Mines and Money '14: Junior miners must abandon erroneous obsession with inflated mineral prices

By Laura Syrett
Published: Thursday, 04 December 2014

Companies which have based their equity valuations and project economics on unrealistic price projections risk destroying shareholder value and should take conservative, evidenced based approaches to generate wealth - a mantra that is particularly relevant to juniors in the lithium, rare earths and graphite sectors.

Junior mining companies need to break their habit of linking equity valuations with overly optimistic mineral prices and root themselves in rationality if they want to generate returns for their shareholders, delegates heard at Mines and Money 2014 in London today.

In a presentation discussing how junior miners can glean the best value from their assets, Jayant Bhandari, analyst for mining metals at Anarcho Capital, said that most junior miners' management boards are more focused on survival than wealth creation and that there is a culture within the industry of underpinning projects with unrealistic values for mined commodities.

"There is a big obsession in this business of using big metal prices to value equities (...) This is an erroneous fashion which should not exist in the industry," he said.

"There was a euphoria about lithium, rare earths and graphite for a while," he continued, pointing out that this generated unrealistic price expectations in these industries that are proving hard to shake off.

Bhandari urged junior miners to conduct thorough risk-reward analysis based on conservative mineral prices. "By conservative, I mean a spot price or less than a spot price," he explained.

Touching on the divisive issue of royalties, Bhandari voiced concerns that selling royalties on mineral sales, while favoured by many as a source of project funding, in fact destroys shareholder value when assets are brought into production.

"Investors should punish management when they sell royalties," he said and suggested that companies in possession of assets subject to punitive royalty contracts should divest them from their portfolios.

In line with many of the industry commentators offering opinions at Mines and Money this year, Bhandari said he expected volatility in the mining sector would continue for several years and that it would be some time before the industry's obsession with inflated prices began to fade.

 "It's not easy to change a culture," he said, noting that those companies which root themselves in rationality and evidence-based approaches to equity valuations and project economics would be best positioned to thrive when the mining cycle begins to turn up.