Daniel O’Connell of Kerman & Co LLP delves into the mining sector and the benefits of raising exploration funds on the small-cap market

Activity in the mining sector appears to be part of a long-term boom in the cyclical market for commodities of all descriptions. This is linked to the trend towards economic globalisation and spectacular growth in the emerging market economies, notably Brazil, Russia, India and China.

Growth in the emerging markets, on top of the requirements of industrialised nations, has led to increased demand for mineral and other resources used for the generation of energy and the production of goods. This growth is taking place not only in the supply of finished products manufactured in emerging countries, but also in the development of their infrastructure.

The burgeoning demand for natural resources isn’t solely derived from the development of new industries and manufacturing capacity. Increasing global prosperity has led to heightened demand for precious metals and stones used for jewellery, particularly in China and the Far East.

Safe haven

World stock markets are experiencing a period of volatility and uncertainty due to the impact of the credit crunch. However, the demand for natural resources has been such that the cost of these has not fallen. This is good news for those willing to finance the risks of exploration in all parts of the world.

The continuing, and possibly long-term, weakness of the US dollar as a world currency has focused particular attention on gold as a form of reserve currency. The demand for gold, whose further extraction and production is necessarily protracted and limited, has in turn led to increased demand for silver, stocks of which are more available than those of gold.

Exploring AIM

AIM has proved popular with mining companies, in terms of raising exploration funds, because they aren’t required to demonstrate a track record to obtain the listing. This has been a significant factor in AIM’s success in attracting start-ups across a number of sectors.

PLUS Markets also has no requirement for a trading history in order to qualify a company for a primary listing, but it appears that AIM has been able to maintain its lead over PLUS in attracting new entrants.

AIM’s renowned ‘light touch’ with regard to regulation has meant that corporate governance structures are flexible and are guided by the company’s nomad, and this has undoubtedly been attractive to exploration companies in which individual qualities of enterprise and entrepreneurship are at least as important as formal compliance with rules.

In addition, AIM has benefited from the restrictions of the Sarbanes-Oxley regime in the US, which has proved to be a disincentive for companies seeking investment through US markets.

Going public

The corollary of all this is that both nomads and investors will be particularly concerned to see that the track record of individual proprietors, managers and management teams responsible for bringing a new company to market is such that the new company can responsibly be introduced to a public market.

Investors may derive comfort from the AIM requirement for a Competent Persons Report, containing expert comment on the viability of a project, to be prepared in connection with the new listing of a mining company.

AIM has been criticised for its lack of liquidity, and there are risks for investors in companies that first obtain a listing long before an income stream is imminent because it can be difficult to maintain interest in the stock during this ‘fallow’ period. However, for those engaged in M&A activity this is probably good news – a company whose stock price is drifting may become a potentially attractive takeover target.