is spent on exploration. The balance gets eaten up on relatively unproductive expenditure. * Investors are heartily sick of the vendor rip-offs. Promoters place high vendor valuations on what can only be described as contingent assets. Most times the results don’t come through. The typical junior struggles to raise its $, floats at 20c, within a year is 10c, a year after that 5c. Why bother. * I suspect that much of the money that IS spent on exploration is spent unwisely on projects that should never have been drilled in the first place. * Explorers seem to totally misunderstand the concept of gambler’s ruin. Clearly exploration is a long odds game. If one grass roots hole in 100 hit ore, we would be doing well. However, too often we find that a company floats with five properties and plans to drill perhaps 20 holes. Can’t possibly work on average. * Finally, the junior exploration companies have not really been coming up with the discoveries. From an investment perspective, investing in exploration in Australia has generally been unsuccessful.
Flow-through may play a role, but I suggest that the industry would do much better in government circles if it accepted responsibility for at least some of the problem rather than bleat to the government “please help us”. The industry could introduce initiatives such as:
* No vendor consideration: In Canada they don’t allow vendor consideration. What they do is to allow company promoters to have the first 1 million shares. This would avoid a lot of the “valuation” BS that we see. Can the industry not get it that what they are dealing with in balance sheet terms is a certain liability (the funds raised WILL be spent) balanced by a contingent asset that hopefully will be big enough to offset the certain liability on a risk weighted basis. The “value” in the contingent asset should only be recognised when the value is demonstrated. * If it is deemed that vendor consideration IS still required, then we need to think about changing the way it is done. One issue is the need for class B vendor shares that don’t participate in shareholder rights (capital distributions etc) until the B shares have earned their status. The impetus for this is an example in the dot.com boom. A company floated with an internet commerce idea. They raised $25 million by selling 50% of the company. The idea failed, and when they still had $8 million left, they closed the business down and returned capital to shareholders. Problem is, the vendors got $4m cash for a failed business idea. * Much more stringent criteria for companies floating: Access to public funds is a right that should be managed properly. In today’s corporate governance world we have thick prospectuses, but nobody asks the big questions. Is the business plan sound (is the exploration program valid) and does the board and management have the capacity to deliver the business plan. Too many exploration companies float on what many in the industry would describe as “moose pasture”. We need some scheme to allow peer review of companies planning to float. Unless you meet clear criteria, you don’t get to raise funds. * IPO grants scheme: In another area, I have suggested that there is potential for a feasibility study grant scheme – the grants would only be available if the company meets stringent criteria demonstrated to be necessary for a successful project. This could perhaps be adapted for exploration companies. * NSX: We should work with the NSX to foster smaller, simpler raisings. Today an ASX listing will raise at least $2m and often much more. However, this is often more than is needed for stage 1. Better to raise $500k or $1m on NSX to prove the concept. If it doesn’t work, tough. This would dramatically reduce the costs of raising funds – NSX requires only 50 shareholders v 500 on ASX. * Upgrade reporting requirements: A key factor in exploration reporting is how much of funds raised has been spent on exploration as opposed to other costs. It is also relevant to report how much money has been spent by other companies on exploration, eg by JV partners. Make it clear that shareholders expect companies to spend funds on productive exploration.
There are no doubt other ideas that will emerge once we start asking the right questions. I didn’t get the sense that the Exploration Action Agenda, having identified funding as a key issue, thought to examine why there is a problem. I think that is also true of the Prosser enquiry and all of the other initiatives that are trying to address the issues.
(1) Mineral Exploration Action Agenda – Notice of Meeting