Feeling unloved? Others don’t appreciate your true value? Maybe then you are the boss of one of the many small mining companies listed on the London Stock Exchange. Because lately several of them have been telling me that their shares are deeply undervalued.
It’s not a sentiment exclusive to mining bosses. Company chiefs regularly complain to me that their shares are too cheap. But still, some of these mining bosses have a point.
The truth is that junior miners have been neglected by City analysts for years. And many are finding a much more receptive audience in Sydney and Toronto. That creates a pretty smart opportunity for us penny share investors.
How Central Asia is safer than London
Share prices are determined by one simple thing. They are determined by whatever investors are prepared to pay. But the investors who invest on the London stock market are not the same people who invest in Toronto or Hong Kong or Rio de Janeiro. And from their perspective things might look different.
Take London property, for example. I might wonder why anyone should want to live in this overcrowded, dysfunctional city. But for somebody born behind the iron curtain, London carries an allure that I cannot appreciate.
Perspectives differ, and this is one reason why mining shares might have one value in London but a different value elsewhere. Take a gold mine in Central Asia. So far as we are concerned, that is a distant, dodgy land, surrounded by hostile neighbours and probably riddled with corruption. We distrust the politics, we are suspicious of the local officialdom and we doubt that roads and power lines will be constructed as promised.
But the Chinese might see things differently. Central Asia is next door. The ways of doing business are understood. And the Chinese are prepared to take the long view. So when it comes to a Central Asian mining business, Chinese investors may be more enthusiastic than London investors and ascribe a higher value.
However it is not just a question of prejudice. The valuation of mining shares is tricky. They must be properly understood to be properly valued, and many mining chiefs are now questioning the much vaunted expertise of the City of London’s analysts and investors.
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City analysts have been left behind
A problem for the City is that it is short of experienced industry specialists. Ten years ago the mining sector was so out of favour that it had virtually disappeared from view. No budding young analyst or fund manager wanted to specialize in this moribund corner of the market and the level of knowledge required today to cover this rejuvenated sector cannot be built overnight.
There is a lot to learn. No two mines are the same. Mining is a complex affair, taking place all over the world. There is the nature of the ore body, the all-important grade (the amount of valuable metal per ton of ore), the requirement for access, power, and machinery, and the finance to build the mine.
Will the mine then be a straightforward open pit operation or a complicated and unpredictable underground mine? How long will it take to bring it into production, and by that time will metal prices be as high as they are today?
A proper valuation of a mining concern takes all of these factors and more into account. The calculations are not easy, but they are crucial – especially when it comes to raising the finance that most new mining ventures need. Many mining chiefs now think that the financial community in Toronto and Australia has a better understanding of these things and that a stock market quote in Toronto or Sydney would produce a higher share price.
Why miners are leaving for Canada
One mining company that has already indicated its intention to list on the Toronto Stock Exchange is Vatukoula Mining (LSE:VGM). Another is Mariana Resources (LSE:MARL), while GGG Resources (LSE:GGG) is hoping to list on the ASX before the end of the year. Anglo Pacific (LSE:APF), which secures royalty streams in exchange for financing mining operations, has taken the step already.
According to analysts at Fairfax ‘we would expect that this should lead to a gradual re-rating as Anglo Pacific becomes an established company in the Canadian market which gives high ratings to royalty stream companies.’
So while the trend for mining companies to look to overseas investors to give them the credit they deserve should be a worry in London, it also presents an opportunity for smart investors to buy into such shares before Canadian or Australian investors drive them to a higher value.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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