Exploration has almost become a dirty word in financial markets.
Nobody wants to support it – let alone put money into it – especially in greenfield environments that lie far from existing headframes.
That’s a pity – because a recent study reveals an exploration focus as the winner among a number of alternative strategies that small resources companies can deploy in order to reach critical mass.
Perhaps we always knew the answer – but had somehow forgotten?
Faced with a choice of mergers and acquisitions, project development, buying an old mine and restarting production, seeking out a strategic cornerstone investor, or else exploration, small companies are leaning towards the “ABE” (anything but exploration) strategies.
However, shareholder return data over five years from 80 emerging ASX-listed resources companies suggests that exploration is actually the biggest hitter in value terms – if it is successful of course.
Here is how the study was undertaken.
First a selection of 90 companies was chosen using size as the principal selection criteria.
The largest 10 mining companies were omitted – as already established – leaving the next 80 to be analysed in more detail – the smallest having a market capitalisation of $110 million.
The overarching research question was to ascertain what made the best 20 companies among the 80 so special, ranked by five-year shareholder return (2008-2013).
Of course such a brief research study has many limitations – not least among them that the dataset is biased towards successful outcomes (that is, omitting companies that “failed” in their strategies and had yet to achieve the $110 million size cut-off).
Next a principal strategy was assigned to each company’s activity over the five-year time horizon with the benefit of 20:20 hindsight.
The strategies were classified as one of the following:
- Exploration discovery
- Purchase and produce (restarting an old mine)
- Project development (of a new mine)
- M&A (growth by amalgamation)
- Strategic investor (attracting a “big brother”); or
Among the 80 companies studied – and remember they are all “winners” by nature of having achieved reasonable scale, the most common strategies were project development (33%) and exploration discovery (30%) then followed by purchase and produce (10%), M&A (7%) and strategic investor (1%).
For the 19% remainder, the strategy was not immediately clear.
The critical insight was then to look at the top 20 companies by shareholder return.
Here, the data jumps out at you.
Among these companies the strategies were led by exploration discovery at a whopping 65% (13 companies), then purchase and produce, and project development (both 15%, three companies each) and finally M&A (5% – one company).
So the data is pretty straightforward: clearly exploration success unlocks the door to value creation – big time – beating out rival strategies on the winners list.
But then we always knew that exploration creates value for those companies that are successful didn’t we?
Funny how the investment community across planet Earth seems to have forgotten!
Allan Trench is a professor of mineral economics at Curtin Graduate School of Business and professor (value & risk) at the Centre for Exploration Targeting, University of Western Australia, a non-executive director of several resource sector companies and the Perth representative for CRU Strategies, a division of independent metals and mining advisory CRU Group (firstname.lastname@example.org).
Graham Arvidson works for an emerging resource company in a leadership capacity – having previously worked on mineral projects around the world including Canada, west Africa, China, and Australia. He has recently undertaken combined masters of science and business administration (mineral economics) at Curtin University, which included his research on success strategies for emerging mineral sector companies. He is a chartered engineer and member of AusIMM (email@example.com).