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