reasons for foreign listings by south african junior mining and exploration companies
TRANSCRIPT
Reasons for foreign listings by South African junior mining and exploration companies
Vicki Shaw
A research report submitted to the Faculty of Commerce, Law and Management,
University of the Witwatersrand, in partial fulfilment of the requirements for the degree of
Master of Business Administration
Johannesburg
September 2008
i
ABSTRACT
The purpose of the research was to identify the reasons given by South African junior
mining and exploration companies for their choice of listing location. This will assist the
JSE Securities Exchange in developing a strategy to attract more listings by junior
mining and exploration companies. A review of the available literature revealed six
possible reasons for the choice of listing location, and these were used as propositions
for the remainder of the research.
Semi-structured interviews were conducted with CEOs of juniors listed on stock
exchanges located in London, Toronto and Johannesburg, mining specialists and Alt-X
Designated Advisors. A content analysis was carried out on the data collected.
The most significant reason identified in the study is the access to risk capital, followed
by the ratings attracted by the company and the liquidity of the exchange. The other
reasons identified in the study will depend upon the individual requirements of the
companies.
ii
DECLARATION
I, Vicki Ann Shaw, declare that this research report is my own, unaided work, except as
indicated in the acknowledgements, the text and the references. The report is submitted
as partial fulfilment of the requirements for the degree of Master of Business
Administration at the University of the Witwatersrand (Wits), Johannesburg. It has not
been submitted before, in whole or in part for any other degree or examination at any
other institution.
……………………….
VICKI ANN SHAW
SEPTEMBER 2008
iii
ACKNOWLEDGEMENTS
I would like to thank:
Max Mackenzie for his valuable knowledge, guidance, support and patience;
All the Alt-X Designated Advisors, mining analysts and specialists for sharing their
knowledge and experiences;
The CEOs for taking time out of their busy schedules to make a valuable contribution to
the research; and
Dick Kruger (Chamber of Mines of South Africa), Jopie Coetzee (Graduate School of
Business) and Catherine Reichardt (Wits School of Mining) for their assistance with the
investigation into the junior mining sector in South Africa.
iv
ACRONYMS AND ABBREVIATIONS
AIM Alternative Investment Market Alt-X Alternative Exchange Asgi-SA Accelerated and Shared Growth Initiative for South Africa ASX Australian Stock Exchange BEE Black Economic Empowerment BIT Bilateral Investment Treaties CEO Chief Executive Officer CGT Capital Gains Tax CIM Canadian Institute of Mining CMA Common Monetary Area CP Competent Person CPR Competent Person Report CSA Canadian Securities Administrators DME Department of Minerals and Energy EV Enterprise value FDI Foreign direct investment GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product GEAR Growth, Employment and Redistribution GMT Greenwich Mean Time IMMM Institute of Materials, Minerals and Mining (UK) IPO Initial Public Offering JORC Joint Ore Reserves Committee JSE JSE Securities Exchange Ltd LSE London Stock Exchange MPRDA Mineral and Petroleum Resource Development Act, No.28 of 2002 NASDAQ National Association of Securities Dealers Automated Quotation system NAV Net asset value NSJME Nedsec Junior Mining and Exploration Index NYSE New York Stock Exchange NZX New Zealand Stock Exchange PDAC Prospectors and Developers Association of Canada PGM Platinum Group Metals
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QCA Quoted Companies Alliance QNA Question not asked RDP Reconstruction and Development Programme ROPO Recognised Overseas Professional Organisation SACNASP South African Council for Natural Scientific Professions SADC South African Development Community SAMREC The South African Code for the Reporting of Mineral Resources
and Mineral Reserves SARB South African Reserve Bank SEAQ Stock Exchange Quotations System SEC Securities Exchange Commission (United States) SETS Securities Exchange Electronic Trading System SME Small and medium-sized enterprises SOX Sarbanes-Oxley Act STRATE Share Transactions Totally Electronic TSX Toronto Stock Exchange US United States of America UK United Kingdom
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TABLE OF CONTENTS
ABSTRACT..................................................................................................II
DECLARATION ..........................................................................................III
ACKNOWLEDGEMENTS.......................................................................... IV
ACRONYMS AND ABBREVIATIONS........................................................ V
TABLE OF CONTENTS............................................................................ VII
1 INTRODUCTION.................................................................................1
1.1 PURPOSE OF STUDY................................................................................................ 1 1.2 CONTEXT OF STUDY................................................................................................ 1 1.3 PROBLEM STATEMENT............................................................................................. 3 1.4 SIGNIFICANCE OF STUDY ......................................................................................... 3 1.5 DELIMITATIONS AND LIMITATIONS.............................................................................. 3
1.5.1 DELIMITATIONS ...................................................................................................................3 1.5.2 LIMITATIONS .......................................................................................................................4
1.6 DEFINITION OF TERMS ............................................................................................. 4 1.7 ASSUMPTIONS ........................................................................................................ 5
2 LITERATURE REVIEW ......................................................................6
2.1 INTRODUCTION ....................................................................................................... 6 2.2 BACKGROUND ........................................................................................................ 6
2.2.1 SOUTH AFRICAN ECONOMY.................................................................................................6 2.2.1.1 MACROECONOMIC POLICY....................................................................................................... 7 2.2.1.2 GROWTH ............................................................................................................................... 9 2.2.1.3 EXPORTS............................................................................................................................... 9
2.2.2 MINING.............................................................................................................................10 2.2.2.1 LEGISLATION ........................................................................................................................ 12 2.2.2.2 PRODUCTION ....................................................................................................................... 15 2.2.2.3 EXPORTS............................................................................................................................. 17 2.2.2.4 JUNIOR MINING INDUSTRY ..................................................................................................... 18
2.3 ACCESS TO CAPITAL FINANCE ............................................................................... 22 2.3.1 TORONTO STOCK EXCHANGE / VENTURE EXCHANGE .........................................................23 2.3.2 LONDON STOCK EXCHANGE / AIM EXCHANGE ...................................................................27 2.3.3 JSE SECURITIES EXCHANGE LTD/ ALT-X EXCHANGE.........................................................31 2.3.4 CONCLUSION....................................................................................................................35
2.4 INDUSTRY PEERS.................................................................................................. 36 2.4.1 MINING INDUSTRY.............................................................................................................36 2.4.2 CONCLUSION....................................................................................................................37
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2.5 LIQUIDITY............................................................................................................. 38 2.5.1 THE ATTRACTION OF FOREIGN EXCHANGES ........................................................................41 2.5.2 CONCLUSION....................................................................................................................41
2.6 SECURITIES REGULATORY REQUIREMENTS.............................................................. 42 2.6.1 CORPORATE GOVERNANCE...............................................................................................43 2.6.2 REGULATORY ENVIRONMENT FOR SMES ...........................................................................44 2.6.3 COSTS ASSOCIATED WITH LISTING IN EQUITY MARKETS .......................................................46
2.6.3.1 INDIRECT ............................................................................................................................. 46 2.6.3.2 DIRECT................................................................................................................................ 47
2.6.4 CONCLUSION....................................................................................................................48 2.7 PUBLIC REPORTING OF MINERAL RESOURCES AND RESERVES................................. 49
2.7.1 DIFFERENCES BETWEEN THE REPORTING CODES AND THEIR IMPLEMENTATION.....................54 2.7.2 THE FUTURE OF THE PUBLIC REPORTING OF MINERAL RESOURCES AND RESERVES ............56 2.7.3 CONCLUSION....................................................................................................................57
2.8 TAX INCENTIVES FOR INVESTORS ........................................................................... 58 2.8.1 AIM EXCHANGE................................................................................................................58
2.8.1.1 CAPITAL GAINS TAX BUSINESS ASSET TAPER RELIEF .............................................................. 59 2.8.1.2 INHERITANCE TAX ................................................................................................................. 59
2.8.2 TSX AND TSX VENTURE EXCHANGES...............................................................................60 2.8.2.1 BENEFITS OF THE FLOW-THROUGH SHARE SYSTEM................................................................... 61
2.8.3 JSE AND ALT-X EXCHANGES ............................................................................................62 2.8.3.1 CAPITAL GAINS TAX.............................................................................................................. 62 2.8.3.2 POTENTIAL TAX BENEFIT SCHEMES.......................................................................................... 63
2.8.4 CONCLUSION....................................................................................................................65 2.9 CONCLUSION........................................................................................................ 65
3 PROPOSITIONS...............................................................................68
3.1.1 PROPOSITION 1 ................................................................................................................68 3.1.2 PROPOSITION 2 ................................................................................................................68 3.1.3 PROPOSITION 3 ................................................................................................................68 3.1.4 PROPOSITION 4 ................................................................................................................68 3.1.5 PROPOSITION 5 ................................................................................................................69 3.1.6 PROPOSITION 6 ................................................................................................................69
4 RESEARCH METHODOLOGY ........................................................70
4.1 POPULATION ........................................................................................................ 70 4.2 SAMPLE SIZE AND SELECTION ................................................................................ 70
4.2.1 SAMPLE SELECTION..........................................................................................................70 4.2.2 SAMPLE SIZE ....................................................................................................................71
4.3 RESEARCH DESIGN ............................................................................................... 73 4.4 DATA COLLECTION ................................................................................................ 74 4.5 DATA ANALYSIS AND INTERPRETATION .................................................................... 76
4.5.1 ROLE OF RESEARCHER......................................................................................................77 4.6 VERIFICATION AND DEPENDABILITY ........................................................................ 78
4.6.1 CREDIBILITY .....................................................................................................................78 4.6.2 TRANSFERABILITY.............................................................................................................79 4.6.3 DEPENDABILITY ................................................................................................................79
5 PRESENTATION OF RESULTS ......................................................80
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6 INTERPRETATION OF RESULTS...................................................83
6.1 AVAILABILITY OF CAPITAL ...................................................................................... 83 6.1.1 SIZE OF CAPITAL MARKETS ...............................................................................................84 6.1.2 APPETITE FOR RISK...........................................................................................................87
6.1.2.1 SOUTH AFRICAN INVESTORS.................................................................................................. 88 6.1.2.2 OFFSHORE INVESTORS.......................................................................................................... 88 6.1.2.3 RECENT INVESTOR TRENDS.................................................................................................... 90
6.2 INDUSTRY PEERS.................................................................................................. 91 6.2.1 COMMODITY RELATED .......................................................................................................95 6.2.2 RATINGS ..........................................................................................................................97
6.3 LIQUIDITY........................................................................................................... 101 6.4 SECURITIES REGULATIONS REQUIREMENTS.......................................................... 103
6.4.1.1 MULTIPLE LISTINGS ............................................................................................................. 106 6.5 PUBLIC REPORTING OF MINERAL RESOURCES AND RESERVES............................... 107 6.6 TAX INCENTIVES FOR INVESTORS ......................................................................... 109 6.7 OTHER POSSIBLE REASONS ................................................................................. 113
6.7.1 GEOGRAPHIC LOCATION..................................................................................................113 6.7.2 POLITICAL ......................................................................................................................115
6.7.2.1 EXCHANGE CONTROL REGULATIONS .................................................................................... 115 6.7.2.2 BLACK ECONOMIC EMPOWERMENT (BEE) DEALS.................................................................. 117
6.7.3 MERGERS AND ACQUISITIONS .........................................................................................118 6.7.4 PERSONAL PREFERENCE OF MANAGEMENT ......................................................................119
7 ADDITIONAL FINDINGS................................................................120
7.1 SECONDARY LISTINGS OFFSHORE ........................................................................ 120 7.2 INWARD LISTINGS IN SOUTH AFRICA ..................................................................... 121
8 CONCLUSION ................................................................................124
8.1 SUMMARY OF FINDINGS ....................................................................................... 124 8.2 CONCLUSIONS AND RECOMMENDATIONS FOR FURTHER RESEARCH ......................... 126
REFERENCES.........................................................................................127
APPENDIX A ...........................................................................................134
APPENDIX B ...........................................................................................144
APPENDIX C ...........................................................................................161
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LIST OF TABLES
Table 1: Breakdown of AIM companies by country or region of operation (June 2007) 30
Table 2: Breakdown of AIM companies by sector – first quarter 2007 (percent)........... 30
Table 3: List of participants ........................................................................................... 72
Table 4: Advantages and Limitations of the interview method of data collection. ......... 75
Table 5: The advantages and disadvantages of the face-to-face and telephone interview
methods ........................................................................................................................ 76
Table 6: A matrix of the responses collected from the participants interviewed during the
study ............................................................................................................................. 81
Table 7 - List of similarities and differences between the most popular reporting codes used
globally......................................................................................................................... 135
Table 8 – Comparison of the listing requirements for the stock exchanges included in
the study ..................................................................................................................... 145
Table 9 – Listing requirements for Exploration & Mining Companies listing on the TSX
and TSX Venture Exchanges...................................................................................... 159
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LIST OF FIGURES
Figure 1: South African reserves and production in key minerals, 1998 (percentage of
world reserves............................................................................................................... 11
Figure 2: Production trends for a selection of minerals in South Africa for the period
1980 – 1998.................................................................................................................. 17
Figure 3: Worldwide Exploration Budget by company type, 1997-2006 (as a percentage
of worldwide exploration) .............................................................................................. 20
Figure 4: Equity finance raised by resource companies in 2006................................... 25
Figure 5: Comparison of the Alt-X and JSE main board share indexes ........................ 34
Figure 6: Classification of mineral resources and mineral reserves as proposed in the
JORC Code and similar codes...................................................................................... 52
Figure 7: Main aspects of the review process for Competent Persons Reports and
disciplinary procedures for Competent Persons as part of the JSE/SAMREC/Statutory
bodies agreement ......................................................................................................... 55
Figure 8: Summary of the responses collected from respondents during the study...... 82
Figure 9: Summary of views of respondents on the availability of capital as a reason for
the choice of listing location .......................................................................................... 83
Figure 10: Summary of views of respondents on the appetite for risk by investors as a
reason for the choice of listing location ......................................................................... 87
Figure 11: Summary of the views of respondents on the location of listings by industry
peers as a reason for the choice of listing location ....................................................... 91
Figure 12: Summary of views of respondents on the preference of the commodity mined
by investors as a reason for the choice of listing location ............................................. 95
Figure 13: Summary of views of respondents on ratings as a reason for the choice of
listing location ............................................................................................................... 97
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Figure 14: Relative performance on junior mining indices .......................................... 100
Figure 15: Summary of views of respondents on liquidity as a reason for the choice of
listing location ............................................................................................................. 101
Figure 16: Summary of views of respondents for the compliance with securities
regulations requirements as a reason for the choice of listing location ....................... 103
Figure 17: Summary of views of respondents on the public reporting of mineral
resources and reserves as a reason for the choice of listing location ......................... 107
Figure 18: Summary of views of respondents on the tax incentives for investors as a
reason for choice of listing location ............................................................................. 109
Figure 19: Summary of views of respondents on the geographical location of the stock
exchange as a reason for the choice of listing location............................................... 113
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1 INTRODUCTION
1.1 Purpose of study
The purpose of the research is to identify the reasons given by South African junior mining
and exploration companies for their choice of listing location.
1.2 Context of study
The increased globalisation of business has produced the need for a global capital
marketplace resulting in increased competition among the major stock exchanges around
the world. Internationalisation of capital markets first started in the seventies with investors
and firms investing in foreign equity markets in order to diversify their portfolios in an
attempt to increase earnings (Foerster and Karolyi 1993). There was a significant increase
in the trading of foreign stock between 1981 and 1991 where trading in foreign stock by
investors in the United States of America (US) increased from US$19 billion to US$273
billion per year during this period, and by the end of 1989 foreign stocks accounted for just
over 14 percent of the total trading volume in the world (Saudagaran and Biddle 1995).
There has been a growing trend towards companies listing their stocks on foreign
exchanges, suggesting that these companies perceive the benefits of gaining access to
foreign capital markets through equity listing as outweighing the related costs of such a
strategy (Saudagaran 1988). The choice to list outside their country of incorporation may
be as their first public listing or as a dual listing after having listed on their domestic
exchange.
Stock exchanges in the US largely attract the foreign listings of Canadian, Latin American
and Israeli companies, whereas South African and Asian companies list predominantly in
London, and Japanese firms appear to prefer the Frankfurt stock exchange (Pagano, Roell
and Zechner 2002).
Foreign listings have become important to the strategies of both stock exchanges and
companies alike. Stock exchanges compete to attract new equity listings, such as the
National Association of Securities Dealers Automated Quotation system (NASDAQ) and
New York Stock Exchange (NYSE), which compete for domestic and foreign listings in the
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Unites States. There is also strong competition between stock exchanges in Europe for the
listings of small capitalisation companies (Foucault and Parlour 2004). These stock
exchanges develop different strategies to attract foreign equity listings, which will include
the choice of trading rules, listing costs and trading technology.
In 2000, the US attracted 89 percent of new foreign listings however by 2004 London had
attracted 88 percent of all new foreign listings for the year. In 2006 London attracted 86
Initial Public Offerings (IPOs), which raised a total of €15 billion (Arcot, Black and Owen
2007). This change in preferred choice of foreign equity listing location appears to be
related to the introduction of the Sarbanes-Oxley Act (SOX) in the US in 2002, indicating
the importance of stock exchanges adopting an appropriate strategy when attracting
foreign equity listings.
In the last decade, there have been a number of primary listings that have departed the
JSE Securities Exchange Ltd (JSE) for other exchanges, including the London Stock
Exchange (LSE) and the Toronto Stock Exchange (TSX). Some of these listings included
Anglo American, Billiton, Old Mutual, and South African Breweries (SAB) quoting a desire
for the access to much larger capital markets (Carmody 2002). Listing offshore was also
intended to improve their global competitiveness and facilitate increased investment in their
South African operations.
Many of the junior mining companies in South Africa also prefer to list on foreign small
capital stock exchanges such as the Alternative Investment Market (AIM) in London and
the TSX Venture Exchange in Toronto. Yet Greenhill, the senior general manager for
marketing and business development at the JSE, claims that there is an investment
environment in South Africa where these companies are able to raise their capital funding
requirements. In particular, the JSE Alternative Exchange (Alt-X), a market launched by the
JSE in 2003 for small and medium-sized enterprises (SMEs) with high growth potential, has
listing requirements that are appropriate for new exploration, late stage exploration or junior
mining projects (Mining Review Africa 2006).
The JSE is aware of some reasons given by South African companies for their choice to list
abroad but has not yet conducted any formal studies to explore the factors influencing the
decision by some junior mining and exploration companies to list abroad.
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1.3 Problem statement
The purpose of the research is to identify the reasons for the choice of listing location by
South African junior mining and exploration companies.
1.4 Significance of study
Junior exploration and mining companies often face the challenge of attracting finance in a
capital-intensive industry. These companies often lack a bankable record of technical skills
and experience as well as a lack of sufficient collateral to comply with the conservative
lending standards of banking institutions. These companies must therefore attract high-risk
equity funding to raise capital for their projects (PDAC 2001).
(McKay 2006a) observed that Toronto and London have proved to be the favourite markets
in which to raise capital for exploration activities throughout the world. Many junior mining
and exploration companies operating in South Africa have followed this trend while others
have chosen to list on the local JSE Securities Exchange, and in some cases dual listings
on the JSE and another exchange have resulted.
The JSE has undertaken several informal investigations into the reasons for the
preference of many companies to list offshore, however, no formal study of this
phenomenon has yet been conducted.
This study intends to complete a detailed study of the reasons why these companies may
prefer to list abroad. By identifying these reasons, the JSE will be better equipped to
address the concerns of these companies and develop a strategy to attract more equity
listings of junior mining and exploration companies to the Alt-X and main board of the JSE.
1.5 Delimitations and limitations
1.5.1 Delimitations
This study is delimited to the junior mining and exploration companies operating in South
Africa that have elected to list their shares on the stock exchanges in London, Toronto and
Johannesburg. This includes companies with single or multiples listings; however, only the
primary listing location chosen by these companies will be explored. The study is delimited
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to exploring the reasons for their choice of primary listing location. No effort will be made to
evaluate the validity of these reasons.
1.5.2 Limitations
The sample for the study is purposive. The researcher will select respondents who have
the required knowledge and experience to answer the research question. No attempt will
be made to ensure that the sample is random and representative of the population.
The perceptions and experiences of the participants in the study will be considered
representative of the population.
1.6 Definition of terms
Inward listing - where foreign shares issued by listed companies are granted a listing on
the JSE in terms of the Exchange Control Regulations pertinent to foreign entities listing on
South African exchanges (JSE Securities Exchange 2004).
Junior mining company - is generally a small company with an entrepreneurial mindset
and geological expertise. Many of these companies are either exploration or single mine
operations (Burton 2006).
Mineable - defines those parts of the ore body, both economic and uneconomic, that are
extracted during the normal course of mining (SAMREC Committee 2006).
Market Maker - a firm that stands ready to buy and sell a particular stock on a regular and
continuous basis at a publicly quoted price. Market makers usually trade to over the
counter markets such as the Nasdaq. Market makers that buy and sell stocks listed on an
exchange are called third market makers (www.sec.gov).
Modifying Factors - factors that will affect the conversion of mineral resources to mineral
reserves as defined in the JORC and SAMREC Codes. These factors include mining,
metallurgical, economic, marketing, legal, environmental, social and governmental
considerations (JORC Committee 2004).
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Nomad - an abbreviation for Nominated Advisor which, is a company that has been
approved by the LSE (London Stock Exchange) to help a new company in its admission to
the AIM Exchange and to provide continuing advice to prevent the delisting of the company
(www.londonstockexchange.com).
1.7 Assumptions
a. For the purpose of this study a South African junior mining and/ exploration company
is defined as a company that owns mining and/ exploration operations located in
South Africa.
b. All participants included in the study have been exposed to or have knowledge of the
factors considered by junior mining and exploration companies in South Africa when
choosing the exchange on which to list their company.
c. The overall validity of the study will be influenced by the perceptions and
experiences of the participants in the study.
d. Most junior mining and exploration companies in South Africa will undertake a
similar decision-making process and consider similar factors when choosing where
to list the shares of their company.
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2 LITERATURE REVIEW
2.1 Introduction
The choice to go public is one of the most important decisions a company and its
management will make and is often another stage in the growth of a company. The choice
of capital markets is also associated with the decision to go public and this will include the
assessment of the advantages and disadvantages of listing on domestic and foreign stock
exchanges (Pagano et al 2002).
As an increasing number of companies choose to list their shares on foreign stock
exchanges, the decision to list abroad is becoming an important strategic consideration for
companies across the globe. There are a number of factors that will influence this decision
(Stalinski and Tuluca 2006). It is important for stock exchanges to identify and address
these factors in order to retain domestic equity listings as well as to attract new domestic
and foreign listings.
This section will review the available literature related to the possible factors that may
influence the decision of a company to list their shares on a particular stock exchange,
particularly those that are applicable to junior exploration and mining companies in South
Africa.
2.2 Background
2.2.1 South African Economy
Carmody (2002) describes the transition to democracy in 1994 as the most significant
change in the history of South Africa; however, the new government faced a number of
political and economic challenges. Prior to this transition the economy had been in long-
term decline for over twenty years, including the structural crisis in the mid-seventies, which
was characterised by stagnant productivity (particularly in manufacturing), high inflation,
low volumes of export, weak currency, low reserves and high unemployment. This was
compounded by more than a decade of economic isolation through politically lined
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sanctions on trade and investment as well as the exclusion from global capital markets
(Carmody 2002).
Carmody (2002) explains that after the elections, the ANC leadership focussed on creating
sustained economic growth, which would require a significant investment by the private
sector (domestic and international) as well as an improvement in the competitiveness of
domestic producers. This would depend upon the relaxation of external constraints (such
as sanctions and the debt moratorium) as well as an increase in exports and capital
inflows, improved investment ratios and industrial productivity (Carmody 2002).
The broad outlines of policy and planning to achieve this growth emerged in 1990 and the
implementation of trade and financial liberalisation started well before the elections held in
1994. Gelb and Teljour (2002) describe how by the end of 1994 inflation had decreased,
the Reserve Bank independence had been included in the interim Constitution, legislation
had been passed opening up both the banking system and the JSE to the international
community, and plans for the gradual relaxation of capital controls were also being
considered.
Gelb and Teljour (2002) attributed the improved economic performance between 1995 and
2000 to several factors; one was the transition to a democratic country and another was the
re-integration of South Africa into the global economy following more than a decade of
economic isolation.
2.2.1.1 Macroeconomic Policy
Prior to 1994, South Africa had experienced an economic crisis that had started in the
seventies, yet despite slower growth overall, some sectors thrived while others were in
decline. Macroeconomic policy at the time favoured mining exports while increasing the
costs of manufacturing imports (Gelb and Teljeur 2002).
During the transition process, the ANC proposed an economic programme called the
Reconstruction and Development Programme (RDP), which focussed on small and
medium producers selling labour-intensive consumer goods (Gelb and Teljeur 2002). This
policy position was initially successful with an increase in net capital inflows of one percent
of Gross Domestic Product (GDP) in 1994 and four percent in 1995 compared with an
outflow of four percent in 1993. Carmody (2002) states that in 1995 there was a common
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view that the RDP and its associated programmes were unlikely to increase economic
growth and stimulate job creation sufficiently to meet the current demand for employment.
The new macroeconomic policy introduced by the government in June 1996, called the
Growth, Employment and Redistribution (GEAR) strategy, had the immediate goal of
stabilising the foreign exchange market after the first post-apartheid foreign exchange
crisis. This included new methods of growth such as the increase of foreign direct
investment (FDI) and domestic fixed investment through policy that would be more
acceptable to international investors (Gelb and Teljeur 2002).
The main criticism of the new policy was the lack of consultation with organised labour and
business during its formulation phase. The trade union movement persistently condemned
government for the introduction of the GEAR policy and this conflict concerned domestic
investors who felt that the government might be coerced into adopting policies that were
more popular (Gelb and Teljeur 2002).
However in January 2002 the government announced its intention to develop a new policy
and by July 2005 the government launched the Accelerated and Shared Growth Initiative
for South Africa (Asgi-SA) with the main objective of halving unemployment and poverty by
2014 (Standard Bank 2007). Frankel, Smit and Sturzenegger (2007) identified substantial
investment in infrastructure, the targeting of economic sectors with growth potential and the
development of small businesses to reduce the disparity between the formal and informal
economies as some of the initiatives set out in the policy.
The Asgi-SA programme has, however, also attracted some criticism. One criticism from
Frankel et al (2007) is that the programme appears to rely on capital deepening, yet
international experience suggests that this is not the key to accelerated growth. There is
also evidence in recent South African economic data that capital deepening has not been
the most important driver of growth (Frankel et al 2007).
Another question related to feasibility is whether there will be available resources to finance
this increase in investment. A large increase in spending will place pressure on domestic
resources, which will in turn call for an increase in government and private savings in order
to avoid an increase in external imbalances (Frankel et al 2007). The increase in pressure
on domestic resources may result in increased interest rates and if growth is financed with
external resources the vulnerability of the current account may increase, leading to an
increase in financing costs (Frankel et al 2007).
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2.2.1.2 Growth
Prior to 1994 the South African economy experienced almost two decades of economic
stagnation where the GDP growth rate decreased from 5.5 percent in the sixties to 3.3
percent in the seventies to 1.2 percent in the eighties. Gelb (2004) found that this was
related mostly to political instability and uncertainty as well as volatile terms of trade
resulting from exports being dominated by primary commodities, particularly gold.
The manufacturing industry, although contributing substantially to domestic output, was
focussed on the domestic market and therefore internationally uncompetitive. Gelb (2004)
stated that the total factor production (TFP) growth in manufacturing decreased from 2.3
percent per annum in the sixties to 0.5 in the seventies and –2.9 during the first half of the
eighties. There were some short-lived, limited cyclical upswings in the growth rate but the
longest and deepest recession lasted from 1989 to 1993 with a negative growth in GDP of
–0.2 percent recorded in 1990. (Gelb 2004)
The average rate of growth of the economy between the years 1994 and 2003 was 2.77
percent per annum, which was considered an improvement in growth since the eighties, yet
slightly disappointing given that the population growth averaged two percent in the same
period (Gelb 2006).
The country continued to experience improved growth with a real GDP increase of five
percent in 2006, which was broadly in line with the growth recorded in the previous two
years. A report completed by (Standard Bank 2007) found that annualised growth
accelerated from 4.5 percent in the third quarter of 2006 to 5.5 percent in the fourth quarter,
reflecting the improved growth in all of the major sectors of the economy.
2.2.1.3 Exports
Political sanctions, which had been in place for most of the eighties, were gradually lifted in
the early nineties, allowing South Africa the opportunity to re-integrate into the world
economy (Casteleijn 2000). The newly elected democratic government identified
international trade as key to the growth of the domestic economy and responded by
adopting several changes in trade policy. Casteleijn (2000) identified the reduction of import
tariffs and improved market access through preferential trade agreements and regional
integration as some of the changes included in the new trade policy.
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Regional integration was also seen as a crucial factor in the successful re-integration of the
country into the global economy. In 1994 South Africa entered the South African
Development Community (SADC), a regional community striving towards development and
economic growth which today consists of 14 member countries including South Africa
(Standard Bank 2007). The government also entered into preferential trade agreements
such as the Free Trade Agreement with the European Union, signed in 1999 and is a
recipient of unilateral preferential trade agreements such as the African Growth and
Opportunity Act (AGOA) providing market access opportunities in the US (Standard Bank
2007).
Exports (as a percentage of GDP) have increased from 24.7 percent in 1996 to 26.6
percent in 2006 (Standard Bank 2007). The total value of exports also increased in value
from R453 billion in 2005 to R556 billion in 2006, 6.4 percent of which was attributable to
gold exports. A report released by Standard Bank (2007) revealed that merchandise trade
more than doubled between 2000 and 2006 from R384 billion to R875 billion. Today South
Africa has, to a large extent, become dependent on international markets owing to the size
and characteristics of the economy.
Standard Bank (2007) explained that foreign trade for South Africa is similar to that of
several other emerging economies in that its exports are largely commodity based and
imports are mostly higher value-added goods. The top five non-gold merchandise exports
are precious and semi-precious stones, precious metals, mineral products, vehicles and
other transport equipment, machinery and mechanical appliances, electrical equipment and
base metals and products thereof (Standard Bank 2007).
2.2.2 Mining
The discovery of world-class diamond and gold deposits in the latter half of the eighteenth
century resulted in the transformation of South Africa from a primarily agricultural to a
modern industrial economy. Iliffe (1999) states that South Africa has an exceptional variety
of geological deposits including gold, diamonds, iron ore and platinum group metals
(PGMs). Figure 1 illustrates the mineral reserves and production for South Africa as a
percentage of total world reserves. The figure shows that South Africa accounts for more
than half of the manganese, chromium and PGM reserves in the world, as well as over 40
percent of the vanadium, gold and vermiculite reserves in the world. The mining industry
- 10 -
contributed 5.6 percent to the South African GDP in the second quarter of 2007, which was
down from six percent in the second quarter of 2006 (Rostoll 2007). (Iliffe 1999)
Figure 1: South African reserves and production in key minerals, 1998 (percentage of world reserves
Zinc
Iron Ore
Uranium
Nickel
Coal
Diamonds
Fluorspar
Zirconium
Vermiculite
Gold
Vanadium
PGMs
Chromium
Manganese
Reserves
Production
0 20% 40% 60% 80% 100%
Source: Malherbe and Segal 2000:5
Malherbe and Segal (2000) found that the political changes undertaken towards
democratisation in 1990 posed enormous challenges to the mining industry. The corporate
and governance structures that had evolved within the South African mining industry were
considered unacceptable to the international investment community who had re-entered
South Africa. This investment community was important to South African mining companies
for the raising of capital for both domestic and off-shore projects (Malherbe and Segal
2000).
The start of modernisation within the mining industry began in the nineties and what
emerged was a more focussed, competitive and internationally active industry (Malherbe
and Segal 2000). The mining industry provided the base for what would become the
competitive advantage for the country in electricity, chemicals and related industries. Both
- 11 -
upstream and downstream activities associated with mining operations also significantly
contribute to the economy (Malherbe and Segal 2000).
2.2.2.1 Legislation
The Mineral and Petroleum Resources Development Act (MPRDA), No. 28 of 2002, which
was enacted in May 2004 along with the Mining Charter is used to regulate the South
African mining industry (Seccombe 2007).
The goal of this legislation is “to make provision for equitable access to and sustainable
development of the nation’s mineral and petroleum resources; and to provide for matters
connected therewith” (Department of Minerals and Energy, 2002:1).
The government has undertaken the responsibility of custodianship of the mineral and
petroleum resources of South Africa. This includes the protection of the environment for
future generations, promotion of the development and social upliftment of communities
affected by mining, and redressing the results of past racial discrimination, while creating
an internationally competitive and efficient administrative and regulatory environment
(Department of Minerals and Energy 2002).
Exploration and mining companies attempt to limit their business risks to their core
expertise of geology and mining operations. Some of the risks that these companies are
exposed to can best be reduced through a stable and predictable macro-environment, and
companies depend on government to establish and maintain such an environment. The
goals of the South African government, such as increased opportunities for persons from
historically disadvantaged backgrounds, and local economic development, may be
considered as stabilising to the social macro-environment (PDAC 2001). Although these
legislative schemes tend to increase costs of compliance for mining and exploration
companies, they may also result in the reduction of risks, and to this extent would be
consistent with the interests of the exploration industry.
However, since the promulgation of the act there have a number of concerns expressed
regarding the means by which the goals of this legislation have and will be implemented.
PDAC (2001) believed that the regulations proposed in the draft of the MPRDA and later
included in the act, would be to the detriment of junior exploration companies.
- 12 -
These companies require a legal framework whereby prospectors can acquire, hold and
then freely transfer prospecting and mining rights, as this would allow prospectors to stake
their claims at minimal costs and then later raise high-risk equity capital based on a secure
claim that could generate high rewards (PDAC 2001). A legal risk associated with the
retention of prospecting and mining rights to a particular claim at any stage after the initial
equity contributions for the claim would significantly reduce the possibility of raising capital
on equity markets. Risks such as these would effectively dissuade junior exploration
companies from contributing to the mineral development in the country.
Although Africa is becoming a more popular place to explore for new sources of minerals,
South Africa is failing to attract much of the capital that is being invested into discovering
these resources (McKay 2006b). South African firms accounted for 26 percent (US$469
million) of the world spend for exploration in 2005, however only five percent of their
budgets were for exploration in South Africa itself.
The Fraser Institute Annual Survey of Mining Companies is a survey that represents the
opinions of executives and exploration managers in the mining companies and consulting
firms to the industry and covered 65 jurisdictions on six continents in 2006. This survey
uses the PPI (Policy Potential Index) that measures the effects of government policies on
the attractiveness of exploration in these jurisdictions (McMahon and Melhem 2007). South
Africa ranked 48 out of the 65 regions in 2006, dropping from 19 out of 53 jurisdictions in
2003.
The reason for the reduced interest in South Africa as a destination for exploration is partly
the perception that there are limited exploration opportunities, but another is the regulatory
environment in the country, which appears to work against the requirements of mining and
exploration companies (McKay 2006b). This was reiterated by Leon in a presentation to the
IBA (International Bar Association), who said that the MPRDA had come at a cost to South
Africa, including a decline in foreign investment in the mining industry (Rostoll 2007).
Leon describes the new mineral regulation as well intended, but it has created an
unpredictable, discretionary environment where the Minister of Minerals and Energy has
the discretion to grant, refuse, suspend or cancel prospecting and mining rights where the
MPRDA is based on vague social and labour objectives, which are potentially
immeasurable (Rostoll 2007). Also, when applications for rights are rejected, artificial
reasons are given, despite the requirements of the Constitution and the MPRDA to give
- 13 -
appropriate reasons for the decisions taken by the Department of Minerals and Energy
(DME).
Another growing concern is that the regulators do not appear to be capable of effectively
administering the MPRDA because of the significant time taken for the processing of
prospecting and mining applications (McKay 2006b). An example of this is where 907
prospecting rights applications were received by the DME in the first 10 months of 2007,
yet only 11 had been granted by the end of October 2007. Between July 2006 and June
2007, 448 mining applications had been submitted to the DME and only two had been
granted by the same date (Rostoll 2007). Rostoll (2007) observed that these questionable
decisions, along with the unpredictability and delays in decision-making, have increased
litigation and dissatisfied investors are now searching for alternative investment
opportunities.
Most of the current lawsuits are related to the controversial expropriatory effect of the
MPRDA, which allows anyone who can prove that the MPRDA has expropriated their
property to claim compensation (Rostoll 2007). The Constitution grants that compensation
claims will be limited to what is just and equitable, and the MPRDA provides that the
obligation to redress the racial discrimination of the past and encourage equitable access to
minerals should be considered, when deciding what is just and equitable compensation.
Leon believes that under these laws, just and equitable is likely to be well below market
value of the expropriated asset.
This could create a potential conflict with the obligations of South Africa under some of the
bilateral agreements it has signed with a number of countries. Many of the earlier bilateral
investment treaties (BITs) did not exempt the new reform programmes from treaty
protection (Rostoll 2007). The Luxembourg-based Finstone, the holding company for the
South African granite producers, Marline, Kelgran and Red Graniti, registered the first
international expropriation claim against the government in January 2007. This lawsuit will
claim compensation of €266 million under the South Africa/Italy and South Africa/Belgo-
Luxembourg Economic Union BITs, due to unlawful expropriation of their investments
through the removal of their mining rights in South Africa.
After these claims were registered, the Minister of Minerals and Energy amended the
MPRDA by removing all identified obstacles that may hinder mining investment and the
revised Act was published in August 2007. Leon believes that this amendment does not
- 14 -
address the failings of the MPRDA as it has not established objective criteria and still
permits the unrestricted discretion of the Minister with regard to licensing requirements.
Seccombe (2007) considers the changes to the legislation to be an attempt to block
potentially damaging lawsuits alleging expropriation in the near future. The extended period
for the conversion of mineral rights included in the amended MPRDA, will allow the DME to
reduce the number of lawsuits related to this process.
The global perception of South Africa as a destination for exploration is poor. In The Fraser
Institute Annual Survey of Mining Companies, South Africa rated average for its geological
database and was perceived to have acceptable infrastructure, however, it scored very
poorly on its land claims, labour relations and tax regime (McMahon and Melhem 2007).
A report compiled by PDAC (2001) suggests that conditions considered favourable to junior
exploration companies would also promote the goal of the South African government of
increasing the participation of historically disadvantaged persons in the mining industry.
Mining and exploration companies owned by these individuals also face the challenge of
attracting finance without a record of technical ability and experience as well as the lack of
the necessary collateral to satisfy cautious lending standards.
The ministerial discretion regarding the forfeiture of rights undermines the confidence of
status and free transferability, which are prerequisites to raising high-risk capital. The
Prospectors and Developers Association of Canada (PDAC) proposed that “Ministerial
discretion over use of the rights that results in reasonable delays or added costs will be
much more acceptable to investors than ministerial discretion that can result in forfeiture of
the rights” (PDAC 2001:4).
2.2.2.2 Production
All of the most important minerals mined in South Africa have experienced growth in
production over the long-term, with the exception of gold and manganese (Malherbe and
Segal 2000). Gold has experienced a downward trend in production for over three decades
with the exception of the early eighties as illustrated in Figure 2 and Malherbe and Segal
(2000) identified production for 1998 to be around 464 tonnes, which was approximately
half the peak production of gold in 1970.
The low rand gold price, increasing costs and restructuring of several operations has
impacted upon the viability of a significant proportion of the mining sector, particularly in the
- 15 -
first half of 2005 (Chamber of Mines of South Africa 2006). The Chamber of Mine of South
Africa (2006) also reported a decline in gold production in 2005 by 13.1 percent year-on-
year to 297.3 tons, the lowest level of production since 1923. Despite this decline in
production, the South African gold mining industry remained the largest gold producer in
the world in 2005, accounting for 11.8 percent of global new mine supply in the same year.
A rally in gold prices in the last couple of years, owing to fears of inflation and concerns
about global stability, has stimulated the gold mining industry and gold mining companies
are now spending millions of dollars on expansion projects (Onstad 2006). The deepest
mines in the world can be found in South Africa and with the increase in the gold price,
some producers are willing to go deeper, where it is estimated that there is as much gold
between 3500m and 5000m below surface as that mined out of the Witwatersrand to date.
This may lead to an increase in production trends in the future (Onstad 2006).
The production trend for Chrome appears to be the most volatile compared with other
production trends recorded in Figure 2 (Department of Minerals and Energy 2007). With
stainless steel being the major end-use for chrome ore, world stainless steel production has
had a significant impact on the demand for chromium, thereby influencing the production of
chrome ore. The Department of Minerals and Energy (2007) has identified five major
events in the past 20 years that have affected the general performance of the chrome ore
and ferrochrome market.
One of these events is the dissolution of the former Soviet Union in 1991, resulting in a
decrease in demand for chromium from these markets, which is reflected in the downward
trend of chrome ore production in Figure 2. This was followed by the introduction of
democracy in South Africa, which attracted international investment into the mining industry
from the mid-1990s (Department of Minerals and Energy 2007).
The Asian crisis in 1997 resulted in a lower demand for stainless steel, pushing chromium
production lower, however, this may not have affected South African production
immediately as this downward trend is not reflected on the graph in Figure 2. The
Department of Minerals and Energy (2007) describes the fifth event as being the recession
in the US in 2000, which had a similar effect to the Asian crisis, which also does not reflect
in the graph in Figure 2.
Despite the downward trend in the production for certain minerals, there are three sectors
within the mining industry that have doubled in production since 1980, namely coal, chrome
- 16 -
and PGEs. The production of platinum and its related minerals continues to grow and
accounts for just over half the production of these minerals in the world, and iron ore
production now accounts for more than half of the world production (Department of
Minerals & Energy 2007). This has resulted in the mining industry growing faster than the
rest of the South African economy over the last three decades (Malherbe and Segal 2000).
Figure 2: Production trends for a selection of minerals in South Africa for the period 1980 – 1998
1980 1984 1988 1992 1996 1998
40
60
80
100
120
140
160
180
200
Gold
PGM
Iron ore
Manganese
Coal
Chrome
Tonn
es
Source: (Malherbe and Segal 2000:6)
2.2.2.3 Exports
Mining and related beneficiated products (e.g. ferroalloys and aluminium) account for
almost half of the exports from South Africa and continue to be the most important earner
of foreign exchange in the economy (Malherbe and Segal 2000). During the nineties,
mining directly generated, on average, 41 percent of total exports and in 1997 the value of
- 17 -
mineral exports was R51 billion. Malherbe and Segal (2000) describe how in the same year
non-gold mineral exports valued at R27 billion exceeded the value of gold exports valued at
R25 billion, which was by itself responsible for one-sixth of the export earnings for South
Africa.
In 2005 primary mineral sales were valued at R101, 906 million, which was 29.3 percent of
the total value of goods exported from South Africa for the same year (Roberts 2006). This
showed an increase from the R89 673 million recorded in 2004, which accounted for 28.9
percent of the total value of exports. Roberts (2006) explains that by including processed
minerals exports in these figures, the contribution to exports would increase to 37.4 percent
for both 2004 and 2005.
2.2.2.4 Junior Mining Industry
For over a century, mining finance houses dominated the private South African economy.
These firms were initially formed to develop and exploit the Johannesburg gold deposits
and ultimately financed the entire South African gold mining industry. These firms
enveloped the diamond industry, pioneered coal and platinum mining and funded most of
the manufacturing base in South Africa for the last 50 years. These firms were also
instrumental in the development of capital and money markets in South Africa (Malherbe
and Segal 2000).
Today the traditional mining house no longer exists. Malherbe and Segal (2000) list some
of the contributing factors bringing about the exit of this model and the introduction of new
models of mine production. These included the rise of black unionism, political and
legislative change as well as investor pressure for higher returns. South Africa remains an
important hub for some of the largest mining companies in the world, including Anglo
American, a world leader in gold and platinum as well as considerable interests in copper
and coal. Today, however, the mining industry also consists of a diversity of firms with
differing strategies, including small mines focussed on the high productivity exploitation of
marginal operations and single commodity companies with long-life, high-yielding deposits
(Malherbe and Segal 2000).
The introduction of new technologies and the increasing focus on cost and restructuring in
recent years has opened up opportunities in the mining industry for these smaller
companies. These mining juniors have been vital in saving a large number of marginal
operations by making them more feasible through the implementation of more flexible and
- 18 -
effective management methods (Malherbe and Segal 2000). Many of these firms, including
Durban Roodepoort Deep (DRD) Gold, Harmony Gold Mining and African Rainbow
Minerals, have grown considerably and are important players in the South African mining
industry today.
The new industry structure has opened up new opportunities for a variety of small
companies with exceptional skills, including explorations juniors, specialists in marginal
deep-level mining and mining contractors (Malherbe and Segal 2000).
a) Exploration juniors
Junior exploration companies play an essential role as catalysts for the growth in mineral
development for a country. These companies are often formed by an entrepreneurial
person or group of people who wish to take advantage of their greater familiarity with the
local geology (PDAC 2001). These companies can then raise capital to advance a prospect
once there is evidence of a potential find.
With the development of new technology in the industry, the need for scale in exploration
has been reduced. This has enabled small firms with the necessary technology and
geology skills to compete effectively in this field, and these junior exploration companies
have changed the economics of the industry. The capital required by these firms is
provided mostly by individual investors or larger mining companies that have chosen not to
undertake exploration themselves (Malherbe and Segal 2000).
Figure 3 is a comparison of the total exploration budgets for major, intermediate and junior
mining companies as well as commercially-oriented, government-controlled entities (Metals
Economics Group 2006). The diagram indicates that in 1997, at one of the peaks of
exploration spending, juniors accounted for less than 40 percent of exploration budgets
worldwide. The decline in exploration spend by juniors between 1997 and 2001 was partly
due to the decline in metal prices during this period and was compounded by industry
scandal which affected the ability of juniors to secure necessary exploration funds. By 2001
the share of exploration spend by juniors had decreased to 25 percent (Metals Economics
Group 2006).
- 19 -
Figure 3: Worldwide Exploration Budget by company type, 1997-2006 (as a percentage of worldwide exploration)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Govt / OtherJuniorsIntermediatesMajors
0%
10%
20%
30%
40%
50%
60%
70%
Source: Metals Economics Group 2006:6
However by mid-2002, there was resurgence in exploration spend by juniors due to the
recovery of the gold price and the re-emergence of dormant junior mining companies. An
increase in the gold price also promoted gold exploration juniors in the Witwatersrand, such
as Wits Gold which have prospecting rights for ground that is claimed to hold 159 million
ounces of gold, much of it below 2500 metres (Onstad 2006).
The improved commodity prices encouraged investment in the mining industry, which
enabled juniors to raise the necessary funds to restart exploration projects. Since 2002,
junior exploration spend has increased by more than 350 percent and in 2004 surpassed
that of the majors; in 2006 juniors accounted for more than half to the total worldwide
exploration spend.
b) Marginal deep-level mining specialists
In the gold mining industry the larger companies, Anglogold and Gold Fields, have chosen
to focus on the higher-grade shafts and the release of their marginal operations to smaller
firms. These smaller firms have demonstrated increased flexibility in work re-organisation
as well as improved worker incentives and mine planning. This has enabled them to mine
deposits more profitably (Malherbe and Segal 2000).
- 20 -
Operating at depths of more than 4000 metres can be challenging for mining firms as these
companies must spend significant amounts of money on ventilation to cool mine workings,
as temperatures increase with increasing depth and can reach up to 62 degrees Celsius at
4000 metres below surface (Onstad 2006). However with the increased gold price in recent
years, investors are willing to invest in companies that are reviewing the viability of deeper
mines.
c) Mining contractors
Specialist and production outsourcing has increased in recent years in the South African
mining industry, including contract mining. Many of the companies in this field are rather
small and these firms are active on many open-cast mines in Africa (Malherbe and Segal
2000).
There has been a trend in recent years from owner-operated mines to contractor-operated
mining operations. The growth of contractor-operated mines has been precipitated by the
entry of junior mining companies into the industry, industrial relations and the increasing
skills shortage in South Africa. It is important that contract-mining companies are aware of
all cost implications (from drilling to blasting), are skilled and constitute an efficient part of
the mining operation (Naidoo 2007). Visser, the operations manager of Bulk Mining
Explosives, said that the responsibility for risk should be shared between the contractor and
mining company in order to ensure the continued success of the contract-mining industry.
(McKay 2006b) observed that the junior mining sector in South Africa has grown in recent
years and with the number of newcomers to the industry in 2005 and 2006, there remains
the potential for more growth.
- 21 -
2.3 Access to Capital Finance
Junior mining and exploration companies are recognised as the most financially volatile
and high-risk companies in the resources industry and one of the major obstacles that
these companies must overcome is the difficulty in attracting finance in a capital-intensive
industry (MiningWatch Canada 1997). These companies often lack a bankable record of
technical skills and experience as well as a lack of sufficient collateral to comply with the
conservative lending standards of banking institutions (PDAC 2001).
Private equity through financing institutions is often reserved for larger transactions and
junior mining and exploration projects are often considered too small for a merchant bank
to justify the time and energy required to complete the transaction (Botha 2002). Botha
(2002) also identified the importance of sponsors for these companies seeking financial
assistance. Sponsors should be technically and financially sound in order to assist juniors
should there be challenges related to a project, therefore junior companies with large
sponsors are more likely to be successful in debt financing their projects. However not all
junior mining and exploration companies have the benefit of large sponsorship and so they
are left to seek the finance for their projects from alternative sources (Botha 2002).
Junior exploration companies have a number of distinguishable requirements. These
companies search for new mineralisation of economic value that may one day result in the
development of a new mine (MiningWatch Canada 1997). Because these companies do
not generate a cash flow from their activities they must attract high-risk equity funding to
raise capital for their projects through either public financing or joint ventures with larger
mining companies (PDAC 2001).
These companies must be able to fulfil the investment goals of potential shareholders who
are willing to contribute the high-risk equity capital; not all equity is contributed at once and
so these companies must often return to equity markets to raise capital for successive
stages of prospecting as the prospect becomes more promising (PDAC 2001).
The shareholders in junior mining companies are usually investing in identified prospects
that may be based on unproven but promising insights of entrepreneurial geologists, who
have undertaken the initial investigations and secured prospecting rights for an area of
interest. PDAC (2001) explains that the only assets these companies usually have are their
professional staff, their experience and ideas, and land, to explore for potential mineral
- 22 -
deposits. The success rate for developing these mineral deposits into a mine is very low,
however, the reward for the discovery of an economically viable deposit is considerable
and this is often what maintains the interest of investors (PDAC 2001).
McKay (2006b) observed that Toronto and London have proved to be the favourite markets
in which to raise capital for exploration activities throughout the world. The TSX in Canada
is considered the most active stock exchange in the world for mining companies and this is
attributed to the entrepreneurial spirit of Canadians, which has made it easier to raise
money for high-risk capital projects (MiningWatch Canada 1997). This speculative financing
potential and the appetite of Canadian investors to invest in offshore projects has made the
TSX an increasingly favourable destination for South African exploration and mining
companies wanting to raise capital offshore (Fraser 2005).
In an interview with Fraser (2005), an independent mining analyst, Grohmann, suggested
that although the TSX presents the access to a larger pool of risk capital for an international
mining project, London has a closer affinity than Toronto to riskier jurisdictions such as
Africa. He has found that although London is more conservative than Toronto, a number of
South African mining companies have successfully raised capital in London on both the
LSE main board and AIM Exchanges (Fraser 2005). (Froneman 2005)
In an interview on Radio 2000 with Froneman (2005), the Chief Executive Officer (CEO) of
Aflease said that their consideration of a primary listing in Canada was related to the risk
appetite of investors, which was greater in Canada when compared with South Africa,
where there appeared to be a resistance to investing in junior mining companies.
Although a number of junior mining and exploration companies operating in South Africa
have selected equity listings on stock exchanges offshore, others have chosen to list on the
local JSE main board and Alt-X Exchanges. Some companies have also opted for multiple
listings on the JSE and one or more offshore exchanges (McKay 2006b).
The evaluation of the characteristics of the London Stock Exchange (LSE), Toronto Stock
Exchange (TSX) and JSE Securities Exchange (JSE) has been included below.
2.3.1 Toronto Stock Exchange / Venture Exchange
The TSX Group consists of the TSX Exchange, TSX Venture Exchange and the NEX
Exchange and is located in Toronto, Canada. Canada is often perceived as the global
- 23 -
leader in resources and this is reflected in the Canadian equity and currency markets
where trading has often been closely linked to fluctuations in commodity prices (Burleton
and Apollonova 2006). This study suggests that the perception may have foundations in
reality given that in 2004 and 2005 approximately one fifth of capital raised for mineral
exploration was targeted for projects in Canada, surpassing all other countries.
Canada produces a wide variety of metallic minerals and is one of the fifth largest
producers of aluminium, cadmium, copper, molybdenum, nickel, PGEs, titanium, uranium
and zinc and is the seventh largest producer of gold (Friedman, Haney, Peterson, Farrell
McDemott 2007). The country is also a net exporter of coal and petroleum. Combined with
the low political risk and open access to the US markets, the resource sector in Canada is
rivalled by few countries around the world (Friedman et al 2007).
The capital markets in Canada have also become major sources of debt and equity for the
mining industry worldwide. In 2006, over 1200 mining companies were listed on both the
TSX Exchange and TSX Venture Exchange and raised 38 percent of the total equity capital
raised by publicly listed mining companies throughout the world (Friedman et al 2007).
Figure 4 shows the TSX and TSX Ventures Exchanges as the largest source of equity
finance for resource companies in 2006 followed closely by the LSE and AIM Exchanges in
London.
The TSX Exchange has also earned the reputation as a leader in trading technology by
becoming the first exchange to develop a computerised system for the trading of some of
its stocks with the launch of CATS (Computer Assisted Trading System) in 1977 (Ellingham
2005). The TSX also became the first large exchange in North America to migrate to a
floorless trading system when it closed its trading floor in favour of electronic trading in
1997. The Toronto Stock Exchange has also developed market surveillance workstations,
which use artificial intelligence to monitor stock changes and alert staff to unusual trading
activity (Ellingham 2005).
- 24 -
Figure 4: Equity finance raised by resource companies in 2006
10,095 9777
2,6581,969
537 503 468 493
0
2,000
4,000
6,000
8,000
10,000
12,000
TSX-TSXVenture
LSE -AIM
HKGSE ASX RussianSE
NYSE SaoPaulo
Other
Stock Exchange
US$
mill
ions
Source: Toronto Stock Exchange 2006:1
The Toronto Stock Exchange was started in October 1861 with a trading list of only 18
securities and an average of two to three transactions per day (Ellingham 2005). However,
by 1936 the Toronto Stock Exchange had become the third largest stock exchange in North
America and in 1980 a record 3.3 billion shares valued at US$29 billion were traded,
accounting for 80 percent of all equity traded in Canada for the year (Price Waterhouse
Coopers 2007).
West (2007) explains that in 1999 there was a realignment of the Canadian equity markets
where the Toronto Stock Exchange became the sole exchange for the trading of senior
equities in Canada. The trading of derivatives became the responsibility of the Montreal
Exchange whereas the Vancouver and Alberta Stock Exchanges merged to form the
Canadian Venture Exchange (CDNX) on which junior equities were listed. The Canadian
Dealing Network, Winnipeg Stock Exchange and equities portion of the Montreal Exchange
later merged with the CNDX (West 2007).
The Toronto Stock Exchange later acquired the CNDX and the stock list migrated to the
TSX trading platform in December 2001 and renamed the TSX Venture Exchange in early
- 25 -
2002. Since then the TSX Venture Exchange has appreciated in value in excess of 220
percent and companies listed on this exchange were able to raise over six billion Canadian
dollars in the first half of June 2007 alone (West 2007).
TSX Venture Exchange
The TSX Venture Exchange is intended for early-stage resource companies seeking to raise
smaller amounts of capital to finance exploration activities and small mining operations. A
study by Murphy, Zvanitajs and Donaldson (2007) of the top 100 mining companies listed on
the TSX Venture Exchange revealed that 86 of these companies were in the exploration
phase of their life cycle.
Murphy et al (2007) indicated that the TSX Exchange is suited to larger companies with
producing mines and the TSX Group is structured such that junior mining companies will be
encouraged to graduate to the TSX from the TSX Venture Exchange once they have
established themselves as large-scale mining companies. This is often different from
exchanges such as the AIM Exchange where not all resource companies graduate to the
LSE main market once they have matured into firms with greater capitalisation and
resources (Murphy et al 2007).
An article by Forrest (2007) describes a growing trend by a number of Australian junior and
mid-cap mining companies that have chosen to list on the TSX Venture Exchange or to dual
list on the TSX Venture Exchange and Australian Stock Exchange (ASX). The access to a
larger pool of capital in the North American markets and a reputation as a large capital
market for mining companies have been the major attractions of the TSX Exchange for
Australian and South African mining companies. Australian mining companies have also
preferred the exploration focus of the investors on the TSX Exchange as opposed to the
cash flow and dividend focus of the ASX investor community (Forrest 2007).
The investors on the TSX Venture Exchange are attracted to projects not just in Canada, but
also in more unusual places. The increased tolerance for risk and the reduced focus on
dividends have made the TSX Venture Exchange a popular destination for foreign junior
exploration companies seeking capital funding (Forrest 2007).
The Canadian government has actively encouraged investment in their junior mining industry
through an attractive tax structure including the flow-through shares system. Murphy et al
- 26 -
(2007) explains that this system allows exploration companies that issue flow-through shares
to renounce tax deductions that would usually be available to the company and pass the tax
benefit on to their investors, provided that funds raised from these shares are spent on
mineral exploration in Canada (Murphy et al 2007). This system has stimulated investment in
resource companies, so although foreign companies may not directly benefit from this
system, they may benefit indirectly through the increased stimulation in investment in the
resource sector.
The success of the TSX Venture Exchange is evident in the marked increase in total market
capitalisation from US$14.8 billion in 2005 to US$27.6 billion in 2006. Exploration companies
were also able to raise US$1.2 billion in 2006 through the issuing of shares, an increase of
206 percent from the previous year (Murphy et al 2007).
2.3.2 London Stock Exchange / AIM Exchange
The London Stock Exchange (LSE) is one of the oldest stock exchanges in the world with
its origins dating back to the late seventeenth century in the Coffee Houses of London
(Board, Wells, Dufour and Sutcliffe 2006). Today the LSE consists of the main board, the
professional securities market designed for specialist securities and the AIM Exchange,
which was created to stimulate growth for small to medium-sized companies (Board et al
2006).
London is considered the most important financial centre in the global economy according
to a report commissioned by Mastercard on the top 50 worldwide centres of commerce,
followed by New York and Tokyo, with Chicago in fourth place (Beattie 2007). Beattie
(2007) writes that a stable legal and economic framework and transparent business
regulation were cited as the factors contributing to the success of London as a financial
centre.
Arcot et al (2007) also notes that London houses many of the world leading investment
banks and fund managers, which has allowed the LSE the opportunity to increase its share
of international company flotations as well as the trading in foreign securities. In 2006
London attracted 86 IPOs, accounting for 75 percent of all international IPOs in Europe for
that year. Sixty six of these IPOs were listed on the AIM Exchange and the remaining 20
were listed on the LSE main board, raising a total of €15 billion (Arcot et al 2007).
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Goodison (1988) considers the time zone in which London operates to also be to its
advantage as a preferred destination. Stock exchanges around the world favour local
trading over shift work in one international centre, which presents London, as the largest
and most sophisticated exchange in Europe, with the opportunity to be one of the three key
trading centres in the world along with Tokyo and New York. The reason for this is that
London opens for trading before Tokyo closes and remains open after the start of trade in
New York. Neither New York nor Tokyo can match this advantage. Goodison (1988)
believes that this key advantage has attracted many dual-listings by large companies listed
on exchanges in other time zones to the LSE. (Goodison 1988)
The LSE has also used technology to increase the efficiency and speed of trading and in
October 1997 the Stock Exchange Electronic Trading Service (SETS) automated system
was launched, where highly liquid shares could be traded on an order-driven basis (Board
et al 2006). Board et al (2006) explains that this system automatically executes a trade
when a buy and sell price are matched and is used for constituents of the FTSE All Share
Index, Exchange Traded Funds and Commodities as well as over 180 of the most traded
AIM and Irish securities.
The LSE has also chosen to maintain the older, semi-automated Stock Exchange
Automated Quotations System (SEAQ) system, which is used for securities that are traded
less regularly where market makers maintain the liquidity of the shares (Board et al 2006).
These market makers are required to hold shares of a specific company and then set the
bid and ask prices thereby ensuring a market for the stock. The SEAQ system is used for
the Fixed Interest Market and AIM securities that are not traded on the SETS system
(Board et al 2006).
The SETS system proved successful in improving the speed and efficiency of the trading
environment on the LSE illustrated by the record average daily number of 357,658 equity
trades carried out across the exchange in October 2005 (London Stock Exchange 2005).
However this increase in trades placed the SETS system under growing pressure and in
June 2007, the LSE launched their new trading system, TradeElect, which has enabled the
exchange to facilitate higher volumes of trades while lowering the fees associated with
trading (London Stock Exchange 2007c).
The LSE raised £43.8 billion in new and further issues during 2007, which Barriaux (2007)
explains was less than the £52 billion raised in 2006. The number of IPOs for 2007 was a
- 28 -
total of 252 less than the 367 recorded for 2006. This is the first time in four years that the
LSE has not recorded a year-on-year increase in money raised on the exchange and for
the first time in two years the LSE has raised less money than the New York Stock
Exchange (NYSE) (Barriaux 2007). Despite the reduction in money raised through IPOs in
2007, the LSE has maintained its position as the most international equity market in the
world by attracting 86 international IPOs from 22 countries in the same year with an
increase of 4.5 percent in money raised from international IPOs (Barriaux 2007).
Since the early eighties the LSE has offered a platform allowing the trading in foreign,
particularly European stocks. Goodison (1988) describes how this platform initially provided
liquidity and trading in size that was not available in mainland European markets at the
time. However European markets today offer higher levels of liquidity, regulation and
effective settlement systems, which has reduced the attractiveness of the LSE for
European firms and so the LSE has shifted its focus to attracting firms operating in
emerging markets (Board et al 2006).
AIM (Alternative Investment Market) Exchange
The AIM Exchange was launched in 1995 and was originally designed for small and
medium-sized British companies seeking equity capital for expansion. However over the
last 12 years the exchange has developed into a significant capital market for growing
companies around the world (Keepin 2007).
Although there is a significant constituency of British companies listed on the exchange,
Arcot et al (2007) explain that there are a growing number of foreign companies in a variety
of sectors listed on the exchange, which accounted for nearly half of the total market
capitalization of the AIM Exchange in 2007. These include companies incorporated outside
of the United Kingdom (UK) as well as those that are operating through UK registered
companies (Arcot et al 2007). Table 1 shows a breakdown of companies by region of
operation.
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Table 1: Breakdown of AIM companies by country or region of operation (June 2007) Country / Region No. of
companies Percentage of total (%)
Market Value (£ million)
Percentage of total (%)
UK 1,144 70.0 52,046 48.3 Remainder of Europe 151 9.2 18,896 17.7 Americas 141 8.6 17,165 15.9 Asia 119 7.2 10,941 10.2 Australasia 48 2.9 3,978 3.6 Africa 36 2.1 4,640 4.3 Total 1,639 100.0 107,666 100.0
Source: (Arcot et al 2007:32)
Since 1995 there have been over 2300 British and 400 foreign companies that have raised
funds on the AIM Exchange. In 2006 there were 462 new IPOs that raised £15.7 billion,
almost double the amount of £8.9 billion raised from the 519 IPOs in 2005 (Taylor, Burkitt
and Campbell 2006). In the same period some 1000 companies left the exchange for a
variety of reasons including transfers to the main board. Taylor et al (2006) attributed much
of the significant growth over the last three years to foreign companies mostly in the mining,
oil and gas sectors, which accounted for 31 percent of the market in the first quarter of
2007 based on market capitalisation (Table 2). There were 1796 companies quoted on the
AIM Exchange at the end of February 2008 (London Stock Exchange 2008).
Table 2: Breakdown of AIM companies by sector – first quarter 2007 (percent) By number of companies By market value Financial 21 29 Resources 17 31 Technology 15 7 Business services 8 6 Media and content 7 4 Lifestyle 4 3 Health 7 5 Industrials 9 7 Consumer products 7 5 Construction 3 2 Other 2 1
Source: Arcot et al 2007:31
The failure rate of companies listed on the AIM Exchange is low at less than three percent
despite the fact that a large proportion of these companies are early-stage businesses that
are often operating in high-risk sectors (Arcot et al 2007).
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The UK government has also introduced tax incentives devised to encourage private
investors to invest in small and growing businesses. These incentives included relief from
income and capital gains tax as well as exemptions from inheritance tax for investors who
have held shares in these companies for at least two years (Arcot et al 2007).
Taylor et al (2006) found evidence suggesting that the AIM Exchange is very attractive to
junior mining and exploration companies where 36 junior resource companies were
admitted onto the AIM Exchange in 2004 and 66 companies were admitted in 2005, nearly
double the IPOs for the previous year. There has also been an increase in confidence in
the resource sector in the last several years, boosted by the strengthening in commodity
prices, which has resulted in record amounts of capital being raised by junior resource firms
through financing activities on the AIM Exchange. In 2004 £229 million was raised through
IPOs and £262 million was raised in 2005 (Taylor et al 2006).
There have also been a number of criticisms of AIM Exchange. A criticism from the NYSE
and the Securities and Exchange Commission (SEC) is that the regulatory framework is not
strict enough and exposes investors to serious risk (Arcot et al 2007). Evidence collected in
the study by Arcot et al (2007) observed that the regulatory environment at this time,
although less rigorous than other exchanges that cater for larger more established
companies, is sufficiently effective for both the investors and companies whose shares are
traded on the AIM Exchange.
Another concern regarding the AIM Exchange has been the increasing size of the
exchange. Taylor et al (2006) found that some observers are apprehensive that, as the
market grows, the smaller companies may receive little attention from analysts as well as
little visibility among the investors on the exchange. However Arcot et al (2007) suggest
that markets are often self-correcting and the decrease in the number of IPOs in 2007
compared with those in 2005 and 2006 is an indication of this self-correcting mechanism.
2.3.3 JSE Securities Exchange Ltd/ Alt-X Exchange
Financial markets in South Africa are the most highly developed in sub-Saharan Africa and
the JSE is one of oldest and most liquid exchanges in the region (Irving 2005). The JSE
was established in 1887 after the discovery of gold in the Witwatersrand. Irving (2005)
described how this discovery led to the development of financial institutions that in turn
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created the need for a stock exchange. The JSE accounts for nearly 90 percent of the total
market capitalisation in sub-Saharan Africa.
In the mid-nineties the JSE underwent significant reform when the market was opened to
foreign investors after the removal of the two-tier exchange rate and all capital controls on
foreign investors. Around the same time the exchange also introduced a fully automated
trading system that replaced the open outcry trading system (Irving 2005).
Prior to the democratic elections in 1994 and the changes to the JSE in 1994 and 1995, the
South African economy was dominated by a small group of large conglomerates, the four
largest of which controlled 83 percent of the companies listed on the JSE, namely Anglo
American, Mutual, Sanlam and Rembrant (Gelb 2006). In general, the trading in one or a
few of these stocks dominated total trading activity on the JSE. However, by 1998 the five
largest conglomerates controlled only 55 percent of the shares listed on the JSE (Gelb
2006).
Another consequence of the abolition of apartheid and the introduction of new economic
policies, has been the substantial increase in foreign investment inflows to the JSE (Irving
2005). The exchange has benefited from these capital inflows; however, the exchange has
also become more susceptible to volatility in international financial markets. Irving (2005)
uses the financial crises in Russia and Brazil in 1998 as an example of this, where the
overall share index for the JSE fell by 30 percent in the month of August alone.
Share volumes traded on the JSE increased from 2.2 billion shares in 1992 to 5.2 billion in
1995 and climbed to over 55 billion shares by 2002. The liquidity (value of shares traded as
a proportion of the market capitalisation) rose from five percent in 1992 to 43 percent a
decade later and South African non-residents accounted for 52 percent of share
transactions by value in 2002 (Gelb 2006). In terms of market capitalisation the JSE was
ranked 17 in 2005 with a market capitalisation of US$549,310 million but dropped to 19 in
2006 with a market capitalisation of US$711,232 million (JSE Securities Exchange 2007).
More recently, the JSE has undergone further restructuring and reform with the amendment
of its listing requirements and a move to an electronic settlement system, along with an
official name change to the JSE Securities Exchange (Irving 2005). South Africa was one
of the last of the top 20 bourses in the world to enter the electronic settlement arena. Strate
(2007) (Share Transactions Totally Electronic) is the authorised Central Securities
Depository for the electronic settlement of all financial instruments in South Africa, the first
- 32 -
phase of which, was implemented in September 1999. The pilot company, Harmony Gold
Mining, was successfully transferred to the electronic settlement environment in late 1999
prompting the migration of further counters to Strate, and by January 2002 every listed
company on the JSE had migrated into Strate (Strate 2007).
Strate introduced the software, SAFIRES (South African Financial Instruments Real Time
Electronic Settlement system) and its corresponding front-end system SAFE (SAFIRES
Front End), which enabled the transition from a paper-based to an electronic-based
environment. Today the JSE guarantees all main board transactions with no failed
settlement for main board trades to date (Strate 2007).
The shift to an electronic settlement system has improved market activity as well as the
international perception of the South African market by reducing settlement and operational
risk in the market and increasing efficiency resulting in the reduction of costs (Strate 2007).
Irving (2005) wrote that included in this reform has been the alliance with the London Stock
Exchange (LSE), allowing the JSE access to the trading system technology used by the
LSE. The SETS trading system and was introduced on the JSE in May 2002. The JSE also
extended its trading hours and introduced indices which are designed to encourage
increased foreign investment and trading (Irving 2005).
Irving (2005) recorded 403 companies listed on the JSE in December 2004, which was
down from the 426 in the previous year and 668 in December 1998. However, the total
market capitalisation recorded in December 2004 was US$455.5 billion, up from US$263.9
billion recorded a year earlier. By the end of February 2008, there were 333 companies
listed on the JSE, 68 of which were dual-listed on other stock exchanges. Resource
companies accounted for 46 percent of these dual-listed companies, 58 percent of which
have primary or secondary listings on the LSE and 26 percent have primary or secondary
listings on the TSX or TSX Ventures Exchanges (JSE Securities Exchange 2008).
Alt-X (Alternative Exchange)
In December 2003, the JSE Securities Exchange (2006) launched its Alternative Exchange
(Alt-X) as a specialised tier for high-growth potential small and medium-sized enterprises
(SMEs). Several previous attempts by the JSE to host small, developing companies,
namely the Development Capital Market (DCM) and Venture Capital Market (VCM), were
unsuccessful due to the listing of poor quality companies. However, the Alt-X Exchange
has been successful in attracting good quality, stable companies, mostly from South Africa.
- 33 -
The success of the Alt-X Exchange is illustrated in the comparison of the Alt-X and JSE
main board share indexes in Figure 5 (Theobald and Williams 2007).
According to Theobald and Williams (2007) many companies have been able to raise
significant amounts of capital on the Alt-X Exchange at reasonable price/earnings ratios
and in some cases these companies have been oversubscribed. In the first quarter of 2007,
the Alt-X Exchange had succeeded in building a market cap of R13 billion since its
inception and by the end of February 2008 there were 78 companies listed on the
exchange. Theobald and Williams (2007) also recognised that companies listed on the Alt-
X Exchange have, on average, better ratings than those listed on the main board of the
JSE.
Figure 5: Comparison of the Alt-X and JSE main board share indexes
Index18017016015014013012011010088
A M J A S O N D F MJ J2006 2007
Alt-X IndexAll share Index
based to 100 at start
Source: (Theobald and Williams 2007:33)
- 34 -
2.3.4 Conclusion
In summary, the literature suggests that junior mining and exploration companies are
considered the most financially volatile and high-risk companies in the resources industry
and will therefore experience difficulty in attracting finance in a capital intensive industry
(MiningWatch Canada 1997). Because these companies do not generate a cash flow from
their activities they must attract high-risk equity funding to raise capital for their projects
through either public financing or joint ventures with larger mining companies (PDAC 2001).
McKay (2006b) observed that Toronto and London have proved to be the favourite markets
in which to raise capital for exploration activities throughout the world due to the higher risk
appetite of investors on these exchanges. The TSX Exchange in Canada is considered the
most active stock exchange in the world for mining companies and this is attributed to the
entrepreneurial spirit of Canadians, which has made it easier to raise money for high-risk
capital projects (MiningWatch Canada 1997). Fraser (2005) suggests that although the
TSX Exchange presents access to a larger pool of risk capital for an international mining
project, London has a closer affinity than Toronto to riskier jurisdictions such as Africa.
Proposition 1: Junior mining and exploration companies in South Africa prefer to list on
stock exchanges where there is greater and easier access to capital.
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2.4 Industry Peers
The industry in which a company operates may influence their choice of stock market in
which to raise their capital requirements. Corwin and Harris (2001) suggest that firms are
inclined to list on exchanges where the majority of other companies in their industry are
currently listed. Anecdotal evidence from previous studies indicates that firms tend to list on
the exchange that they perceive to have the expertise or experience in trading similar
securities (Corwin and Harris 2001).
The choice of listing location may be influenced by the location of analysts and investors
with superior technological knowledge of the industry which the firm is in (Stalinski and
Tuluca 2006). This is relevant in cases where the availability of such information may
substantially affect the accessibility of equity finance and the terms at which the finance is
available. Saudagaran and Biddle (1995) use high-tech firms as an example of this
because they are more likely to list on exchanges in the US, where the corresponding
industries are well developed. Previous research cited in Saudagaran and Biddle (1995)
reveals that many of the Dutch and Israeli firms that choose to bypass their home markets
to list in the US, are high-tech, fast growing companies. There also appears to be a general
perception by listing companies that increased knowledge about a firm or an industry is
beneficial to their investors (Saudagaran and Biddle 1995).
2.4.1 Mining Industry
The mining industry is considered a high-risk investment for some investors partly because
the industry is dependant on commodity prices. Murphy et al (2007) observed that strong
commodity prices over the last several years have significantly increased the value of junior
mining companies listed on the TSX Venture Exchange and other exchanges where the
total market capital for the exchange was US$27 billion in 2006, an 86 percent increase
from US$14.8 billion in the previous year. However lower commodity prices can easily
produce the opposite effect by reducing the value of these companies (Murphy et al 2007).
Exploration companies add another component of risk, where investors may potentially
never experience returns on their investment if the company is unsuccessful in their
attempts to find an economically viable mineral source. Investors who do not understand
the risks associated with junior mining companies may be reluctant to invest in such
ventures (Forrest 2007).
- 36 -
Mining and exploration companies may choose to raise capital on stock exchanges such as
the TSX and TSX Venture Exchanges in Canada, a country perceived to be a global leader
in the mining and exploration fields (Forrest 2007). These exchanges are dominated by
mining and exploration companies, with almost 60 percent of public mining and exploration
companies in the world listed on these exchanges in 2006 (Toronto Stock Exchange 2006).
One of the attractions of these exchanges is a large community of mining analysts, which
allows for the coverage of a broader range of companies. In 2005, there were 68 mining
analysts in Canada, more than half of the total number of mining analysts in the world
(Ellingham 2005).
A further attraction of the TSX and TSX Venture Exchanges, as identified by Forrest
(2007), is that investors on these exchanges are more knowledgeable of the risks
associated with mining and exploration companies and appear to have a greater tolerance
for risk when investing in these companies. Canadian investors also appear to be more
focussed on exploration rather than cash flows and dividends, which was found to be the
trend with investors on the ASX Exchange. This is attractive to firms that are in the early,
exploration phase of their life cycle (Forrest 2007).
2.4.2 Conclusion
In summary, the literature suggests that companies may choose to list on a stock exchange
that they perceive to have expertise or experience in trading similar securities (Corwin and
Harris 2001). This can be relevant in cases where the availability of such information may
substantially affect the accessibility of equity finance and the terms at which the finance is
available (Saudagaran and Biddle 1995).
Junior mining and exploration companies operate in a high-risk industry partly because of
their dependency on commodity prices and so these companies may choose to raise
capital in markets where investors have a greater understanding of the industry and its
associated risks (Murphy et al 2007).
Proposition 2: Junior mining and exploration companies in South Africa prefer to list on
stock exchanges where the majority of their industry peers have chosen to list their shares.
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2.5 Liquidity
A modern corporation of any size often requires ready access to capital markets at the
lowest possible cost in order to function effectively. Bernstein (1987) observed that stock
markets provide more than just finance and in fact the character of these markets is
critically important to corporate management. The information in market valuations is often
used in merger and acquisition decisions and is one of the most accepted guides to the
evaluation of the ability of a management team to handle the affairs of a company
(Bernstein 1987).
The development of organised stock markets has enabled people to transfer their
ownership in companies without any direct negotiation or contact with the buyer or seller on
the other side of the transaction (Bernstein 1987). Markets need to be liquid if they are to
carry out this function effectively. Bernstein (1987) describes a liquid market as being one
where investors can buy and sell their shares promptly with minimal impact on the price of
the stock.
Bernstein (1987) explains that liquid markets require a large number of interested and
active investors, however the larger the number of investors interested in a firm, the smaller
the share of the firm that each investor will own. A potential investor who will own too small
a share in a company to influence management policies will only buy those shares if they
are able to sell their shares at a time when the sale will serve their needs (Bernstein 1987).
Only stock markets can effectively provide these investors with an exit at a fair price
(Bernstein 1987). Companies that have investors with insufficient shares to have a
controlling interest in the company have an obligation to provide liquid and efficient markets
in which investors can trade their shares. Bernstein (1987) therefore concluded that the
easier the exit from ownership of a company, the more attractive the ownership becomes.
To better understand the benefits of liquidity in stock markets, the three fundamental
dimensions of liquidity as identified by Dong, Kempf and Yadav (2007), namely depth,
spread (breadth) and resiliency, will be explored. These attributes are generally accepted
as the basic requirements for good markets. Depth measures the ability of the market to
absorb and execute large orders with the least possible impact on the price of a stock;
Dong et al (2007) describe spread as the measure of the transaction costs for these orders,
which are often estimated by bid/ask spread related measures. A market with depth and
- 38 -
spread suggests that sufficient interest exists on both the sell side and buy side for traders
to carry out a large number of transactions in a short period of time.
Dong et al (2007) defines resiliency as the speed with which pricing errors caused by
uninformative order-flow shocks are corrected in the market. Resiliency indicates that there
is a large counterbalance order-flow whenever transaction prices change as a result of
temporary order variances. Dong et al (2007) considers resiliency to be the measure of the
time dimension of liquidity, whereas depth and spread are measures of the quantity and
price dimensions, respectively.
Having defined the dimensions of liquidity it is now necessary to explore how a stock
market is able to establish and maintain these attributes. The answer lies in what motivates
buyers and sellers to enter into a market in the first place (Bernstein 1987). Black (1986)
distinguishes between investors who trade on the basis of information and noise traders
who trade on noise as though it were information. An investor with information about
individual firms will want to trade but will also realise that only another investor with
information will take the other side of the trade. Investors who trade based on noise will
trade, even though from an objective point of view they would be more sensible not to.
Black (1986) suggests that it may be that they simply like to trade or they may think that
noise is in fact information.
Information traders will be reluctant to trade with one another, because an investor with
special information will be aware that other traders have their own particular pieces of
information and will therefore not automatically enter the market to trade. However with an
abundance of noise traders in the market, it becomes worthwhile for investors with
information to trade (Black 1986).
Noise traders, according to Black (1986), act on imperfect information, often resulting in
prices being pushed away from equilibrium values. This induced under-valuation or
overvaluation will attract information traders, whose trading activity will push prices back to
equilibrium values. In a market with both information and noise traders, Black (1986)
proposes that it would pay for people to seek out critical information on which they can
trade. Noise traders are therefore important in a market as they make it possible for
transactions to take place (Pagano 1989). Transactions are important for a market as they
enable the observation of stock prices, which are critical pieces of information in investment
- 39 -
decisions and company valuations. Noise traders provide the depth, spread and resiliency
necessary for a liquid market (Pagano 1989).
Bernstein (1987) identified speed as another dimension of liquidity. Stock markets attempt
to provide this dimension by attracting large numbers of buyers and sellers as well as
market makers who will buy and sell stocks in the absence of outside buyers and sellers.
Bernstein (1987) also observes that stock markets will attempt to make transfers simpler
along with maintaining low transaction costs.
In order for a market maker to provide liquidity for a specific stock, Bernstein (1987)
considers the importance of distinguishing between transactions based on noise, which
constitute random movements in supply and demand, and transactions based on
information. Bernstein (1987) explains that a market maker should reduce the impact of
noise on the price of a stock while allowing information-motivated transactions to freely
guide stock prices.
In liquid markets, the last price is the best indicator of the equilibrium price, even though
new information will raise or lower the equilibrium price and this change may be
discontinuous. Furthermore, price changes should be relatively unaffected by the size of
the transaction (Bernstein 1987).
There are a variety of methods that have been developed to measure the levels of liquidity
in a stock market. Bernstein (1987) found that the most popular and intuitive measure of
liquidity is to divide the dollar volume of trading by the average absolute percentage change
in price where, the higher the ratio resulting from this calculation, the greater the liquidity of
the given stock. However after an extensive review of the different methods used to
measure liquidity, Bernstein (1987) concluded that there is no single measure that fully
incorporates all of the dimensions of liquidity and that liquidity may rather be a perception
that will have varying importance to different parties.
A company preparing to sell new shares will focus on the ability of a market to price its
stock as close to the equilibrium value as possible (Bernstein 1987). In doing so the
financing can be maximised without exposing the investors in a company to any future
disappointments. However, at the same time, liquid market conditions around that
equilibrium price are a necessary condition for keeping the cost of capital for a company (or
the required returns for their investors) as low as possible (Bernstein 1987).
- 40 -
For many firms, the initial public offering is the first in a series of public offerings and so
liquidity could be an important consideration in the initial listing decision. Corwin and Harris
(2001) argue that firms can reduce their cost of capital through financial policies that
increase liquidity. Therefore when considering the listing decision, management should
choose to list on a stock exchange that provides the highest liquidity (Corwin and Harris
2001).
2.5.1 The attraction of foreign exchanges
Corwin and Harris (2001) suggest that a firm may choose to enter capital markets larger
than their domestic capital market in an effort to increase the potential investor base and
the demand for their stock. Narrower quotation spreads, better stability and the increased
depth on particular foreign markets may be expected to have a positive effect in improving
the marketability of shares in a company (Corwin and Harris 2001).
Foerster and Karolyi (1993) observe that companies seeking to cross-list on a foreign
exchange might also be driven by a desire for higher liquidity, particularly those companies
from relatively illiquid domestic exchanges. It is proposed that cross-listing will lead to a
winner takes most philosophy where there is a reduction in the trading volume of the stock
in the domestic market, but an overall increase in trading volume for the stock of a
company, assuming that the costs of trading are lower in the foreign markets (Foerster and
Karolyi 1993).
A company that is primarily concerned with providing a liquid facility for its shareholders will
want a relatively stable price with changes as continuous as possible (Corwin and Harris
2001). The same is likely to apply to a company that is buying its own shares or seeking to
acquire the shares of other companies. Corwin and Harris (2001) also recognise that
excessive attention to liquidity at the expense of correct management of corporate
information may also lead to the loss of trust of investors. This, in turn, may result in
significant price discontinuities once the relevant information is made public.
2.5.2 Conclusion
Bernstein (1987) describes a liquid market as being one where investors can buy and sell
their shares promptly with the least impact on the stock price. A company intending to sell
new shares will focus on the ability of a market to price its stock as close to the equilibrium
- 41 -
value as possible, as this will maximise their access to capital without exposing their
investors to any future disappointments (Bernstein 1987).
Corwin and Harris (2001) observe that a firm may choose to enter capital markets larger
than their domestic capital market in an effort to increase the potential investor base and
the demand for their stock. Narrower quotation spreads, better stability and the increased
depth on various foreign markets may be expected to have a positive effect in improving
the marketability of shares in a company (Corwin and Harris 2001).
Proposition 3: Junior mining and exploration companies in South Africa prefer to list on
larger stock exchanges that provide increased liquidity.
2.6 Securities regulatory requirements
Accounting and regulatory disclosure requirements are important considerations for a
company when selecting the listing location for its shares. Policy makers and accounting
regulators face the challenge of choosing the appropriate level of disclosure standards for
companies listing within their jurisdictions (Saudagaran and Biddle 1995). It is important to
balance the protection of domestic investors from misleading financial information with the
ability to provide these investors with reasonable access to foreign capital and investment
opportunities. Stock exchanges will compete to attract listings by designing a regulatory
environment that is expected to lower the cost of capital of their listed companies (Foucault
and Parlour 2004).
A company that selects a tightly regulated exchange indicates their commitment to adhere
to high standards of corporate governance. Companies from countries where there are
poor legal standards can secure a lower cost of capital by committing to more stringent
regulation standards, thereby reducing the agency costs of external finance (Pagano et al
2002). The agency costs problem includes the information asymmetry problem, where
managers are typically better informed about expected future cash flows than investors,
and the second problem is where management has its own objectives which may differ
from those of investors (Stulz 1999).
Mendoza (2007) explains that an adequate flow of high quality information is necessary to
encourage investor confidence, which in turn contributes to the development of deep and
liquid financial markets. Increased transparency will allow for a high stream of information
- 42 -
to reach the market on a timely basis, but may also improve the quality of the data being
disclosed. This data may then become more uniform, which Mendoza (2007) observed as
being useful to investors, as this enables them to compare different business prospects
more effectively.
2.6.1 Corporate Governance
“Corporate governance can be defined as the set of rules and incentives by which the
management of a company is directed and controlled in order to maximize the profitability
and long-term value of the firm for shareholders” (Shahid 2005:2).
Corporate governance rules govern how companies, particularly large public companies,
make decisions, the transparency of the decision making processes, the accountability of
their directors and employees, and the level of information to be disclosed to investors, as
well as the protection of minority shareholders (Denis and McConnel 2003). These rules
include matters of company law, securities law, bankruptcy and competition laws,
accounting standards applicable to listed companies and the listing rules of the relevant
stock exchange.
Companies in developed and emerging markets have found that corporate governance has
become a critical concern when considering their decision to go public; mergers with local
and foreign companies; accessing capital from international financial markets; and also
their ability to remain competitive in both their domestic and international business
environments (Mendoza 2007).
There has, however, been much controversy surrounding the introduction of SOX in the US
in 2002, which Mendoza (2007) observed has significantly increased the regulatory costs
for companies listed in the US due to the burden of complying with the different provisions
set out in SOX. Mendoza (2007) describes SOX as the result of a legislative reaction
following a market crash and policy makers are continually investigating the appropriate
level of regulation for capital markets.
For instance, the more strict regulations imposed in the US financial markets reduce the
cost of capital for a company, along with a higher valuation premium. These conditions are
most favourable for large public companies or those opting to cross-list for bonding
purposes or other benefits (Mendoza 2007). Conversely these strict regulations may
- 43 -
preclude smaller companies from listing in mainstream regulated markets due to the costs
associated with compliance with these regulations. Mendoza (2007) explains that smaller
public firms may be required to bear a disproportionate part of the regulatory costs of listing
their shares and therefore may be forced to operate under low or possibly negative profit
margins, which may eventually result in the delisting of the company.
2.6.2 Regulatory environment for SMEs
It may however be possible to design cost structures that specifically accommodate the
requirements of different types of companies while ensuring an adequate level of disclosure
and investor protection. Mendoza (2007) suggests that such specialised rules may be a
possible product of the increasing regulatory competition among stock exchanges, even
though proponents such as Coffee (2002) claim that this competition would rather lead to a
convergence around a set of uniform rules. (Coffee 2002)
The introduction of different cost structures could result in the offering of various securities
products, depending on the specific characteristics of a company (i.e. market capitalisation,
growth stage) and the market conditions at the time of listing, which Mendoza (2007)
believes would allow for either stringent requirements that improve bonding benefits, or
low-cost access to equity for smaller companies. This would enable stock exchanges to
maintain high levels of regulation for the main market while establishing a lower market tier,
allowing for lighter levels of regulation, thus enabling smaller companies to gain increased
visibility and liquidity at lower costs (Mendoza 2007).
Such low-tier markets could be used as a springboard for companies that wish to engage in
future share issuances in main markets such as the LSE, NASDAQ or NYSE once they
have reached a stage in their growth cycles, which allows them to list in these senior
markets (Mendoza 2007).
The London Stock Exchange introduced an approach similar to that proposed by Mendoza
(2007) in 1995 called the Alternative Investment Market (AIM), which has been classified as
an exchange-regulated market. The AIM Exchange has lower listing standards and
reduced ongoing requirements for listed companies; these have been balanced with the
condition of contracting a Nominated Adviser (Nomad), a consultant who will guide
companies with regard to their obligations as listed companies (London Stock Exchange
2007b).
- 44 -
This alternative approach to securities regulation has enabled the AIM Exchange to
become one of the fastest growing exchanges in the world by number of IPOs (Beattie
2007). The AIM Exchange appeals to investors, firms and policy-makers alike due to its
remarkable results over the past decade and has led to the replication of the AIM Exchange
in some markets in Europe, namely the Mercato Expandi created by the Borsa Italiana in
December 2003 and the Irish Enterprise Exchange in Ireland in April 2005. Other
international exchanges such as the JSE and TSX Exchanges have also developed their
own alternative markets called the Alt-X Exchange and TSX Venture Exchange,
respectively (Mendoza 2007).
A comparison of the legislative requirements and costs for the AIM, Alt-X and TSX
Ventures Exchanges has been included in Table 10 in Appendix B. An evaluation of the
listing requirements for each of these exchanges shows that the AIM Exchange has the
lowest level of regulation with no formal requirements for corporate governance but rather
encourages companies to adopt guidelines such as those created by the Quoted
Companies Alliance (QCA). The AIM Exchange has also insisted that companies must
appoint a Nomad to assist during the pre-listing phase and continue the appointment of the
Nomad in an advisory role after listing (London Stock Exchange 2007b).
The Alt-X Exchange has adopted a similar strategy with the adoption of the Designated
Adviser in a similar role to the Nomad; however, the exchange has also implemented a
number of corporate governance requirements related to the management selection criteria
for a company that have been included in Table 10 (JSE Securities Exchange 2003). The
TSX Venture Exchange also requires that a company should meet the disclosure
requirements as listed in the National Instrument 58-101 (Disclosure of Corporate
Governance Practices) but does not require the appointment of an adviser. The TSX main
board requires that a company should have a sponsor prior to listing. The TSX Venture
Exchange, on the other hand, does not require a sponsor, however, the exchange
recommends sponsorship as this may become a persuading factor if a company fails to
meet certain listing criteria (Toronto Stock Exchange 2007).
The AIM Exchange has also chosen not to include any minimum listing criteria such as
minimum earnings and share price whereas the Alt-X and TSX Venture Exchanges have
elected to implement minimum criteria for listing including minimum capital and public
holding requirements (Table 10). The TSX Venture Exchange has a unique system for
listing requirements where the exchange places companies into one of three categories;
- 45 -
Industrial/general, Mining or Oil and gas, and there are specific listing criteria for each
category (Toronto Stock Exchange 2007). The listing criteria for mining and exploration
companies on the TSX and Venture Exchanges are listed in Table 11 in Appendix B.
2.6.3 Costs associated with listing in equity markets
The access to financial markets will provide companies with a number of benefits that are
not available to private companies, while simultaneously imposing significant costs upon a
company. The net benefit to a company will depend upon the regulatory model that the
company has selected (Mendoza 2007).
A report by Mendoza (2007) explains that regulatory costs ensure that the system operates
efficiently and that the probability of market failures is reduced. Securities regulation will
have a net benefit if it succeeds in reducing the cost of capital more than it increases the
costs associated with compliance with the regulation in a given jurisdiction. Regulatory
costs in the US and European senior markets may be too high for SMEs seeking finance in
equity markets, and they may therefore consider low-tier markets during the growth phase
of their operations (Mendoza 2007).
There are costs and benefits of listing in each of these models and it is important to
understand these when determining the impact of the differences of each model upon the
various types of companies (Pagano et al 2002). There are costs associated with the initial
listing process as well as the maintenance of a public listing on an ongoing basis. Pagano
et al (2002) identify both direct and indirect costs associated with the listing of shares in a
company.
2.6.3.1 Indirect
Indirect costs may include the loss of private control by controlling shareholders (which may
include the loss of proprietary information due to disclosure requirements) and IPO under-
pricing that sometimes occurs in some listing venues (Mendoza 2007).
Indirect costs of being a listed company may be substantially higher in certain jurisdictions,
such as the US, where there is a significant increase in the power of shareholders to
interfere in managerial decisions (Pagano et al 2002). This may include distracting the
attention of management from maximising shareholder value in order to reduce their
- 46 -
exposure to risk, thereby distorting the incentive structures of directors and managers and
exposing management to excessive litigation (Pagano et al 2002).
2.6.3.2 Direct
Pagano et al (2002) identified the direct costs associated with going public as initial listing
fees, IPO underwriting fees, professional fees (legal and accounting advisers), costs
associated with disclosure requirements and other administrative costs such as printing
and translation, where necessary. There may also be recurring monetary and non-
monetary costs with regular re-registration and updating requirements (Pagano et al 2002).
The costs of complying with regulatory requirements such as US Generally Accepted
Accounting Principles (GAAP) and the risk of lawsuits are considered amongst the most
significant costs when listing on stock exchanges in the US. Countries with extensive
disclosure requirements also tend to have significant registration requirements
(Saudagaran and Biddle 1995).
Low-tier markets such as the AIM, TSX Venture and Alt-X Exchanges have design cost
structures that are purposely tailored to accommodate the requirements of small and
medium-sized firms (Mendoza 2007). Table 10 has included a comparison of the costs
incurred when listing on these exchanges. The AIM Exchange has created a simple listing
fee structure where a once off admission fee is payable prior to listing and the same
amount is payable annually for the ongoing listing fees (London Stock Exchange 2007a).
The Alt-X and TSX Venture Exchanges, however, prefer a sliding scale where admission
fees and ongoing listing fees increase with increasing market capitalization values.
The Alt-X Exchange has the lowest admission costs when compared with those of the other
two exchanges; however, the size of the companies that may be listed on this exchange
are limited and once companies have achieved the requirements listed in section 4.28 of
the JSE listing requirements, companies are required to graduate to the JSE main board
(JSE Securities Exchange 2003). The TSX Venture Exchange has a similar policy where
companies with exploration projects that progress to developing mining operations from
these projects will be encouraged to migrate to the TSX main board (Toronto Stock
Exchange 2007). However companies listed on the AIM Exchange are not required to
migrate to the LSE main board if they do not wish to do so (Mendoza 2007).
- 47 -
The AIM and Alt-X Exchanges also have additional costs associated with the appointment
of advisers whose services must be retained for the duration of the listing on these
exchanges. These are additional professional fees that will vary depending on the
contractual agreement between the adviser and listed company.
Although the corporate governance requirements are less stringent for the Alt-X and TSX
Venture Exchanges than the requirements for the senior markets, there will be costs
related to the compliance with these regulations (London Stock Exchange 2007b). The AIM
Exchange on the other hand, does not have any formal corporate governance requirements
and therefore the regulation costs will be minimal and will rather depend on the disclosure
and compliance levels chosen by the company (London Stock Exchange 2007b).
2.6.4 Conclusion
In summary, the literature suggests that a favourable securities regulation framework
should attempt to strike a balance between investor protection and regulatory costs for
listed companies (Denis and McConnel 2003). The introduction of different cost structures
could result in the offering of various securities products, depending on the specific
characteristics of a company (i.e. market capitalisation, growth stage) and the market
conditions at the time of listing, which would allow for either stringent requirements that
improve bonding benefits or low-cost access to equity for smaller companies (Mendoza
2007). The choice of listing location for a company will be influenced by the benefits and
costs of different listing locations and a company will seek to maximise the net benefit of
listing their shares on a particular exchange.
Proposition 4: Junior mining and exploration companies in South Africa prefer to list on
stock exchanges where they are able to maximise the net benefit of raising capital and the
costs associated with going public.
- 48 -
2.7 Public Reporting of Mineral Resources and Reserves
As discussed in previous sections the exploitation of mineral resources requires large
amounts of capital and the success of exploration and mining projects often relies on
external sources of financing. Financing is most often in the form of equities, loans and
more rarely in the western world, contributions from government and state-owned
institutions (PDAC 2001). Camisani-Calzolari (2003) explains that investors providing
finance for these projects are primarily interested in mineral reserves and resources, which
will secure the capital invested and yield expected returns on their investment with a high
degree of certainty.
In the nineties there was a growing necessity to report transparently to shareholders and
potential investors, prompted by a rise in reporting scandals (Camisani-Calzolari 2003).
One of these scandals was the Poseidon nickel boom in the sixties, involving false
information provided by directors of a prospecting company, which lead to a frenzy of
fraudulent capital raisings within the Australian mining sector. This, along with other such
scandals, raised concerns from the Australian government and regulatory bodies who
warned that if the mining industry did not develop appropriate reporting standards, the
government regulators would do so (Camisani-Calzolari 2003). The Australian mining
industry responded by establishing the Joint Ore Reserves Committee (JORC) and in 1989
the first version of the JORC Code was published and immediately incorporated into the
ASX listing rules. This code would become the foundation on which other national codes
would be built (Camisani-Calzolari 2003).
In 1997, Bre-X would be another scandal to shake the mining industry, involving the
fictitious Busang gold deposit in Indonesia (Camisani-Calzolari 2003). Brown and Burdekin
(2000) describe how the company deceived investors with assays of salted rock samples
where gold had been added to samples after they were extracted from the ground. The
analytical methods used were sophisticated enough to mislead many mining analysts who
recommended the purchase of Bre-X shares. It was only after Freeport-McMoran sought
independent verification of the drilling results prior to their planned joint venture with Bre-X
that the fraudulent activity was revealed (Brown and Burdekin 2000).
Bre-X started trading on the Vancouver Stock Exchange in Canada in 1994 for less than
one dollar per share and by May 1996 the share price had peaked at 201,75 Canadian
dollars (Brown and Burdekin 2000). However after Freeport-McMoran and the independent
- 49 -
consultants, Strathcona were unable to confirm Busang as an economically significant gold
deposit by revealing the salting scandal; the joint venture deal was terminated and the
remaining shareholders were left with worthless stock (Brown and Burdekin 2000).
Bre-X shareholders were not the only investors to experience significant losses at the time
of the scandal. Brown and Burdekin (2000) observed that the failure of Bre-X destroyed
almost six billion Canadian dollars of value in stocks traded on Canadian stock exchanges
at the time. The Bre-X scandal precipitated a collapse in confidence in the mining sector
with the smaller exploration-focussed firms being most affected. Brown and Burdekin
(2000) explained that events such as Bre-X and Poseidon overshadowed good work
carried out by honest geologists and engineers in the industry, and for some it became a
scandal too many. The mining industry, particularly junior mining firms, often rely on public
support and trust built up over years by honest men and women and scandals such as
these undermine this trust (Camisani-Calzolari 2003).
Rendu and Miskelly (2002) note that the events surrounding the Bre-X scandal
demonstrated the importance of reputation and full disclosure to ensure investor confidence
in markets where stock prices are based on high-value, low-probability events. Although it
was evident that regulations alone would not have prevented the scandal, the lack of
regulations and procedures to enforce them was identified as a material contributing factor
(Rendu and Miskelly 2002).
Following these events, the Canadian authorities formed a Mining Standards Task Force,
which published a report in 1999 titled Setting New Standards, Recommendations for
Public Mineral Exploration and Mining Companies. The report contained recommendations
on standards to be followed (Rendu and Miskelly 2002). These standards, if implemented,
would have significant consequences for geoscientists and mining engineers, public
exploration and mining companies as well as brokers and analysts. The National
Instrument 43-101 (NI 43-101), developed by the Canadian Securities Administrators,
along with regulation published in 2004 and is managed by the provincial securities
commissions that must govern how public companies report scientific and technical
information about their mineral projects in Canada (CSA 2005).
South Africa has also experienced its fair share of scandals, a memorable case being that
of Noble Minerals Ltd in the late nineties. The company listed on the JSE by claiming two
resources; Storm, a manganese deposit and Taung, a diamond deposit (Camisani-
- 50 -
Calzolari 2003). The two largest manganese producers in South Africa owned mineral
deposits with claimed grades of between 45 and 50 percent, yet the grade for Storm
deposit was given as 4.8 percent, which would clearly indicate that the deposit was not
commercially viable. However the Competent Persons Report (CPR) for the deposit
concluded that the Storm manganese deposit represented a viable project both in terms of
exploration and future exploitation. There were a number of other inconsistencies and
contradictions in the report, which had not been detected by readers of the report
(Camisani-Calzolari 2003).
Following the lead of Australia and their development of the JORC Code and the aftermath
of reporting scandals such as Noble Minerals, South Africa developed its own set of
standards called the South African Code for the Reporting of Mineral Resources and
Mineral Reserves (SAMREC) Code, which was first published in March 2000 (SAMREC
Committee 2006). Other local codes that have been established throughout the world
include The Reporting Code in the United Kingdom and Europe and the SME Guide in the
US. All of these codes are highly compatible with the JORC Code with the differences
occurring from the need to meet the requirements of local legislations, traditions and
cultural environments (Camisani-Calzolari 2003).
These codes are based on seven definitions as initially defined by the JORC Code: mineral
resource, inferred mineral resource, indicated mineral resource, measured resource,
inferred mineral resource, mineral reserve, probable mineral resource and proved mineral
reserve. The relationship between these standard definitions is illustrated in Figure 6
(SAMREC Committee 2006). The framework set out in the JORC Code and related Codes
for classifying tonnage and grade estimates in order to convey different levels of
geoscientific confidence and different degrees of technical and economic evaluation, is also
illustrated in Figure 6 (SAMREC Committee 2006).
- 51 -
Figure 6: Classification of mineral resources and mineral reserves as proposed in the JORC Code and similar codes
Exploration Results
Mineral Resources
Mineral Resources
Inferred
Indicated
Measured
Probable
Proved
Consideration of mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors
(the modifying factors)
Incr
eas i
ng le
vel o
f geo
scie
nti fi
c kn
owle
dge
a nd
c on f
iden
ce
Reporting as in situ mineralisation
estimates
Reporting as mineable production
estimates
Source: Samrec Committee 2006:16
A comparison of the codes that are most likely to affect South African based firms listing on
stock exchanges in South Africa and/ or overseas has been included in Table 7 in
Appendix A. This table indicates a number of similarities between the codes as each code
has been based upon the JORC Code; however, there are also a number of differences
between the reporting codes.
In each of these codes the responsibility for the estimation of resources and reserves is
assigned to a Competent Person (CP), a term first introduced in the JORC Code (JORC
Committee 2004). In the NI 43-101 this person is referred to as a Qualified Person (QP),
- 52 -
however the responsibilities of this person are similar to those stated in the JORC Code
and similar Codes (Rendu and Miskelly 2002).
Public reports must be based on and impartially reflect the reports completed by a CP and
the written approval of this person should be obtained for the relevant part of their report to
be included in the document. Another requirement is that the qualifications, professional
affiliations and relevant experience of the CP should be disclosed when publishing public
reports (Camisani-Calzolari 2003).
As indicated in Table 7, each of these Codes require that a CP must have a minimum of
five years experience relevant to the style of mineralisation and type of deposit under
review. Another requirement is that the CP must be a member of a professional body,
which has an enforceable code of conduct (JORC Committee 2004). Most importantly, a
CP is legally accountable for the relevant parts of a public report for which they have signed
responsibility, regardless of their affiliations or whether or not they are aware of the legal
implications associated with their signing the report (JORC Committee 2004).
Rendu and Miskelly (2002) explain that these codes have also been adopted by their local
stock exchanges, with the exception of the AIM Exchange, which has chosen not to adopt
any specific reporting code. The JORC Code has been adopted by the Australian Stock
Exchange (ASX) and New Zealand Stock Exchange (NZX); the SAMREC Code by the
JSE; and the NI43-101 by the CSA, which governs stock markets in Canada. However the
NI 43-101 includes a rule in which a company may be allowed to report the estimation of
resources and reserves using definitions found in other recognised Codes such as the
JORC Code, SAMREC Code, SME Guide and The Reporting Code.
The AIM Exchange has elected not to adopt any one code but rather in 2006 released
guidelines for resource companies listing on the exchange. The guidelines for new
applications states that a Competent Persons Report (CPR) should be prepared by a
suitably qualified person and that Nomads should carry out appropriate site visits, where
necessary (AIM Exchange 2006). These guidelines also require that the reports be
prepared in accordance with an internationally recognised standard for reporting mineral,
oil and gas results, resources and reserves, namely the Canadian Institute of Mining (CIM)
(Definitions & standards on Mineral Resources and Reserves adopted by NI43-101),
Institute of Materials, Minerals and Mining (IMMM) (The Reporting Code), JORC, Russian,
SAMREC or SME Guide Codes (AIM Exchange 2006).
- 53 -
2.7.1 Differences between the reporting codes and their implementation
In a comparison of the four most recognised reporting codes adopted by stock exchanges,
some differences were identified. An example of such a difference was identified in the
NI43-101 where importance is placed upon the disclosure of the relationship between the
issuer and the QP, which must remain independent in nature. The (CSA 2005) included
rules in the NI 43-101 regarding what is considered to be an independent relationship and
these have been outlined in Table 7. Another rule unique to the NI 43-101 (2005) is related
to the maintenance of records and states, namely that an issuer must keep copies of
analytical data, drill logs and all other documentation referred to in the Qualified Persons
technical report for at least seven years.
Another contrast between the reporting codes is related to the disciplinary actions that are
taken when there is a serious complaint against a CP and the technical information
supplied in their reports. In the case of the JORC Code, the JORC Committee is not
involved in the enforcement of the code and rather any disciplinary procedures involved in
non-compliance are undertaken by the ASX regulators. One of the mechanisms used by
the ASX Exchange to enforce its rules is through the Disciplinary Tribunal process. This is
a process of peer review and if an alleged contravention of the ASX rules is proven, the
Tribunal can enforce a wide range of penalties, including the use of fines (Australian Stock
Exchange 2001).
The NI43-101 (2004) requires that a QP belong to a professional body that has been given
authority or recognition by a statute in a jurisdiction of Canada or has a foreign association
that admits individuals based on their academic qualifications and experience. This body
should also have disciplinary powers, including the ability to suspend or expel a member.
Any complaints will be directed to the relevant professional body, which will undertake an
investigation into the complaint and if the QP is found to have committed an act of
professional misconduct, disciplinary action will be taken. This may range from a fine to
suspension of the membership of the relevant person within the organisation.
In the cases of both the JORC Code and the NI 43-101, the review process takes place
after the submission of a Competent (Qualified) Persons technical report. However in the
case of the SAMREC Code the review process takes place before the submission of the
CPR.
- 54 -
The JSE Exchange has introduced an independent technical readers panel in their
approval process for public reports where the majority of non-conformances with the
SAMREC Code are detected before the final submission of the report. However any
unresolved complaints concerning a CP will be referred by the JSE Listing Division, through
the SAMREC Committee, to the body under which the CP is registered as a professional
for disciplinary action (SAMREC Committee 2006). This process is unique to South Africa
and is illustrated in Figure 7 below.
Figure 7: Main aspects of the review process for Competent Persons Reports and disciplinary procedures for Competent Persons as part of the
JSE/SAMREC/Statutory bodies agreement
JSE SAMREC COMMITTEE READERS PANEL JSE COMPANY
CPR ACCEPTED / REJECTED
END OF PROCESS
SAMREC REVIEW PROCESS FOR COMPETENT PERSONS REPORT (CPR)
DISCIPLINARY PROCEDURES FOR COMPETENT PERSONS
COMPLAINT SAMREC COMMITTEESACNASP ECSA PLATO
INVESTIGATING COMMITTEE
AD-HOC COMMITTEE
DISCIPLINARYACTION
END OF PROCESS
JSE
COURT
Agreed path of CPR/Complaint
Optional path of CPR/Complaint
Exceptional path of Complaint
Source: Camisani-Calzolari 2003:90
In some cases there is no specific disciplinary process, as was the case of Bullion
Resources where the company was listed on the AIM Exchange in June 2002 and raised
approximately five million pounds. The prospectus published by the company estimated
that it would produce 140,000 ounces of gold per year by 2004 from three shallow mines
with combined reserves estimated at 1,8 million ounces. The company listed on the AIM
- 55 -
Exchange, and although the company operated in South Africa, it was not required to meet
all of the resource and reserve regulations established in the SAMREC Code (McKay
2003).
However, in December 2002 the Geological Society of South Africa called for an inquiry
into the resources statement by Bullion Resources. The statement included information for
the Drylands and Machavie mines, which were generally known to a number of South
African gold industry observers who claimed the mines had always been difficult to mine
and were not economically viable (McKay 2003).
Vermaak, who was registered with the South African Council for Natural Scientific
Professions (SACNASP), signed off the Competent Persons Report for Bullion Resources.
His membership with the SCANASP enabled the professional body to investigate further,
and take action against Vermaak for the possible transgression of the SACNASP code of
conduct. In February 2004 the London Stock Exchange (2004) announced the findings of
the council, in which Vermaak was found guilty of violating the SACNASP code of conduct
by misleading members of the public with incorrect calculations and reporting of resources
and reserves. McKay (2003) reported that he was suspended from practice for a 12-month
period, subject to his not committing a similar transgression.
(Mendoza 2007) describes an optimal securities regulatory framework as a balance
between investor protection and the costs associated with compliance for listed companies.
Reporting codes could be considered part of this regulatory framework for exploration and
mining companies where compliance with these reporting codes may be onerous and
costly for these companies. They may, therefore, prefer to list on stock exchanges that
have encouraged compliance with a reporting code but have also allowed a degree of
flexibility in the choice of a reporting code and its requirements.
2.7.2 The future of the Public Reporting of Mineral Resources and Reserves
The quality of the reporting of mineral resources and reserves has significantly improved
over the last few decades. The progress in the reporting process has now reached the
point where most major industrial countries are working together to develop common
definitions and public reporting standards. International standards have been proposed in
order to create a common language to assist in communications, and improve the quality of
the information disclosed to the public by the mining industry.
- 56 -
A number of challenges remain that must be resolved in order to ensure that truly
international standards are developed and accepted. These issues include the rules that
govern the qualification as a Competent Person and the mineral exploration results
category in the reporting code. The latter has been mostly addressed with the introduction
of Exploration best practices guidelines in the form of Valuation Codes: CIMVAL in Canada,
VALMIN in Australia, and South Africa has developed the SAMVAL Code (Rendu and
Miskelly 2002). It is likely that within the next decade international standards will be
completed and adopted by most major stock exchanges. This may eliminate the selection
of reporting codes as a factor in the choice of listing location for resource firms in the future.
2.7.3 Conclusion
In summary, the literature suggests that there has been a growing trend towards the
necessity for mining and exploration companies to report their mineral resources and
reserves more transparently (Camisani-Calzolari 2003). By complying with the above
reporting codes, these companies can increase the trust in their organisation and improve
the relationships they have developed with their investors. This is particularly important for
junior mining and exploration companies as they often rely on public support in order to
successfully raise the capital required for their projects (Camisani-Calzolari 2003).
Mendoza (2007) describes an optimal securities regulatory framework as a balance
between investor protection and the costs of compliance for listed companies. Reporting
codes could be considered part of this regulatory framework for exploration and mining
companies, where compliance with these reporting codes may be onerous and costly for
junior mining and exploration companies; therefore these companies may prefer to list on
stock exchanges that have encouraged compliance with a reporting code, but have also
allowed a degree of flexibility in the choice of a reporting code and its requirements.
Proposition 5: Junior mining and exploration companies in South Africa prefer to list on
exchanges where the compliance with reporting codes is required but where there is also
flexibility in the choice of a reporting code.
- 57 -
2.8 Tax Incentives for investors
A study completed by Napier (2006) investigated the development of the venture capital
and private equity markets in the UK, France and US and the role of tax incentives in these
markets. The results from the study revealed that tax incentives have proved successful in
increasing the supply of private equity finance in these countries (Napier 2006).
The aims of tax incentives in these markets were identified as:
• the improvement of the post-tax returns on investment for investors (this is designed to
encourage investors to invest more in the companies targeted by these schemes);
• the enabling of companies to use the funds raised to improve their performance;
• the benefiting of the national economy by developing a more competitive SME sector
(Napier 2006).
Tax incentives in the UK and France are extended to both individuals and corporates
investing in qualifying companies either directly (e.g. as a business angel) or indirectly
through an intermediary (Napier 2006). Van der Merwe (2007b) explains that countries
such as Canada have successfully introduced tax incentive schemes specifically designed
to increase investment in, and therefore development of, a particular sector. The
introduction of the flow-through share incentive scheme in Canada over 50 years ago has
proved successful in stimulating mining exploration activity in the country, and Australia
also introduced a form of this scheme in the sixties (van der Merwe 2007b).
The tax incentive schemes applicable to investors on the AIM, TSX and TSX Venture and
Alt-X Exchanges, are discussed in more detail below.
2.8.1 AIM Exchange
Tax incentives in the UK are extended to both individuals and corporates investing in
qualifying companies (Napier 2006). Incentives are provided for individual investors
investing directly (through the Enterprise Investment Scheme) or indirectly (through the
Venture Capital Trust Scheme) in SMEs (Napier 2006).
The UK government has created a number of tax incentives to encourage investment in
unquoted companies, which includes those listed on the AIM Exchange. This enables
- 58 -
SMEs to attract funding for the growth of their organisations where they would otherwise
struggle to raise capital (Napier 2006).
The tax benefits fall under the following UK provisions:
• Capital Gains Tax Business Asset Taper Relief
• Enterprise Investment Scheme
• Venture Capital Trusts
• Inheritance Tax Relief (London Stock Exchange 2006)
The tax benefits that may be beneficial to investors investing in companies listed on the
AIM exchange, but with projects and/or operations outside of the UK, are the Capital Gains
Tax Business Asset Taper Relief and the Inheritance Tax Relief (London Stock Exchange
2006).
2.8.1.1 Capital Gains Tax Business Asset Taper Relief
This tax relief is available to individuals who invest in a qualifying company listed on the
AIM Exchange and hold the shares in such company for more than two years (London
Stock Exchange 2006). This tax incentive allows only 25 percent of the capital gain to be
eligible for taxation under Capital Gains Tax (CGT), where the top rate of CGT rate is 40
percent and therefore the effective rate is 10 percent. A qualifying company must either be
a trading company or the holding company of a trading group and this incentive is available
to both local and foreign companies listed on the AIM Exchange (London Stock Exchange
2006).
2.8.1.2 Inheritance Tax
Investment in qualifying companies listed on the AIM Exchange can attract 100 percent
relief from inheritance tax if the investment is held for at least two years before a
chargeable transfer for inheritance tax purposes (London Stock Exchange 2006). A
qualifying company must be wholly or mainly involved in trading activities. The company
may not be wholly or mainly involved in:
• the dealing in securities, stocks and shares; • the dealing in land or buildings; or • the making or holding investments.
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The residence or place of incorporation of the company listed on the AIM Exchange does
not influence the benefit of this tax relief (London Stock Exchange 2006).
Sharples (2005) observes that there has been a growing confidence in SMEs by investors
in the UK, particularly in companies listed on the AIM Exchange. This has been promoted
by initiatives such tax incentives for investors, which have continued to attract a growing
number of private individuals to invest in companies listed on the AIM Exchange. The
success of these initiatives is visible in the growth figures for the AIM Exchange in 2004; of
more than 20 percent compared with the 7.5 percent increase in the FTSE All Share Index
(Sharples 2005).
2.8.2 TSX and TSX Venture Exchanges
The introduction of the flow-through share incentive scheme in Canada over 50 years ago
was successful in stimulating mining exploration activity in the country and enabled Canada
to become the world leader in mineral exploration expenditure for the last five years (van
der Merwe 2007b).
The concept of flow-through shares was first introduced in 1954 by the Canadian Federal
government and was initially intended to allow the transfer, or flow-through, of tax credits
between companies (Campbell 2007). However in 1972, the government amended this
system to allow exploration companies to transfer specific types of exploration expenses
related to Canadian properties to individual investors as well as institutional investors
(Campbell 2007).
A flow-through share has been defined as a variety of common share, which enables
companies to transfer any applicable tax deductions to investors who may then offset these
deductions against their personal or corporate income tax (Campbell 2007). The flow-
through share system is available to mining, petroleum and certain types of renewable
energy companies in order to assist with the financing of their exploration and project
development activities.
The sale of flow-through shares has allowed exploration companies to receive cash from
investors in return for the investors receiving tax benefits from exploration expenses such
as geological mapping and drillings programmes on properties located in Canada
(Campbell 2007). Canada has a large number of junior exploration companies, that often
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do not generate an income from mining operations and therefore rely upon funds raised on
stock exchanges. Because these companies do not have production revenues against
which to claim the tax deductions, the flow-through share scheme allows them to exchange
these deductions for immediate funding (van der Merwe 2007b).
The government, investors and the mining companies share the benefits of the flow-
through share scheme (van der Merwe 2007b). The government is able to assist local
communities in the long-term through job creation and economic growth associated with
new discoveries, whereas investors and exploration companies benefit in the short-term
through tax deductions and the access to necessary funding, respectively (van der Merwe
2007b).
Van der Merwe (2007b) clarifies that flow-through shares are not a risk-free investment, in
that there is a risk that a project may not result in a viable economic operation and
therefore the money invested will be lost. However, Canadian authorities have put in place
a number of safeguards against fraud including the use of aerial surveys to ensure that
claimed exploration activities are in fact taking place. The benefits of this tax incentive
system continue to outweigh the drawbacks (van der Merwe 2007b).
Typical investors attracted to flow-through shares are individuals who are in the highest tax
bracket and often invest in these shares to gain the tax benefit from them. These investors
are often wealthy and are willing to lose their investment in these high-risk ventures, where
the risk of not finding an economically viable deposit is quite high (Campbell 2007).
2.8.2.1 Benefits of the Flow-through share system
Campbell (2007) has identified a number of direct and indirect benefits resulting from the
introduction of this tax incentive scheme. One of the direct benefits has been the increase
in exploration expenditure, where in 1999 prior to the commodities boom, Canada
accounted for 12.1 percent of the exploration expenditure in the world and in 2006 it
accounted for 19.3 percent. When comparing these figures to those of other regions in the
world during the same period, Africa was the only other region to see an increase in
expenditure from 14.7 to 16.4 percent (Campbell 2007).
A study conducted by Finance Canada, cited by van der Merwe (2007b), found that flow-
through shares have provided a significant portion of all exploration funding during the late
nineties through to the present day, where each dollar of tax relief gained by investors
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resulted in US$2.60 of new exploration funding. The increased exploration expenditure
through a mixture of flow-through funding and other sources of funding has resulted in the
discovery of a significant number of new mineral deposits (van der Merwe 2007b).
There have also been a number of important indirect benefits, including the stimulus
required to develop the junior exploration industry, which in turn has promoted the
development of specialist financial and legal services companies to support this sector.
Wealthy Canadian investors have developed and maintained a greater propensity for risk
with an increased desire for investing in mining and exploration companies (Campbell
2007).
Van der Merwe (2007b) identifies these factors as having contributed to the attraction of
mining and exploration companies from around the world to Canadian stock exchanges in
the hope of raising sufficient funding for their projects. In 2007, there were approximately
1200 mining companies listed on the TSX and TSX Venture Exchanges, which was in
sharp contrast to the near 500 listed on the ASX Exchange, over 200 listed on the London
Stock Exchange (including the AIM Exchange) and around 50 listed on the JSE Securities
Exchange (including the Alt-X Exchange) (van der Merwe 2007b).
2.8.3 JSE and Alt-X Exchanges
2.8.3.1 Capital Gains Tax
The South African Government introduced Capital Gains Tax in October 2001, which in the
case of individuals was 25 percent of any capital gain on disposal of an asset (with the
effective rate of tax was 10 percent at the maximum marginal rate of 40 percent) and 50
percent for all other taxable entities such as companies. There is currently the exemption of
the first R15 000 in capital gains for individuals, and in the year of death, the first R120 000
is exempt (Deneys Reitz Attorneys 2007).
An amendment to the Income Tax Act in October 2007 stated that any shares held by an
individual for more than three years would be considered capital and therefore any profits
from the subsequent sale of these shares will be subject to CGT and not income tax
(Mazansky 2007). This is beneficial to investors as this will allow their gains to be subject to
a lower tax rate; however, the down-side is that, should the price of a share fall below its
cost, keeping it for more than three years would mean that a trading loss (which can shelter
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income or capital gains) will now become a capital loss (which can now only shelter capital
gains) (Mazansky 2007).
This new amendment will only be applicable to equity shares, thereby excluding most types
of preference shares listed on the JSE. In addition, this does not apply to shares held in
foreign companies, unless those shares are listed on the JSE (Mazansky 2007).
2.8.3.2 Potential tax benefit schemes
Since 1994 the South African Government has encouraged the development of SMEs
through the tax system by streamlining VAT (Value Added Tax) procedures and raising the
qualifying tax thresholds for small businesses (Napier 2006). However there has been no
support for individuals wishing to invest in SMEs, unlike investors in developed economies
who are able to take advantage of a number of tax incentives ranging from tax-free
dividends and capital gains tax deferral, to a tax write-off on a loss. These investors in turn
contribute to the supply of equity finance required by projects undertaken by SMEs (Napier
2006).
Discussions with fund managers and private client asset managers by Napier (2006)
suggest that investors would respond positively to tax relief granted for investing in
identified SMEs. It is estimated that there are at least 37,000 individuals with more than R6
million in assets with investment potential; a large pool of investors who would be attracted
by tax incentives, but certainly not the only individuals who would find these incentives
appealing (Napier 2006).
Van der Merwe (2007b) observes that companies that would benefit from increased equity
investment through tax incentives, would be South African mining and exploration juniors
that are forced to compete with foreign mining companies, particularly when raising capital.
Exploration in South Africa is usually undertaken by large mining corporations, which are
self-funded, and junior exploration companies often struggle to raise the funding required
for their projects (van der Merwe 2007b).
It has been suggested that a flow-through share scheme, similar to that in Canada, would
be beneficial for increased investment in junior mining and exploration companies in South
Africa (Campbell 2007). Proponents of the implementation of this system in South Africa
argue that the country has a modern and efficient stock exchange; a well-developed
financial sector; a top marginal personal tax rate that is higher than the corporate tax rate;
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an adequate number of high-income earners to sustain this tax incentive scheme; and rich
mineral deposits, combined with a long history of mining (Campbell 2007).
There are also similarities between junior exploration companies in Canada and South
Africa such as no cash flow (i.e. they have no income from mining operations) and minimal
working capital; the company management may be paid in stock options and their
exploration spending may range from hundreds of thousands to millions of rands (Campbell
2007).
The National Treasury has been studying the flow-through share instrument for several
years and headed a working group that was engaged to evaluate the viability of the
implementation of such a system in South Africa (van der Merwe 2007a). The working
group identified the need to develop the financial community (investors, investment
bankers, analysts and stockbrokers) required to support the junior mining sector as well as
encouraging mineral exploration and the discovery of potential new mines (Campbell
2007).
After due consideration, the South African government elected not to introduce a flow-
through share scheme in South Africa, but rather, as the Finance Minister announced in his
2008 Budget speech, implement the 50 percent deduction incentive instead (Hill 2008).
This incentive will effectively reimburse investors in local junior mining and exploration
companies half of their investment, thereby providing a boost to the sector. Hill (2008)
writes that although this scheme would cost the government a significant amount of money
in the short-term, the government believes the long-term benefits will be worth the cost.
This incentive scheme will, however, have the following limitations:
• Investments in junior mining and exploration companies will have their annual
deductions capped at R1 million for individuals and R10 million for corporation and
venture capital funds.
• The type of junior mining and exploration companies that will qualify under the proposed
incentive will have gross assets of between R30-million to R50-million (Hill 2008).
The framework around this incentive scheme must still be drawn up, only after consultation
with the mining industry; nevertheless, this mechanism could be implemented by the end of
this year. One concern raised about the introduction of a tax incentive scheme in South
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Africa, is that it may stimulate an increase in prospecting license applications, placing
further pressure on an already strained administration within the DME (Hill 2008).
2.8.4 Conclusion
In summary, the literature suggests that junior mining and exploration companies often find
it challenging to access equity finance, as investors are cautious of the risks associated
with such companies (Hill 2008). Tax incentive schemes such as the flow-through share or
Capital Gains Tax Business Asset Taper Relief, can prove successful in attracting
individuals and companies to invest in companies that would otherwise be considered
unattractive (Napier 2006).
The success of some tax incentives has resulted in the overall stimulation of investor
interest in targeted sectors, thereby attracting companies operating in these sectors from
around the globe that wish to raise capital for their projects. Stock exchanges such as the
TSX and TSX Venture have proved successful in attracting listings of mining and
exploration companies throughout the world, with over 1200 mining and exploration
companies listed on these exchanges in 2006 (van der Merwe 2007b).
Proposition 6: Junior mining and exploration companies in South Africa may prefer to list
on stock exchanges where competitive tax incentives have been introduced to stimulate
investment in their companies.
2.9 Conclusion
Small and medium-sized companies are particularly attracted to equity financing owing to
the existence of credit constraints that may increase their cost of capital should they have
access to debt financing. This is often largely the result of the bias of financial institutions
towards projects with low-risk (Stulz 1999). This is the case with junior exploration and
mining companies that operate in a capital-intensive industry but also often lack the
bankable record of technical skills and experience as well as the lack of sufficient collateral
to comply with the conservative lending standards of banking institutions (PDAC 2001).
Saudagaran (1988) has observed a growing trend of companies choosing to list their
stocks on foreign exchanges, suggesting that these companies perceive the benefits of
gaining access to foreign capital markets through equity listing, as outweighing the related
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costs of such a strategy. The choice to list outside their country of incorporation may be as
their first public listing or as a dual listing after having listed on their domestic exchange.
There are a number of factors that will influence this decision (Saudagaran 1988).
McKay (2006b) observed that Toronto and London have proved to be the favourite markets
in which to raise capital for exploration activities throughout the world. Many junior mining
and exploration companies operating in South Africa have followed this trend, while others
have chosen to list on the local JSE, and in some cases dual listings on the JSE and
another exchanges have resulted (McKay 2006b).
Companies may choose to list aboard for financial reasons, where funding may be cheaper
or more easily available and in some cases the cost of listing abroad may be more cost
effective, with reduced legislative compliance costs when listing on low-tier markets such
as the AIM Exchange (Mendoza 2007).
Junior mining and exploration companies will seek to attract the most equity capital while
attempting to reduce their cost of capital by diversifying their exposure to different market
risks, by, for example, selecting markets with increased liquidity (Corwin and Harris 2001).
Companies may choose to enter capital markets larger than their domestic capital market
in an effort to increase the potential investor base and the demand for their stock. Narrower
quotation spreads, better stability and the increased depth on various foreign markets, may
be expected to have a positive effect in improving the marketability of shares in a company
(Corwin and Harris 2001).
Companies may also elect to list on a stock exchange that they perceive to have the
expertise or experience in trading similar securities (Corwin and Harris 2001). This can be
relevant in cases where the availability of such information may substantially affect the
accessibility of equity finance and the terms at which the finance is available (Saudagaran
and Biddle 1995). Junior mining and exploration companies operate in a high-risk industry
with a number of risks, including its dependency on commodity prices, and so these
companies may choose to raise capital in markets where investors have a greater
understanding of the industry and its associated risks (Murphy et al 2007).
When listing their shares on a stock exchange, it is necessary for companies to comply with
a number of regulations such as reporting codes and corporate governance regulations in
order to maintain a positive relationship with their investors (Karolyi 1999).
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By complying with reporting codes, mining and exploration companies are able to increase
the trust in their organisations by their investors. This is particularly important for these
companies as they often rely on public support to successfully raise the capital required for
their projects (Camisani-Calzolari 2003). However, compliance with these reporting codes
may be onerous and costly and these companies may therefore prefer to list on stock
exchanges that have encouraged compliance with a reporting code, but have also allowed
a degree of flexibility in the choice of reporting code (Camisani-Calzolari 2003).
The regulatory environment that governs a stock exchange may be very onerous and
impose significant costs upon a company and will therefore influence the choice of listing
location for the company (Mendoza 2007). Small and medium-sized companies may prefer
to list where the regulatory model does not impose significant disclosure and compliance
costs, thereby maximising the net benefit of going public (Mendoza 2007).
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3 PROPOSITIONS
3.1.1 Proposition 1
Junior mining and exploration companies in South Africa prefer to list on stock exchanges
where there is greater and easier access to capital.
(PDAC 2001), (Botha 2002), (MiningWatch Canada 1997), (McKay 2006b), (Fraser 2005),
(Burleton and Apollonova 2006), (Ellingham 2005), (Arcot et al 2007), (Irving 2005)
3.1.2 Proposition 2
Junior mining and exploration companies in South Africa prefer to list on stock exchanges
where the majority of their industry peers have chosen to list their shares.
(Corwin and Harris 2001), (Ellingham 2005), (Forrest 2007), (Murphy et al 2007),
(Saudagaran and Biddle 1995), (Stalinski and Tuluca 2006), (Toronto Stock Exchange
2006)
3.1.3 Proposition 3
Junior mining and exploration companies in South Africa prefer to list on larger stock
exchanges that provide increased liquidity.
(Bernstein 1987), (Black 1986), (Corwin and Harris 2001), (Dong et al 2007), (Foerster and
Karolyi 1993), (Pagano 1989)
3.1.4 Proposition 4
Junior mining and exploration companies in South Africa prefer to list on stock exchanges
where they are able to maximise the net benefit of raising capital and the costs associated
with going public.
(Beattie 2007), (Denis and McConnel 2003), (Foucault and Parlour 2004), (Mendoza 2007),
(Pagano et al 2002), (Saudagaran and Biddle 1995)
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3.1.5 Proposition 5
Junior mining and exploration companies in South Africa prefer to list on exchanges where
the compliance with reporting codes is required but also where there is flexibility in the
choice of a reporting code.
(Brown and Burdekin 2000), (Camisani-Calzolari 2003), (CIM Standing Committee on
Reserve Definitions 2001), (McKay 2003), (Rendu and Miskelly 2002), (Shahid 2005)
3.1.6 Proposition 6
Junior mining and exploration companies in South Africa may prefer to list on stock
exchanges where competitive tax incentives have been introduced to stimulate investment
in their companies.
(Campbell 2007), (Foucault and Parlour 2004), (Hill 2008), (Mazansky 2007), (Napier
2006), (Sharples 2005)
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4 RESEARCH METHODOLOGY
The choice of research designs and methods of data collection for a particular study will be
influenced by the research problem defined for the study, as different research questions
will yield different types of information (Leedy and Ormrod 2001). This section will describe
the methods used by the researcher to complete the study. The choice of sample, research
design, data collection and interpretation will be discussed in detail below.
4.1 Population
This includes all junior mining and exploration companies in South Africa that are listed on a
stock exchange.
4.2 Sample size and selection
4.2.1 Sample Selection
The researcher selected a combination of the non-probability and snowball sampling
methods. The non-probability sampling method was initially selected for this study as this
method allowed the researcher to select individuals with the appropriate knowledge and
experience to understand the research problem (Creswell 2003). The snowball sampling
method was introduced after the commencement of interviews with initially identified
participants. In snowball sampling a chosen sample serves as initial contacts and these
subjects provide the names of other individuals who fulfil the research criteria (Heckathorn
1997). The researcher then approached these persons and requested their participation in
the study. This method proved useful when gaining access to the CEOs who agreed to
participate in the study.
The sample comprised CEOs from junior mining companies listed on stocks exchanges in
London, Toronto and Johannesburg, mining specialists and analysts from the South African
banking sector and Alt-X Designated Advisors.
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The researcher chose to include the CEOs of public junior mining and exploration
companies in this study as they are involved in or have knowledge of the factors considered
when selecting the listing location for their companies.
Mining analysts/ specialists were identified to participate in the study because of their
knowledge of the capital requirements for the mining industry. The sample was drawn from
various banking institutions and mining consulting firms in South Africa. Some bias will have
been introduced due to the manner in which the mining analysts from different institutions
obtain their information and the researcher attempted to reduce this by selecting
participants from several institutions. However, there was some partiality in the sample
selection owing to the willingness or otherwise of the individual to participate in the study.
A sample of Alt-X Designated Advisors was included in the study because of their role in
the listing process for companies listing on the local Alt-X Exchange as well as other stock
exchanges. The initial sample from this group was selected from the list of advisors posted
on the JSE Securities website. There was also bias in this sample selection depending on
the willingness of the individual to participate in the study.
4.2.2 Sample size
It is important that a researcher select an adequate sample size to ensure that sufficient
data will be available to successfully find a plausible response to the research problem
proposed in the study. Leedy and Ormrod (2001) suggest that a researcher should consider
the degree of homogeneity of the population when choosing an appropriate sample size. A
mostly heterogeneous population will require a larger sample size compared with a more
homogeneous population, should the researcher wish to draw relevant conclusions from the
study (Leedy and Ormrod 2001).
There is heterogeneity between the participant groups selected in the sample, however
there should be homogeneity within each of these groups because the individuals holding
the positions described in each group should have similar levels of education and work
experience. A total of 29 interviews were conducted over a period of eight weeks. A list of
the participants has been included in Table 3 below.
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Table 3: List of participants
Name Company
Junior Mining and Exploration Companies operating in South Africa Ferdi Dippenaar Great Basin Gold Ltd TSX AMX JSE
John Bristow Rockwell Diamonds Inc. TSX JSE
Nico Kruger Namakwa Diamonds Ltd LSE
Colin Bain Tantalite Resources Ltd In the process of selecting a listing location (AIM / TSX)
Mike Solomon Wesizwe Platinum JSE
Paul Miller Keaton Energy JSE
Stuart Simons Chrometco Ltd Alt-X
Hein le Riche Kimberley Consolidated Mines Recently listed on Alt-X
Mining Analysts/ Specialists Gavin Hall Investec Bank
Tim Keating Investec Bank
Anonymous Investec Bank
Nivaash Singh Nedbank Capital
Peter Ford Standard Bank
Matthew Jarvis Price Waterhouse Coopers
Tim Clarke Duetche Bank
Leon Esterhuizen RBC (Royal Bank of Canada)
Steven Brown Rand Merchant Bank – Asset Management
Andy Clay Venmyn Rand
Andrew Brady Qinisele Resources
Alt-X Designated Advisors Henk Engelbrecht Vunani Corporate Finance
Philip Reynolds Nedbank Capital
Kerry Sher Nedbank Capital
Andre Geldenhuis Nedbank Capital
Jannie Grobbelaar PSG Capital Ltd
Morag McGarvie Questco
Pete North Questco
Casper van Wyk River Sponsors
Additional participants Noah Greenhill JSE - Senior General Manager, Business Development
Robert Smith Investec Bank Corporate Finance
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4.3 Research design
Research design is the strategy that is developed by a researcher in order to address a
research problem by defining the procedures for sampling, data collection and analyses
(Leedy and Ormrod 2001). The research problem in this study was to identify and evaluate
the possible reasons for the choice of listing location by junior mining and exploration
companies in South Africa. The qualitative approach was selected for the investigation of
this research problem. This approach allows a researcher to focus on events that occur in
the real world and involves studying these events in all their complexity (Leedy and Ormrod
2001).
With qualitative research, there is not necessarily one, ultimate answer to a research
problem but instead there may be multiple perspectives held by different individuals. Each
of these perspectives may be valid, therefore the objective of a qualitative study is to reveal
the nature of these multiple perspectives (Denzin and Lincoln 1998). The researcher has
sought the different perspectives of the individuals identified in Table 3. The choice of listing
location for a company is influenced by the owners and management of a company, which
in turn may be influenced by the perceptions, desires and preferences of these individuals.
By investigating the perspectives and desires of these individuals the reasons for a
preference of listing location for these firms may be revealed.
Qualitative research makes use of several data collection methods that are interactive and
humanistic in nature. Some of these methods require the active participation by individuals
identified in a sample as well as the sensitivity by the researcher to these participants
(Creswell 2003). The data collection method for this study will be discussed in section 4.4
below. Qualitative research is primarily interpretive and requires the researcher to interpret
the data collected. This includes a description of the individuals included in the study, an
evaluation of the data for common themes or trends and finally, drawing conclusions with
respect to the research problem (Creswell 2003).
A qualitative research study is emergent in that, although requiring considerable planning
and preparation, it may evolve over the course of the investigation(Creswell 2003). Leedy
and Ormrod (2001) have found that as a study progresses, a researcher will gain an
increased understanding of the phenomenon under investigation and in turn the research
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questions may change, be refined or added to as the researcher learns what to ask and of
whom it should be asked.
The researcher initially formulated two general interview questions with six prompts based
on the research propositions that emerged from the literature review. These prompts were
used to gain the opinion of respondents on the validity of these possible reasons if they did
not discuss these reasons when question 1 was asked. Refer to interview guide A
(Appendix C). During the first two interviews the respondents introduced three new reasons
that had not been included in the research propositions and these were included in a new
interview guide B (Appendix C). These prompts were used for the next two interviews, and
where in the fourth interview, the respondent introduced a new reason; this too was added
to the list of prompts in interview guide C. This list of questions and prompts was utilised in
the next three interviews, in which a further two possible reasons were identified by two
respondents interviewed on consecutive days. The final update to the interview guide
included two prompts addressing these new reasons and this interview guide D was used
for the remaining 21 interviews. No new reasons were identified from this point forward.
4.4 Data collection
The data required to complete this study was collected through interviews with the
participants identified in section 4.2. Leedy and Ormrod (2001) describe an interview as
being similar to an informal conversation with the participant, where the interviewee is
allowed to do most of the talking with the interviewer listening for important information that
will assist in answering the research question. Interviews can contribute a great deal of
valuable information to a study by providing a platform for the researcher to ask questions
related to facts, behaviours (present and past) as well as the perceptions, beliefs, feelings
and motives of individuals (Welman and Kruger 2001). The advantages and limitations of
the interview method have been included in Table 4.
The researcher used the semi-structured interview as the method of data collection; this
makes use of a few unstructured and generally open-ended questions intended to obtain
the views and opinions of the participants in the study (Creswell 2003).
One of the advantages of semi-structured interviews over completely structured interviews
is that the researcher is able to use constructive prompts intended to clarify vague
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responses or to request elaboration of incomplete answers (Welman and Kruger 2001).
So, although most participants were asked the same questions, the researcher had
flexibility in the formulation of the interview; for example, the order in which the researcher
introduced different topics varied from one individual to another and was controlled by the
manner in which the interview developed.
Table 4: Advantages and Limitations of the interview method of data collection.
Advantages Limitations
Interviews are useful when participants cannot be observed directly in their natural
setting
Interviews supply indirect information which has been filtered through the perceptions of
the participants
Participants are able to provide historical information that would not be observed by
the researcher
Interviews provide data in a designated place rather than in the natural setting
Allows the researcher control over the line of questioning
The presence of the researcher may introduce bias into the responses of the
participants
Individuals are not equally articulate and perceptive
Source: Creswell 2003:186
An interview guide containing a list of topics was also used as opposed to specific
questions. These topics were relevant to the given research problem and were raised by
the researcher if the interviewee did not do so during the course of the interview. Due to the
emergent nature of the research, a total of four interview guides were used, where new
prompts were added to the interview guide as required. The interview guides used in this
study have been included in Appendix C.
The researcher performed both face-to-face and telephone interviews. Table 5 identifies the
advantages and disadvantages of both methods of data collection. The researcher
performed face-to-face interviews for all but one interview and due to the geographical
location of one participant; the interview was conducted over the telephone.
The researcher recorded the information gathered during the interview process through
hand written notes and recordings of the conversations using a dictaphone (provided the
participants granted permission) (Welman and Kruger 2001). The notes, together with the
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recordings, were used in the analysis and interpretation phase of the study. Three of the 29
interviews were not recorded and so the researcher relied on hand written notes for the
purpose of data interpretation.
Table 5: The advantages and disadvantages of the face-to-face and telephone interview methods
Type Advantages Disadvantages
Face-to-face
interview
The interviewer is able to observe the reactions of the participant during the interview
The less articulate interviewee may present the researcher with a challenge and less than adequate data may be collected from such an interview. The researcher needs individuals who are not hesitant to speak and share their perceptions and ideas.
Telephone interview
This type of interview is ideal when the researcher does not have direct access to the participants.
The researcher cannot see the informal communication offered by the participant.
Source: (Creswell 1998)
4.5 Data analysis and interpretation
The researcher used the content analysis method to analyse and interpret the data
collected during the interviews with participants. “Content analysis is a detailed and
systematic examination of the contents of a particular body of material for the purpose of
identifying patterns, themes, or biases” (Leedy and Ormrod 2001:155). This method is
appropriate for the analyses of data collected from books, newspapers, transcripts of
interviews and other forms of human communication. The researcher considers content
analysis to be the most appropriate method for this study because the data analysed
consisted of hand written notes and transcripts of the interviews carried out during the
study.
A description of the method of content analysis undertaken by the researcher has been
included below.
i. The transcripts and hand written notes collected during all the interviews constitute
the body of data that was used in the content analysis phase of the research. The
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transcripts were used as the main body of data and the hand written notes were
supplementary to this data.
ii. The identification of common themes in the data collected from the interviews was
the central task in the content analysis. The responses from each of the interviewees
were organised into categories that were related to the research propositions
formulated from the literature review. An additional category was also used for
reasons identified by the respondents but not included in the literature review. The
researcher then evaluated each of these responses for validity as well as any
additional detail offered regarding the reasons given by junior mining and exploration
companies for the choice of listing location.
iii. The researcher has taken into account the various ways in which the different
participants have experienced the phenomenon when completing the content
analysis. A CEO, mining analyst and Alt-X Designated Advisor will have different
experiences related to the listing of shares of a junior mining company on a stock
exchange.
iv. The frequency of each characteristic that was identified in the data under analysis
was recorded in a matrix in Table 6 as recommended by Leedy and Ormrod (2001).
4.5.1 Role of researcher
In qualitative research the ability of the researcher to analyse and interpret the body of data
for the study is viewed as vital for the understanding of a social phenomenon. Leedy and
Ormrod (2001) consider the researcher to be an instrument that is as important to
qualitative research as a sociogram or rating scale. The researcher may, however, have
introduced bias into the research through her role as interviewer and through the
interpretation of the data collected during the study. An explanation of the role of the
researcher and possible partialities has been included below.
• The researcher is a qualified geologist and was previously employed as a consultant in
the mining industry. This previous experience in the industry may have influenced her
role as interviewee when interacting with the participants as well as her interpretation of
the data collected during the study.
- 77 -
• The researcher may have introduced bias during her note-taking during the interview
process and through the asking of additional questions other than the prompts included
in the interview guide, where the clarification of certain responses was required.
• The researcher used the transcripts of the interviews as primary data wherever possible
in an attempt to reduce the bias that may have been introduced through the
summarising of responses in note-taking.
• Some degree of prejudice may have been introduced in the content analysis phase of
the study where the researcher used her discretion to evaluate the data to determine
what information would best provide an answer or explanation for the research problem.
4.6 Verification and Dependability
When choosing a research methodology it is important to consider the validity of the
approach. In qualitative research the term verification is used instead of validity and is
described as the accuracy, meaningfulness and credibility of the research project as a
whole (Creswell 1998). In order to ensure the trustworthiness of the research, the
researcher will describe how she has established the credibility, transferability and
dependability of the research, which are the equivalent qualitative research terms for
internal validity, external validity and reliability, respectively (Creswell 1998).
4.6.1 Credibility
The credibility of a study reflects the extent to which the research design and the data
collected have enabled the researcher to construct valuable and appropriate conclusions
concerning the phenomenon being studied (Leedy and Ormrod 2001).
The researcher established credibility in the study by interviewing groups of people who
have different perspectives of the phenomenon under investigation. The CEOs of junior
mining companies will likely have been directly involved in the choice of listing location,
whereas mining specialists have viewed this decision-making process from an external
perspective. The Alt-X Designated Advisors may also have knowledge of the reasons for
the choice of listing location by these companies through the relationships that they have
developed with public junior mining and exploration companies. The researcher sought the
- 78 -
convergence of the perceptions and experiences of the individuals interviewed from each of
these groups.
Any possible researcher bias has been recorded in the research methodology section of
this report. The researcher commented on past experiences, biases and prejudices that
may have shaped the interpretation and approach to the study, thereby assisting in the
credibility of the research (Creswell 1998).
4.6.2 Transferability
Transferability is the extent to which the conclusions drawn from the research are
applicable to other situations outside of the study (Creswell 1998). The researcher made
use of in-depth, detailed description, which includes a description of the participants and the
setting of the study. This enables readers to transfer the information within this research
report to other settings, which will thereby determine whether the conclusions of the study
are transferable because of the shared characteristics.
4.6.3 Dependability
Dependability is comparable to reliability in that it is “the consistency with which a
measuring instrument yields a certain result when the entity being measured hasn’t
changed” (Leedy and Ormrod, 2005:29). The personal biases and perceptions of both the
researcher and participants may influence the interpretation of the data (Leedy and Ormrod
2001). To increase the reliability of the overall study, the aim of the study and topic of
discussion were clearly communicated to the participants at the beginning of each
interview.
Ideally the respondents selected in this sample would have been random and
representative, however to due the accessibility and availability of participants, the sampling
process was purposive. However the reliability of the study was maintained through the
calibre of the participants selected. Interviewees were selected based on their in-depth
knowledge of the mining industry and their knowledge or experience related to the research
problem defined in this study. An interview guide, containing several prompts, was also
used by the researcher to obtain the opinions of participants on topics related to the study,
adding to the dependability of the study.
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5 PRESENTATION OF RESULTS
A matrix of the responses collected during the interviews conducted with the 29 participants
has been included in Table 6. The yellow columns contain the responses to the research
propositions formulated in the literature review and the green columns are the responses
for additional reasons identified during the study. QNA in this table represents ‘Question not
asked’ as this indicates where new reasons were introduced after these participants were
interviewed and therefore they were not asked the question in their interview.
‘No answer given’ indicates that participants did not answer a question in an interview;
there was more than one interviewee in the room and the question was answered by their
colleague so they did not perceive a need to answer the question, or they may or may not
have felt sufficiently knowledgeable to answer the question. ‘Not sure’ indicates that the
participants felt that they had very little knowledge about the question and therefore were
not sure of what their answer would be if they had the relevant knowledge.
For the purpose of anonymity the identities of the respondents have been concealed and
their names replaced with codes that will be used in both the presentation and analysis of
results sections. The codes AA, MS and CEO will be used to represent the Alt-X
Designated Advisors, mining specialists and the CEOs who participated in the study,
respectively. The answers given by Smith will be included in the Alt-X Designated Advisors
section to maintain the anonymity of his answers. JSE1 will be used to represent the
responses of Mr Greenhill from the JSE Securities Exchange for continuity purposes.
Figure 8 contains the summary of the responses collected from each of the participants.
The responses have been divided into three graphs representing the three groups of
respondents included in the study.
- 80 -
Table 6: A matrix of the responses collected from the participants interviewed during the study
Category Availability of capital
Risk Propensity Industry Peers Ratings Commodity related
Liquidity Listing Regulations
Reporting Codes Tax Incentives Geographic Location
AA1 Alt-X Designated Advisor √ √ √ √ QNA √ √ x √ - TSX x - AIM QNA
AA2 Alt-X Designated Advisor √ √ √ √ QNA √ √ x √ QNA
AA3 Alt-X Designated Advisor √ √ √ √ QNA √ x Not sure √ QNA
AA4 Alt-X Designated Advisor √ √ x √ Not sure √ √ x No answer given √
AA5 Alt-X Designated Advisor √ √ √ √ x √ √ x No answer given √
AA6 Alt-X Designated Advisor √ √ √ √ √ √ √ x √ √
AA7 Alt-X Designated Advisor √ √ √ √ x √ √ x No answer given √
AA8 Alt-X Designated Advisor √ √ √ √ x √ √ x √ No answer given
AA9 Alt-X Designated Advisor √ √ √ √ QNA √ √ x Not sure x
MS1 Mining Specialist √ √ √ √ √ √ √ √ (minor) √ (minor) QNA
MS2 Mining Specialist √ √ x No answer given Not sure √ √ x √ x
MS3 Mining Specialist √ √ √ √ √ √ √ √ (minor) √ √ (minor)
MS4 Mining Specialist √ √ √ √ √ √ x x √ √ (minor)
MS5 Mining Specialist √ √ √ √ √ √ √ (minor) x √ (minor) √
MS6 Mining Specialist √ √ √ (minor) √ QNA √ √ x √ QNA
MS7 Mining Analyst √ √ √ √ √ √ x x Not sure QNA
MS8 Mining Analyst √ √ √ √ √ √ √ (minor) x √ x
MS9 Mining Analyst √ √ √ (minor) √ x √ √ x √ √
MS10 Mining Specialist √ √ √ √ QNA √ √ √ (minor) √ QNA
MS11 Mining Analyst √ √ √ √ √ √ √ x √ (minor) √
CEO1 CEO √ √ √ √ (minor) x √ x x x x
CEO2 CEO √ √ (by inference) √ √ √ √ x x x √
CEO3 CEO √ √ √ √ √ √ x x x √
CEO4 CEO √ √ √ √ (minor) x √ x x x √
CEO5 CEO x x x x x √ x √ (minor) x √ (convenience)
CEO6 CEO x x (aware of conservatism) x x x x √ x x √
CEO7 CEO x x x x x x x x x √
CEO8 CEO x x x √ x √ √ x x x
JSE1 Senior General Manager, Business Development √ √ √ √ x √ (minor) √ - US markets
X - TSX, LSE, JSE x √ √ (minor)
- 81 -
Mining Analysts and specialists
0
2
4
6
8
10
12
No.
of r
espo
nden
ts
Alt-X Designated Advisors
01
2345
678
910
No.
of r
espo
nden
ts
CEOs
0
1
2
3
4
5
6
7
8
9
Availability ofCapital
Appetite for risk Industry Peers Commodityspecific
Ratings Liquidity Securitiesregulations
ResourceCodes
Tax Incentives Geographiclocation
No.
of r
espo
nden
ts
Yes No Not sure No answer given QNA
Figure 8: Summary of the responses collected from respondents during the study
- 82 -
6 INTERPRETATION OF RESULTS
6.1 Availability of Capital
Alt-X Advisors
9
0
0
0
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
11
0
0
0
0
Yes No QNA No answer given Not sure
C.E.O.s
4
4
0
0
0
Yes No QNA No answer given Not sure
Figure 9: Summary of views of respondents on the availability of capital as a reason for the choice of listing location
Junior mining and exploration companies are some of the most financially volatile and high-
risk companies in the resource industry and the greatest challenge facing these companies
is attracting finance in a capital-intensive industry (MiningWatch Canada 1997). MS6
(personal communication, 27 May 2008) found that in his personal experience these
companies are often unable to access finance from debt providers due to the conservative
lending standards of these institutions and are therefore constrained to equity finance.
All the Alt-X Designated Advisors and mining specialists who took part in this study agreed
that the availability of capital finance, particularly risk capital was the most important
consideration for junior exploration and mining companies when choosing their primary
listing location.
One mining analyst suggested that a company would ideally prefer to list where the majority
of their assets are located because companies seeking finance would need to consider who
their long-term investors are likely to be and he suggested that maximum interest is likely to
be within their domestic investor community. He argued that for companies operating in
South Africa it would be easier “to get South African investors to go to the middle Orange
River, for example, to go see diamond operations or to go and see platinum junior
operations, than to get a London fund manager out here or an American fund manager out
here” MS11 (personal communication, 30 May 2008). Although this would be considered
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the ideal place to raise equity finance for South African companies, the mining analyst
noted that in his experience South African investors are reticent to invest large amounts of
capital in juniors, particularly exploration companies, despite their familiarity with resource
stocks. Most participants attributed this reticence of investors to their reduced appetite for
risk as well as the size of the capital pool in South Africa.
6.1.1 Size of Capital Markets
Junior resource companies will require varying amounts of capital at different points in their
life cycle depending on their growth requirements. CEO6 (personal communication, 9 July
2008) explained that the choice of listing location may also be governed by the choice of
business model for the company. If a junior company is more opportunistic; with the goal of
identifying potential prospecting sites, adding value by proving possible resources and
reserves and then selling these assets to a major mining corporation to further develop the
project, the amount of capital required by these companies will be different from those
juniors that have a longer-term business model of following a project through to production.
Both business models require significant amounts of capital. However, the latter may
require larger amounts of capital and possibly different types of investors at different
phases in the life cycle of the company (CEO1, personal communication, 25 May 2008).
Due to the comparatively small size of the South African market and the reluctance of
South African investors to provide finance for high-risk projects, junior mining and
exploration companies are often forced to seek capital from markets offshore. South African
junior mining and exploration companies have found that raising equity finance is easier in
a number of international capital markets. AA3 (personal communication, 22 May 2008)
claimed that, “because of the pure size of those capital markets it’s very easy to tap into 50
million or 100 million, it’s nothing in terms of dollars, so it’s the depth of the capital markets”.
The access to a larger pool of capital in the North American markets and a reputation as a
large capital market for mining companies have been the major attractions of the TSX and
TSX Venture Exchanges for both Australian and South African mining companies (Forrest
2007). CEO1 (personal communication, 25 May 2008) also suggested that if the
management of a junior mining and/ or exploration company have intentions of significant
growth, they would likely require more money than they could typically access from
- 84 -
Canadian markets and would therefore need to undertake additional capital raising in
markets such as those in London or Johannesburg.
One CEO interviewed during the study said they were able to raise R1.6 billion after
choosing to list their shares on the LSE main board, which is a great deal more than was
raised accumulatively by their industry peers that elected to list their shares on the JSE
main board and Alt-X Exchanges. The CEO of this company speculated that they would not
have been able to raise this amount of money through a listing on the JSE because of the
size of this capital market along with the lower risk appetite of the investors in this market
(CEO3, personal communication, 9 July 2008).
Several mining specialists and CEOs that participated in the study identified the growing
attraction of stock exchanges in the Middle East (e.g. Dubai and Qatar Stock Exchanges) to
capital-intensive businesses because of the large pools of capital available. There is also
the assumption that it would be easier to return to these markets for additional capital while
maintaining investor confidence (MS3, personal communication, 13 June 2008). One of the
CEOs interviewed in the study said that they had investigated the viability of listing on one
these exchanges and identified investment funds of up to US$6 billion. However, the lack of
liquidity on these exchanges detracted from the benefit of the large capital pools available
(CEO5, personal communication, 17 June 2008). Each of these participants agreed that
while Dubai and Qatar are increasingly attractive markets it would take some time for the
liquidity of shares traded on these exchanges to reach that of the larger European and
North American markets.
Return to market
It is also important to understand the psyche of investors: MS1 (personal communication,
29 June 2008) believes this will influence where juniors choose to list because these
companies must be able to fulfil the investment goals of the investors willing to contribute
high-risk equity capital for their projects. Often these companies will have to return to equity
markets to raise capital for successive stages of prospecting as the project becomes more
promising (PDAC 2001).
Exploration companies will typically identify one or more mineral prospects and attempt to
raise the finance required to evaluate the potential of these prospects. These companies
will then use the initial capital raised for drilling and other exploration activities, to prove the
- 85 -
economic viability of these prospects. If an economically viable deposit is uncovered and
depending on the business model of the company, the company may be required to return
to the markets to raise additional capital for the development of the mining operation. By
returning to the market at strategic phases in the growth cycle, the initial shareholders in the
project do not give away value unnecessarily (AA6, personal communication, 6 May 2008).
The ability to return to market has often proved challenging for exploration companies in
South Africa because most South African investors do not understand the business model
of exploration companies and their financial requirements. These companies may not be
able to calculate precisely the total capital required at the start of a project, as there will be
varying capital requirements at different phases in their growth cycle, depending on the
success of their exploration efforts. MS2 (personal communication, 13 June 2008) proposes
that investors often question whether explorers intend to return to market in the future and if
the answer is positive, most investors will decline to invest because they believe these
companies have not conducted sufficient research into their capital requirements.
However, CEO8 (personal communication, 18 June 2008) proposes that the access to
large pools of capital is not necessarily restricted to certain stock exchanges; instead, a
stock exchange is only a trading and settlement system with a set of regulations that
provides a market place for buyers and sellers, where the buyers are asset managers and
the sellers are the companies seeking equity finance. He also added that global capital is
more freely available and moveable and therefore the access to a pool of capital is not
necessarily restricted to specific stock exchanges because global investors are able to
invest their money wherever they wish. It has been suggested that it is the task of the
company and its management to attract potential and willing investors such as European
fund managers, to the exchange on which the company is listed.
In contrast AA3 (personal communication, 22 May 2008) explained that in his experience
investors are more comfortable with stocks listed in their own jurisdiction, where they
understand the governance issues and can track the shares on a daily basis, whereas
global investors sometimes find it difficult to trade stocks on an emerging stock market.
CEO3 (personal communication, 9 July 2008) observed that many Canadian investors are
reluctant to invest in the UK markets and UK investors are reluctant to invest in the
Canadian markets; and both groups of investors are hesitant to invest on the JSE main
- 86 -
board and Alt-X Exchanges, where “they would by all means come and invest in
Anglogold…but the small caps definitely have a disadvantage”.
6.1.2 Appetite for risk
Alt-X Advisors
9
0
0
0
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
11
0
0
0
0
Yes No QNA No answer given Not sure
C.E.O.s
4
4
0
0
0
Yes No QNA No answer given Not sure
Figure 10: Summary of views of respondents on the appetite for risk by investors as a reason for the choice of listing location
The appetite for risk by investors was discussed in the literature review but was considered
a component of the availability of capital when selecting a listing location. However during
the first few interviews for the study it became evident that although risk appetite is a
component of the availability of capital, it is also an important consideration for junior
exploration companies when selecting their listing location, and for this reason it will be
discussed in some detail. All the Alt-X Designated Advisors and mining specialists believe
this to be an important consideration for the choice of listing location. MS10 (personal
communication, 30 May 2008) regards the access to mineral exploration investors with an
appetite for high-risk projects, to be the most important consideration when choosing a
listing location for these companies.
Exploration companies search for new mineralisation of economic value that may one day
result in the development of a new mine; however, because these companies do not
generate a cash flow from their activities, they must attract high-risk equity funding to raise
capital for their projects through either joint ventures with larger mining companies or public
financing ventures (PDAC 2001).
MS5 (personal communication, 3 June 2008) explains that all investors will be exposed to
the same risk, so if a company fails, the investors will lose their money, irrespective of
whether the company is listed on the JSE or the TSX. Therefore every investor is exposed
- 87 -
to the same risk and it is rather how much risk an investor pool is willing to tolerate,
because investors that are more sensitive to risk are less likely to invest in exploration
companies. The reward for the discovery of an economically viable deposit is considerable
and this is often what maintains the interest of certain investors, despite the low success
rate of developing these mineral deposits into a mine (PDAC 2001).
6.1.2.1 South African Investors
The majority of the participants agreed that South African investors are in general more
conservative when evaluating venture capital opportunities and have been very reluctant to
invest in junior exploration and mining companies. It was proposed by MS6 (personal
communication, 27 May 2008) that a possible reason for this conservatism is the lack of
understanding of junior mining and exploration companies by institutional investors,
because in the past they were only exposed to the larger mining corporations that own
producing mines and finance exploration internally.
Another possible reason for the lack of risk appetite may be related to the failure of several
exploration companies that were listed on the JSE in the nineties; these companies made
sizeable promises but failed to deliver on these promises, resulting in substantial losses for
South African investors. “I think junior mining companies became a little bit tainted with
most South African investors because of the reality of what happened” (AA3, personal
communication, 22 May 2008). The consequence of this is that South African investors
have preferred to invest in producing mines or companies that are close to production and
junior explorers have found raising capital in South Africa prior to the completion of a
bankable feasibility study very challenging.
6.1.2.2 Offshore Investors
The lack of understanding of juniors and the conservatism of South African investors
prompted junior mining and exploration companies to seek alternative equity markets in
which to raise the capital required to fund their exploration projects and the development of
mining operations. The speculative financing potential and the appetite of Canadian
investors to invest in offshore projects, has made the TSX an increasingly favourable
destination for South African exploration and mining companies wanting to raise capital
offshore (Fraser 2005). The increased tolerance for risk and the reduced focus on dividends
have made the TSX Venture Exchange a popular destination for foreign junior exploration
- 88 -
companies seeking capital funding (Forrest 2007). The Alt-X Designated Advisors and
mining specialists interviewed agreed that in Canada on the TSX, and to a lesser extent the
AIM Exchange in London, the risk appetite pools are larger. AA3 (personal communication,
22 May 2008) used the following statement to describe the Canadian markets:
“So people tended to invest on a story rather than on the facts so they were quite happy to
advance extremely high risk capital into exploration on the basis that one in 20 will hit the
jackpot and then you’ll make a fortune out of it.”
MS8 (personal communication, 23 June 2008) suggests that a small amount of risk capital
on the fringes of markets like the TSX is actually quite significant in South African terms and
this is the reason why juniors operating in South Africa have greater success in raising
finance in these markets.
MS9 (personal communication, 24 June 2008) has also observed a larger retail component
in the investor base in the Canadian markets and often these investors have a greater
appetite for risk and are therefore more willing to invest in junior mining ventures. The
number of retail investors in South Africa as a percentage of the population, on the other
hand, is very small. JSE1 (personal communication, 18 July 2008) agrees that the retail
component of an investor community can be important and says that, “Retail investors, you
could argue equates, to liquidity, liquidity equates to price discovery which equates to the
ability to do stuff with your shares”.
In Canada, there are also a larger number of small investment funds that have a higher
tolerance for risk compared with the larger funds under management. If there are many of
these funds willing to invest small amounts of equity in these companies, the raising of
capital becomes a far easier task. In South Africa the investment community is dominated
by large, conservative investment funds. Should these funds choose to invest, they will not
invest small amounts of equity, which is often what is initially required by junior exploration
companies (MS3, personal communication, 13 June 2008). The importance of a large
number of small investment funds was iterated by (CEO8, personal communication, 18
June 2008), who agrees that in the past there were only a few large investment funds that
existed in South Africa. He believes that this is changing and there are now a growing
number of small investment funds under management in South Africa. “We used to be able
to do a road show and fly to Cape Town in two days now you need a week” (CEO8,
- 89 -
personal communication, 18 June 2008). He proposes that this has enabled companies
such as Eland Platinum to raise their capital requirements in South Africa.
Of the CEOs that participated in the study, all of those that selected primary listings
offshore agreed that the risk appetite of investors in a market was a consideration for their
choice of listing location. For CEO3 (personal communication, 9 July 2008) it was
necessary to choose a stock exchange where investors would be comfortable with junior
mining companies and also willing to invest in companies with new and unique business
models.
Two of the four CEOs of companies listed in South Africa said that they were aware of the
conservative nature of the local investors at the time of their listing, but stated that their
reasons for listing in South Africa were for politically motivated as well as for convenience.
Both CEOs are considering secondary listings in offshore markets and said that the risk
appetite of investors would be taken into account when selecting the exchange. The
remaining two CEOs did not consider the risk appetite of investors when choosing the JSE
and one of these CEOs claimed that their choice of listing location was because they
already had an existing investor base from the previous exploration ventures which they
had managed, and they were therefore not perceived as a high-risk investment.
6.1.2.3 Recent investor trends
Several of the participants have suggested that the South African market has started to
change over the last three to five years where there has been a shift in the attitude of
investors towards junior mining and exploration companies in South Africa (AA7, personal
communication, 9 June 2008). There are a number of junior mining and exploration
companies now listed on the JSE and also a growing number of institutional investors that
have become more comfortable with investing in these companies.
Prior to the introduction of the MPRDA in 2002, the mindset of investors was that “the
majors are making all the money and that the juniors are there just to take all the crumbs”
(MS6, personal communication, 27 May 2008). The implementation of the MPRDA
unlocked mineral properties that had previously been retained by the major mining
corporations, thereby opening up opportunities for junior exploration and mining companies
with the necessary skills and experience to develop new mineral projects. MS9 (personal
communication, 24 June 2008) also attributes the change to the development of the PGM
- 90 -
sector, where juniors have been very successful and those that invested in these juniors
have made a lot of money and because of that there is a growing appetite for investment in
juniors.
AA3 (personal communication, 22 May 2008) suggests that, although it is becoming easier
for junior mining and exploration companies to access capital in South Africa, these
companies will still have to attract high-risk capital from foreign markets because investors
in these markets are more prepared to gamble when investing in exploration projects.
6.2 Industry Peers
Alt-X Advisors
8 1
0
0
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
10
1
0
0
0
Yes No QNA No answer given Not sure
C.E.O.s4
4
0
0
0
Yes No QNA No answer given Not sure
Figure 11: Summary of the views of respondents on the location of listings by industry peers as a reason for the choice of listing location
The industry in which a company operates may influence the choice of stock market in
which to raise their capital requirements. Corwin and Harris (2001) suggest that firms are
inclined to list on exchanges where the majority of the companies in their industry are
currently listed. Anecdotal evidence from previous studies indicates that firms tend to list on
the exchange that they perceive to have the expertise or experience in trading similar
securities (Corwin and Harris 2001).
Most of the Alt-X Designated Advisors and all of the mining specialists interviewed agreed
that this would be a factor of consideration for junior mining and exploration companies
when evaluating where best to raise equity capital for their projects. MS11 (personal
communication, 30 May 2008) proposes that a company would “want to have a listing in a
group of companies with similar characteristics because then what will happen is you will
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have more investor interest, you’ll have more brokerages that are writing about those
companies and you’ll have more comparable research that is done”.
So companies tend to raise capital in markets where investors are willing to invest in their
projects, for example IT companies are attracted to the NASDAQ, the TSX is considered
attractive to mining and exploration companies. MS8 (personal communication, 23 June
2008) proposes that companies perceive the AIM Exchange as a stepping stone to a listing
on the LSE main board, which is considered a significant pool of capital.
Stalinski and Tuluca (2006) propose that the clustering of companies from the same
industry on specific stock exchanges may be influenced by the location of analysts and
investors with superior technical knowledge of that industry. They suggest that this is
particularly relevant where the availability of such information may substantially affect the
accessibility of equity finance and the terms at which the finance is available.
This may be pertinent for companies operating in the junior mining sector, as investors are
exposed to high-risk projects where they may possibly not see returns on their investment if
a company is unsuccessful in their attempts to find an economically viable mineral source.
Investors who do not understand the risks associated with junior exploration and mining
companies may be reluctant to invest in such ventures (Forrest 2007).
MS10 (personal communication, 30 May 2008) has found in his experience that Canadian
investors are more knowledgeable about resource companies; for this reason these
companies have had greater success in raising capital for their projects on Canadian
exchanges such as the TSX and TSX Venture Exchanges, when compared with the South
African markets. The London markets appear to attract junior mining companies for a
similar reason as CEO3 (personal communication, 9 July 2008) believes that “to educate
the market in a company with a long-term history but a unique business concept in a small
capital market like the JSE would have been even more difficult than in a place like
London”.
MS5 (personal communication, 3 June 2008) suggested that the increased understanding
of these companies is partly because there is more information freely available regarding
these companies and the industry in which they operate, in markets such as London and
Toronto. Therefore investors can make more informed decisions. This was reiterated by
CEO3 (personal communication, 9 July 2008) when he commented that there are a greater
- 92 -
number of companies listed on these exchanges and so there is more information available
to investors, allowing them to compare their calculations to those of the analysts, thereby
enabling them to make more informed investment decisions.
CEO1 (personal communication, 25 May 2008) considers the TSX Exchange to be more
focussed on resources than the AIM Exchange. He also believes that there is insufficient
infrastructure, such as analysts and investor education, in South Africa to compete with
these markets. JSE1 (personal communication, 18 July 2008) is aware that many South
African investors do not understand the unique investment model for exploration
companies. However, the JSE is making an effort to educate investors through seminars
held on a regular basis. These seminars introduce a variety of information about, and tools
to evaluate junior exploration companies.
One participant found, in his experience, that due to the significant size of these capital
markets there are more equity houses that trade in or raise the capital for these companies
and there would therefore be a larger number of analysts covering the stocks traded in
these markets (AA6, personal communication, 6 May 2008). An article by Ellingham (2005)
also identified the presence of a large community of mining analysts allowing for the
coverage of a broader range of companies in certain markets as a perceived benefit by
companies hoping to amplify their exposure to potential investors, therefore increasing their
likelihood of raising sufficient capital for their projects.
MS7 (personal communication, 28 May 2008) has observed that there are far fewer mining
analysts in South Africa, and most are employed within the banking sector where they
principally cover the large mining corporations. It is only recently that these analysts have
become aware of the junior mining sector and he believes that the lack of analyst coverage
has contributed to the struggle by a number of junior mining and exploration companies to
raise money in the South African market. It is thought that the introduction of the Nedcor
Securities Junior Mining and Exploration (NSJME) Index and the improved coverage by
analysts have aided the growing interest in junior mining and exploration companies listed
on the JSE.
MS3 (personal communication, 13 June 2008), however, disagrees that analyst coverage is
the reason for the improved ability to raise capital in the London and Toronto markets, and
suggests that it is rather the way in which these markets have been constructed to educate
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and attract investors to invest in particular stocks traded in these markets, and uses the
example of flow-through shares, which were introduced to encourage investment in
exploration companies operating in Canada.
CEO5 (personal communication, 17 June 2008) believes that although it may be
constructive to consult with industry peers and investigate their preferences in stock
exchanges, it is also important for management to physically go and investigate the various
markets and consult with local sponsors and advisors before finalising their choice of listing
location. This will allow management to assess the level of knowledge and interest in junior
resource companies in each of these markets.
Pioneers
MS5 (personal communication, 3 June 2008) found that in his experience “birds of a feather
flock together and there’s a reason behind a mass concentration of particular IPOs in an
area. But you get the odd guys that buck that trend because they are more pioneers, your
Wesizwe Platinums, your Wits Golds, most of the guys that are passionately South African
and believe in the market here and go through the pain of doing it and then you get others
that will go straight to Toronto first”.
It was proposed by MS2 (personal communication, 13 June 2008) that some companies
consider listing on stock exchanges where there are fewer of their industry peers with the
intention of being more visible to investors in these markets. This mining specialist has had
dealings with a number of CEOs that have intimated that they would rather list their
companies on stock exchanges where they will be more visible to potential investors (MS2,
personal communication, 13 June 2008). This has also proved to be one of the attractions
of inward listings on the JSE for companies that have chosen a primary listing offshore.
When the CEOs were asked if this was a consideration when choosing their primary listing
location, only half said that it was a factor of consideration; these were the CEOs of the
companies that had chosen offshore listings. Two of the CEOs of companies listed on the
JSE said that it was not a factor and their listings were rather for convenience and political
reasons. These interviewees said that this would perhaps become a factor for consideration
when selecting the stock exchange for their secondary listings.
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6.2.1 Commodity related
Alt-X Advisors
1
3
4
0
1
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
7
1
2
0
1
Yes No QNA No answer given Not sure
C.E.O.s
2
6
0
0
0
Yes No QNA No answer given Not sure
Figure 12: Summary of views of respondents on the preference of the commodity mined by investors as a reason for the choice of listing location
A number of the mining specialists explained that investors in particular markets have a
superior understanding of the risks associated with the mining industry, but also that there
may be markets that have a greater understanding of, and therefore preference for,
investing in particular commodities. MS1 (personal communication, 29 June 2008) and MS7
(personal communication, 28 May 2008) agreed that in their experience Canadian investors
have a greater appetite for base metals, particularly copper and uranium stocks, which may
be related to the location of the largest producers of these commodities; for example, Chile,
Brazil and other South American countries are in the same time zones as Canada and are
the largest producers of copper in the world. It was suggested that historically Canadian
investors have had greater exposure to these commodities prior to the global business
environment which exists today.
The US and Middle Eastern markets are believed to have a preference for gold stocks. The
increased appetite for gold in the US markets is considered to be from retails investors,
particularly those from the southern states of the US (MS1, personal communication, 29
June 2008). Whereas South African investors are considered to have an increased appetite
for platinum stocks because the majority of the platinum supplied to the world is mined in
South Africa, therefore these investors have a better understanding of the risks and
challenges associated with the exploration and mining of this commodity.
The increased appetite for particular commodities does not imply that companies with no
projects exploring or mining these commodities will be unable to raise money in these
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markets; rather, those with projects mining and exploring these commodities may find it
easier to raise money in these markets and may also be able to attract higher multiples for
their projects in these markets (MS5, personal communication, 3 June 2008).
MS7 (personal communication, 28 May 2008) also found in his experience that Canadian
investors prefer to invest in companies focussing on single commodity projects, implying
that these investors do not want diversification and rather diversified junior mining and
exploration companies would attract more interest and better multiples in London than in
Toronto.
MS9 (personal communication, 24 June 2008) disagreed with the idea of commodity
specific centres and said that it is rather an appetite for mining and exploration stocks in
general and did not believe that investors would discriminate between companies that are
mining/ exploring different commodities. In his opinion, “if you can convince them that the
dynamics, the economics, everything is right, they’ll invest. It’s about returns; who cares
what it is?” (MS9, personal communication, 24 June 2008). Both AA7 (personal
communication, 9 June 2008) and CEO4 (personal communication, 12 June 2008) agreed
that investors are unlikely to discriminate on commodity but investors active in particular
markets will have a better understanding of junior mining and exploration companies and
their associated risks and will therefore have an increased appetite for these companies
rather than specific commodities.
The majority of the CEOs interviewed in this study did not consider this to be a factor in
their choice of listing location for their businesses. CEO1 (personal communication, 25 May
2008) agreed with the comments by the above Alt-X Designated Advisors where there are
certain markets that have an affinity for mining and exploration stocks, but they did not
consider certain markets to have a higher preference for certain commodities over others.
Of the two CEOs that said this was a consideration, one stated that it was a factor due to
the obscure nature of the mineral mined by their company and that it was important to
identify advisors and investors that would understand the mineral, along with the risks and
challenges associated with the mining of such a mineral (CEO2, personal communication, 7
July 2008). CEO2 (personal communication, 7 July 2008) proposes that “it probably differs
from company to company but when it’s an obscure mineral most people don’t even know
what tantalite is used for, so when it’s obscure like that one needs to be very cautious about
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that and if you’re going to tell a story, that story would be received in a positive light on the
exchange”.
The second CEO found that over a period of time there has been reduced coverage of
stocks in the local market in companies mining the same commodity as themselves. This
reduced coverage would have made investor education more challenging for their
organisation and he, therefore, sought a market where there would be increased
understanding of their commodity and the mining methods required for the extraction of
such a commodity.
6.2.2 Ratings
Alt-X Advisors
9
0
0
0
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
10
0
10
0
Yes No QNA No answer given Not sure
C.E.O.s
5
3
0
0
0
Yes No QNA No answer given Not sure
Figure 13: Summary of views of respondents on ratings as a reason for the choice of listing location
Initial equity holders in exploration companies will typically identify one or more mineral
prospects and attempt to raise the finance required to evaluate the potential of these
prospects. Companies will use the initial capital raised for drilling and other geological
techniques to prove the potential economic viability of these prospects. If an economically
viable deposit is uncovered and depending on the business model of the company, the
company may need to return to the market to raise capital for the development of the
mining operation (CEO6, personal communication, 9 July 2008).
The raising of equity finance will by implication dilute the shareholding of the initial owners
of the projects, but it is necessary to secure the value growth of the project. Junior mining
and exploration companies will therefore desire to raise capital in the most efficient manner
i.e. attain the least amount of dilution of their initial shareholding. “It’s a complete financial
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decision, are you going to give up 20 percent of your company or 10 percent?” (AA4,
personal communication, 6 May 2008).
Usually the only assets that these companies have are their professional staff, their
experience and ideas as well as land to explore for potential mineral deposits (PDAC 2001).
It is therefore important for these companies to attract the maximum rating for their assets
in order to reduce the dilution of their initial shareholding. Ratings are the calculation of the
value or potential value of a company when listing the entity on an exchange. There are a
variety of methods including net asset value (NAV) and enterprise value per resource
ounce (EV per resource ounce) and part of these ratings are based on criteria such as the
management team and quality of the asset base (AA6, personal communication, 6 May
2008).
In order to grow shareholder value, a company would want their shares to be well rated so
that it will be possible to issue more shares at a later date at enhanced value. The majority
of the respondents proposed that investors in particular markets, because of their increased
understanding and appetite of junior resource stocks, will apply higher ratings to these
companies compared with investors in more risk averse markets.
AA8 (personal communication, 9 June 2008) has found in his experience that juniors will
select a stock exchange where their industry peers have attracted better ratings in the hope
that they will receive similar ratings for their projects and/or operations. CEO3 (personal
communication, 9 July 2008) agreed that the choice of listing location would be influenced
by the ratings attracted by their industry peers in certain markets and asked, “How can any
investor measure you against something when he’s only measuring you against your own
review of numbers?” AA7 (personal communication, 9 June 2008) has observed that the
TSX market, followed closely by the AIM market, has enabled junior explorers to raise
significant amounts of capital with the most attractive ratings, thereby increasing the
attractiveness of these markets for juniors.
The same mining specialists proposing that investors in certain markets would be biased
towards particular commodities also suggest that the same investors would offer a premium
for these commodities trading in their markets. However, others suggest that it is not
commodity-related but rather that the investors in these markets better understand the
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investment models of junior exploration and mining companies and are therefore willing to
offer better ratings for these companies.
Of the CEOs interviewed during the study, five agreed that the ratings their companies
would attract would be a consideration when selecting a listing location. One of the CEOs
said that their company was considering a secondary listing offshore and the revaluing of
their assets would be a component of the selection process (CEO5, personal
communication, 17 June 2008). Another CEO agreed that it was a consideration but was
minor in comparison to the importance of the access to large pools of risk capital (CEO4,
personal communication, 12 June 2008).
Most of the interviewees agreed with the observation by AA7 (personal communication, 9
June 2008) that the Canadian and London markets, in general, offer better ratings to
companies in the junior resource sector. Some participants propose that this trend may be
changing, where companies such as Wesizwe Platinum and Keaton Energy have listed on
the JSE and attracted equivalent or sometimes better ratings than their counterparts listed
on foreign stock exchanges. The possible reason for this is that South African investors
have a good understanding of the platinum and coal mining sectors and in recent years
have also started to better understand the business models of junior mining companies
(AA3, personal communication, 22 May 2008). An article by Theobald and Williams (2007)
has also identified companies that have in recent years been more successful in raising
capital on the Alt-X Exchange as well as attracting more reasonable ratings, and in some
cases, better ratings, than those listed on the JSE main board.
A graph of the relative performance on junior mining indices re-based to 1000 US dollars for
the TSX, AIM and JSE has been included in Figure 14 below. The NSJME was only
introduced in September 2006 and for the purpose of this graph, the index has been back
calculated to August 2004 to indicate what the performance would have been if the index
existed during this period. This graph shows that for a time the juniors on the JSE did not
perform as well as those on the AIM and TSX Exchanges, however towards the end of
2007 the NSJME outperformed the other two indices. This would suggest that the relative
ratings of juniors listed on the JSE have improved relative to those listed on the TSX and
AIM Exchanges; however, this does not indicate that the real ratings for these companies
are higher for those listed on the JSE than for those listed on the other two exchanges.
- 99 -
MS1 (personal communication, 29 June 2008) proposes that the idea that a company is
able to attract higher ratings on foreign exchanges is now a perception rather than reality.
However, other participants believe that although South African investors have developed
an increased appetite for junior mining and exploration stocks, the ratings offered by these
investors remain lower than those on foreign stock exchanges.
Figure 14: Relative performance on junior mining indices
(Singh 2008)Source: Singh 2008:4
- 100 -
6.3 Liquidity
Alt-X Advisors
9
0
0
0
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
11
0
0
0
0
Yes No QNA No answer given Not sure
C.E.O.s
6
2
0
0
0
Yes No QNA No answer given Not sure
Figure 15: Summary of views of respondents on liquidity as a reason for the choice of listing location
A modern corporation of any size often requires ready access to capital markets at the
lowest possible cost in order to function effectively. A company preparing to sell new shares
will focus on the ability of a market to price the shares as close to the equilibrium value as
possible (Bernstein 1987). In doing so the financing can be maximised without exposing the
investors in a company to any future disappointments. However, at the same time, liquid
market conditions around that equilibrium price are a necessary condition for keeping the
cost of capital for a company as low as possible (Bernstein 1987).
The majority of the participants in the study agreed that potential liquidity of the stock is a
consideration for a company when choosing where to list. MS5 (personal communication, 3
June 2008) considers the desire for share liquidity to be more a strategic reason for the
choice of listing location because liquidity is “a key driver in value and the more liquid your
market the less the impact of people’s speculation, the more stable your share price”.
Liquidity is often a challenge for exploration companies because investors in these
companies are likely to take a long-term view and therefore less likely to trade shares,
waiting for the “hole in the ground or the big fish to come and give them a nice premium”
(MS5, personal communication, 3 June 2008).
The Dubai and Qatar markets appear to have an investor base such as this where there is
a large pool of capital available to resource companies; however, investors in these
markets are not eager to trade their shares in these companies, resulting in reduced or no
liquidity for these shares (MS2, personal communication, 13 June 2008). The example of
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Goldfields delisting the shares in their company on the Dubai Stock Exchange due to the
lack of liquidity was used to support the importance of liquidity to a company when selecting
their listing location. CEO5 (personal communication, 17 June 2008) was initially attracted
to the large pools of capital available, but was wary of the lack of liquidity for stocks traded
in these markets.
Another mining specialist suggests that institutional investors value the liquidity of a stock
and fund managers would become wary of a company that was illiquid, particularly those
that are managing large funds, therefore companies will attempt to maximise the liquidity of
their stock (MS11, personal communication, 30 May 2008).
The liquidity of a market may be influenced by the size of the capital markets and the
number of investors active in that market. MS1 (personal communication, 29 June 2008)
proposes that the broader the investor base, the greater chance there is for the shares in a
company to be traded. AA7 (personal communication, 9 June 2008) agreed with this
proposition and further recommended that the markets in Canada, London and Australia
are likely to offer increased liquidity for mining and exploration companies. CEO8 (personal
communication, 18 June 2008) disagrees that a company will have good liquidity on the
AIM Exchange by commenting that, “you can raise your primary quote capital quite easily
but you don’t get a nice liquid share”.
CEO4 (personal communication, 12 June 2008) believes that liquidity is always a challenge
for junior companies but the exchange control regulations governing South African investor
behaviour increases the difficulty in achieving liquidity for stocks listed on the JSE. AA4
(personal communication, 6 May 2008) also proposes that institutional investors located in
foreign jurisdictions would prefer to trade stocks in markets where there will be greater
liquidity of the share when traded. AA2 (personal communication, 26 May 2008) believes
that liquidity is related to investor interest and has in recent years observed a growing
appetite for junior stocks traded on the Alt-X Exchange and therefore the liquidity of these
stocks has improved. In his experience, CEO1 (personal communication, 25 May 2008)
suggests that “the listing doesn’t give you the liquidity but the listing gives you the potential.
What you need to do is go and raise the liquidity by getting the company in the public eye”.
MS8 (personal communication, 23 June 2008) believes that the importance of liquidity may
rather depend upon the intentions of the company at the time of the initial public offering; if
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the main purpose of the IPO is to raise capital, the after market liquidity may not be a
consideration for exploration companies when choosing their primary listing location.
6.4 Securities Regulations Requirements
Alt-X Advisors
7
2
0
0
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
9
2
0
0
0
Yes No QNA No answer given Not sure
C.E.O.s
2
6
0
0
0
Yes No QNA No answer given Not sure
Figure 16: Summary of views of respondents for the compliance with securities regulations requirements as a reason for the choice of listing location
Accounting and regulatory disclosure requirements are thought to be important for a
company when selecting a listing location for its shares. Policy makers and accounting
regulators face the challenge of choosing the appropriate level of disclosure standards for
companies listing within their jurisdictions (Saudagaran and Biddle 1995). It is important to
balance the protection of domestic investors from misleading financial information with the
ability to provide these investors with reasonable access to foreign capital and investment
opportunities (Foucault and Parlour 2004). A report by Mendoza (2007) proposes that
stricter regulations may preclude SMEs from listing in mainstream regulated markets due to
the compliance with these regulations and the associated costs.
The majority of the Alt-X Designated Advisors and mining specialists that participated in the
study agreed that the securities regulations requirements for the various stock exchanges
and associated costs would be a factor for consideration for junior mining companies when
selecting their listing location. “The juniors are focussed on the projects and for them they
will go to the jurisdiction, which is least onerous. They can get a listing in the quickest way
so they can raise the capital to develop the deposit. How quickly you can get this done is
also a factor so where it is least onerous is where they will go. It’s as simple as that” (MS6,
personal communication, 27 May 2008).
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The access to equity capital can prove challenging for SMEs and Mendoza (2007) has
promoted the benefits of designing cost structures to accommodate the requirements of
different types of companies while ensuring an adequate level of disclosure and investor
protection. This would enable stock exchanges to maintain high levels of regulation for the
main market while establishing a lower market tier that would allow for lighter levels of
regulation allowing smaller companies to develop increased visibility and liquidity at lower
costs. One of the most successful low-tier exchanges is the AIM Exchange in London
where there are lower listing standards and reduced ongoing requirements for quoted
companies balanced with the condition of contracting a Nomad that will guide these
companies through their existence as listed companies. Other international exchanges such
as the JSE and TSX Exchanges have also developed their own low-tier markets namely the
Alt-X and TSX Venture Exchanges, respectively (Mendoza 2007).
MS1 (personal communication, 29 June 2008) believes that the desire for increased
compliance with securities regulations by a company will depend upon their position in the
business cycle. Junior exploration companies are generally in the growth phase of the
business cycle and their ability to access equity capital will be a critical success factor for
their continued growth. MS9 (personal communication, 24 June 2008) suggests that the
introduction of low-tier exchanges such as the AIM Exchange, has enabled SMEs such as
junior mining and exploration firms to access capital markets while maintaining a
reasonable level of investor protection. This alternative approach to securities regulation
has allowed the AIM Exchange to become one of the fastest growing exchanges in the
world by number of IPOs (Beattie 2007).
AA6 (personal communication, 6 May 2008) observed that the regulatory framework for the
AIM Exchange was initially less onerous for SMEs, however in recent years this has
changed. The AIM Exchange is considered a self-regulating environment and owing to a
number of regulatory failures by companies listed on the exchange, the Nomads advising
these companies have introduced more stringent compliance requirements. Companies
wanting to attract investment from major international investors will also be required to
comply with additional regulatory requirements imposed by these investors rather than the
exchange itself. AA1 (personal communication, 5 June 2008) also observed these changes
in the AIM market, and believes that the less onerous nature of the AIM Exchange today is
more a perception than a reality.
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When considering the regulatory environment for the Alt-X Exchange, MS6 (personal
communication, 27 May 2008) suggests that the regulatory requirements for this low-tier
market are almost as onerous as the JSE main board requirements, and this has deterred a
number of companies from listing on this exchange. However due to the increasing costs
associated with listing on foreign stock exchanges, AA5 (personal communication, 6 May
2008) suggests that the JSE main board and Alt-X Exchanges may become more attractive
owing to the relatively lower costs associated with listing and ongoing regulatory
requirements.
MS11 (personal communication, 30 May 2008) believes that most companies “would want
to be on main boards if they could but while they are still small and growing they will look at
being on a secondary board where the costs are certainly lower. I mean everyone definitely
does aim to be on a main board in time because you need better coverage and potentially
better ratings”. Therefore low-tier markets could be used as a springboard for companies
that wish to engage in future share issuances in main markets such as the LSE, NASDAQ
or NYSE once they have reached a stage in their growth cycle which allows them to list in
these senior markets (Mendoza 2007). CEO4 (personal communication, 12 June 2008)
described how the management of his company chose to initially list on the TSX Venture
Exchange to gain access to capital and they have since migrated to the TSX main board in
the last year as they considered this to be a more active exchange where managers of the
larger funds are more comfortable when investing.
MS5 (personal communication, 3 June 2008) suggests that if the reason for listing a
company is financially driven, then management will focus on where they will have access
to a large pool of capital and will comply with the necessary regulations. The benefit of
accessing a large pool of capital will offset the costs associated with the listing and ongoing
regulatory requirements. MS7 (personal communication, 28 May 2008) believes that the
access to capital will always be an overriding factor for junior mining and exploration
companies, where they will select a listing location based on their ability to raise capital for
their projects and will incur the necessary costs to raise their required capital.
The majority of the CEOs interviewed during the study said that the strict levels of
governance and regulations commanded on most stock exchanges would not be a
deterrent when choosing a listing location but rather “the hoops are quite frankly things that
you should be doing anyway” (CEO2, personal communication, 7 July 2008). All the CEOs
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agreed that the costs associated with listing their shares on the stock exchanges located in
London, Toronto, Australia and South Africa would be justified by their access to markets in
which they could raise their capital requirements.
Several of the respondents recommended that increased regulation might discourage
companies from listing on certain stock exchanges, and AA7 (personal communication, 9
June 2008) used the introduction of SOX, governing the behaviour of companies listed on
US exchanges, as an example of this. MS2 (personal communication, 13 June 2008)
observed that the costs associated with these strict regulations has reduced the
attractiveness of the NYSE and other US markets; there has been a visible reduction in the
number of IPOs on these exchanges in recent years. In some cases, companies have
chosen to delist because of the excessive costs incurred when complying with these
regulations.
Pagano et al (2002) also identified indirect costs associated with increased securities
regulation, including the distraction of the attention of management from maximising
shareholder value in order to reduce their exposure to risk, distorting the incentive
structures of directors and managers and exposing management to excessive litigation.
One CEO said, “Yes there’s a huge investor base but it comes at a cost and the huge costs
are genuine. The legal fees of investing in the US are huge, it’s just I would have to have a
permanent office in New York just managing the US regularity environment” (CEO6,
personal communication, 9 July 2008). On the other hand, CEO1 (personal communication,
25 May 2008) believes that if a large portion of the potential investor base for a company
can be found in these markets, a company will comply with the considerable costs
associated with SOX.
6.4.1.1 Multiple listings
MS7 (personal communication, 28 May 2008) proposes that the compliance costs
associated with a primary listing will always be justified, however, the benefit versus the
cost of maintaining a secondary listing will be more carefully considered by companies, in
particular SMEs. MS8 (personal communication, 23 June 2008) agreed that the cost of
maintaining a listing is only likely to become a consideration when a company has elected
to list shares in their company on multiple stock exchanges.
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In some cases, junior mining and exploration companies with assets in South Africa and a
primary listing offshore, will consider a secondary listing for a variety of reasons, often
because of the limitations associated with the Exchange Control Regulations introduced by
the South African Reserve Bank (SARB) in 1961. Some of these reasons will be discussed
in section 6.7.2. Both (CEO3, personal communication, 9 July 2008) and (CEO4, personal
communication, 12 June 2008) believe that the further regulation and expense associated
with additional listings can be very onerous for companies, in particularly junior mining and
exploration companies.
6.5 Public Reporting of Mineral Resources and Reserves
Alt-X Advisors
08
0
0
1
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
3
8
0
0
0
Yes No QNA No answer given Not sure
C.E.O.s
17
0
0
0
Yes No QNA No answer given Not sure
Figure 17: Summary of views of respondents on the public reporting of mineral resources and reserves as a reason for the choice of listing location
Mendoza (2007) describes an optimal securities regulatory framework as a balance
between investor protection and the costs of compliance for listed companies. Reporting
codes could be considered part of this regulatory framework for exploration and mining
companies, as investors providing finance for their projects are primarily interested in
mineral reserves and resources, which will secure the capital invested and yield expected
returns on their investment with a high degree of certainty (Camisani-Calzolari 2003). The
mining industry, particularly junior exploration and mining firms, often rely on public support
and trust and compliance with these codes may establish this trust but may also be onerous
and costly for juniors.
Only four respondents agreed that the choice of listing location might be influenced by the
compliance with particular reporting codes that have been adopted by the different
exchanges, however, each of these respondents maintain that this would be a minor
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consideration. Both MS1 (personal communication, 29 June 2008) and CEO5 (personal
communication, 17 June 2008) proposed that the requirements included in NI43-101
adopted by the TSX may be more onerous than those in the JORC and SAMREC Codes,
whereas MS10 (personal communication, 30 May 2008) found that in his experience the
SAMREC Code includes sections that could be considered onerous by junior mining and
exploration companies.
One of the respondents was unsure if this would be a consideration for juniors when
choosing their listing location and did not consider himself sufficiently knowledgeable about
the requirements contained in each of the codes to offer an informed opinion.
Most of the participants agreed that there were some differences between the more
traditionally accepted codes, where the NI43-101 was considered more onerous in some
respects than the JORC and SAMREC Codes. The NI43-101 was said to require a greater
amount of general administration, including the need for more notifications to the market of
the dealings of the company.
Several mining specialists found, in their experience, that the AIM market in previous years,
more attractive to some juniors because they were able to access a large pool of capital in
a market with less onerous regulation. “But they’ve now come more in line and companies
are now saying if we’re going to compete for global capital or funds’ money then we’ve
actually got to show that we are complying both with the technical codes and with regulation
stuff. So where is the reasonable stock market today?” (MS2, personal communication, 13
June 2008).
AA4 (personal communication, 6 May 2008) said that most investors have come to expect a
standard of information and therefore the access to capital in these markets would require
the level of transparent reporting of resources and reserves as demanded in each of these
reporting codes.
All of the CEOs interviewed agreed that it is important to gain the trust and support of
investors and that the compliance with the various codes for the transparent reporting of
mineral resources and reserves was necessary to achieve this. CEO1 (personal
communication, 25 May 2008) stated, “If you are a serious operation you have to adhere to
whatever compliance matters”. One CEO said that the cost of the additional compliance
- 108 -
required by the NI43-101 might be a slight deterrent, but if they were able to raise the
required capital in this market they would comply as necessary.
The majority of the respondents agreed that there were some differences between the more
popular and accepted codes for the reporting of mineral resources and reserves,
nevertheless all agreed that this would not be a driving factor when considering the choice
of listing location.
6.6 Tax Incentives for investors
Alt-X Advisors
5
0
0
3
1
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
10
0
0
0
1
Yes No QNA No answer given Not sure
C.E.O.s
0
8
0
0
0
Yes No QNA No answer given Not sure
Figure 18: Summary of views of respondents on the tax incentives for investors as a reason for choice of listing location
The results of a study into the development of the venture capital and private equity
markets in the UK, US and France completed by Napier (2006) revealed that tax incentives
have proved fruitful in increasing the supply of private equity finance in these countries.
Investor tax incentives are designed to encourage increased investment in the companies
targeted by these schemes, thereby enabling companies to improve their performance
through the use of the funds raised and in turn benefit the national economy by developing
a more competitive SME sector (Napier 2006).
Junior mining and exploration companies often find it challenging to access equity finance,
as investors are cautious of the risks associated with such companies (Hill 2008). Canada
successfully introduced a flow-through share tax incentive scheme in the fifties specifically
designed to increase investment in, and therefore development of, mining exploration in
Canada (van der Merwe 2007b). This has resulted in the overall stimulation of investor
interest in the targeted sector and MS9 (personal communication, 24 June 2008) believes
that the flow-through share tax scheme has contributed to the increased risk appetite of
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retail investors in the Canadian markets and has in turn attracted companies seeking high-
risk capital from around the globe.
Tax incentives such as Venture Capital Trusts and Inheritance Tax Relief were also
introduced in the UK in order to stimulate investment in SMEs quoted on the AIM Exchange
and have proved successful in growing the number of private individuals that now invest in
companies listed on the exchange (Sharples 2005).
There was a range of answers offered by respondents during the interview process. The
three Alt-X Designated Advisors that did not answer the question were participants in
interviews where more than one interviewee was present in the room. They may not have
answered the question believing that their colleague had offered a similar answer to theirs,
or they did not feel that they were adequately informed to answer the question honestly.
The researcher did not clarify this at the time of the interview. The majority of the Alt-X
Designated Advisors and mining specialists that offered their opinion recommended that tax
incentive schemes may, on some level, be a consideration for junior mining and exploration
companies when selecting their listing location.
AA2 (personal communication, 26 May 2008) and AA3 (personal communication, 22 May
2008) agreed that tax incentives have been a consideration for companies listing on the
Toronto and London markets, as these tax incentives have encouraged investors that
would otherwise be hesitant, to invest in traditionally high-risk companies such as junior
exploration and mining companies. Most respondents agreed that tax incentives would be a
consideration for junior mining and exploration companies when choosing their listing
location, but also found that in their experience this would be minor compared with other
considerations, such as access to risk capital and liquidity.
However AA6 (personal communication, 6 May 2008) believes that the introduction of tax
incentive schemes has been a key factor in the increased risk appetite of investors trading
in these markets. “Both those, if we talk AIM specifically and TSX especially with respect to
junior mining, they’ve got very aggressive tax incentives for individuals to invest in junior
mining companies. In Toronto it’s a concept called flow-through shares…and on the AIM
market they’ve got specific tax breaks for what they call venture capital trusts which are
trusts that are actually listed on the LSE main board where when they invest into these AIM
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companies with perceived high-risk, there’s tax based incentives so that is additional” (AA6,
personal communication, 6 May 2008).
One mining specialist did not consider the flow-through share tax scheme to be a
consideration for South African companies because the tax benefit was only available to
investors trading in shares in exploration companies operating in Canadian territories, and
would therefore not apply to those operating in South Africa. He was not well acquainted
with the tax incentives available to investors trading on the AIM Exchange but said that if
juniors operating in South Africa could directly benefit from increased investment through
these incentives, he believed that such schemes would become a consideration for these
companies when choosing a listing location (MS5, personal communication, 3 June 2008).
MS4 (personal communication, 13 June 2008) proposes that if tax incentives are not a
direct consideration for junior mining and exploration companies operating in South Africa,
these incentives will still play an indirect role in their choice of market, because these
schemes have contributed to the development of larger pools of investors willing to invest in
high-risk projects.
South African investors have not been exposed to tax incentive schemes of this nature and
until recently the only tax relief offered has been the ability to claim share losses through
CGT tax regulations (Napier 2006). However in February 2008, the Finance Minister
proposed the 50 percent deduction incentive, intended to reimburse investors with half of
their investment in local junior mining and exploration companies, in an attempt to boost
investment in this sector (Hill 2008).
Some participants believe that this tax incentive will assist in the development of an investor
community with increased appetite for junior mining stocks, while most remain sceptical as
to how the tax incentive will be implemented (MS6, personal communication, 27 May 2008).
In particular, respondents suggested that if the tax incentive were to be limited to
exploration activities in South Africa, there would be very little or no success because many
properties under exploration by South African juniors are located in Africa, mainly Southern
Africa and only a few in South Africa. Therefore this tax incentive would not be applicable to
most South African juniors so investment in these stocks would not attract the tax incentive,
thereby maintaining investor conservatism related to these companies. These companies
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would then continue to seek high-risk capital in larger markets offshore (MS3, personal
communication, 13 June 2008).
All of the CEOs interviewed for the purpose of the study said that this was not a
consideration when selecting their listing location. A number of the CEOs explained that
their companies are not involved in exploration activities and have mining operations only;
therefore many of the tax incentives schemes were not available to investors in their stocks,
thereby eliminating investor tax schemes as a factor of consideration for their companies
(CEO4, personal communication, 12 June 2008). One CEO revealed that he was not well
informed with regard to the tax incentives available to investors in the various equity
markets, but would be open to evaluate these schemes should they consider additional
listings in the future (CEO5, personal communication, 17 June 2008).
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6.7 Other possible reasons
6.7.1 Geographic location
Alt-X Advisors
4
1
3
1
0
Yes No QNA No answer given Not sure
Mining Analysts/ Specialists
5
24
0
0
Yes No QNA No answer given Not sure
C.E.O.s
6
2
0
0
0
Yes No QNA No answer given Not sure
Figure 19: Summary of views of respondents on the geographical location of the stock exchange as a reason for the choice of listing location
The geographic location of a stock exchange as a reason for the choice of listing location
was introduced by MS11 (personal communication, 30 May 2008) therefore the seven
participants interviewed prior to this date were not given the opportunity to offer their
opinion on the validity of this reason. It is proposed that the geographic location (i.e. the
physical location of the stock exchange relative to where the majority of the assets owned
by a company are located) may influence the decision made by management as to where
to list the shares in their company.
The geographic location of the stock exchange will influence the proximity to the investor
base of a company and MS11 (personal communication, 30 May 2008) found in his
experience, that a company would ideally prefer to list on a stock exchange close to the
majority of their assets. However, owing to the conservative nature of South African
investors and the larger pools of capital, a number of junior mining and exploration
companies have preferred to list their shares on stock exchanges offshore.
AA7 (personal communication, 9 June 2008) suggests that when a company is evaluating
more than one stock exchange with similar characteristics, such as large pools of risk
capital, ratings and liquidity, the geographic location of the exchange may then become a
factor for consideration. The management of a company may take into consideration the
ability to conduct business across time zones and the travelling required by themselves to
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preserve good relations with their investors. It is suggested that the management team may
find the managing of operations while travelling across time zones to develop investor
relationships rather cumbersome, and some may prefer the LSE to the TSX or ASX
because of a similar time zone to that of South Africa. The TSX and ASX operate in the
GMT-5 and GMT+10 time zones, whereas the LSE is operates in the GMT (Greenwich
mean Time) time zone, which is only at most two hours behind South Africa.
In his experience, CEO2 (personal communication, 7 July 2008) has found that it is more
practical to have a listing in London because the travel time is less than that for Toronto,
and his personal recovery time after travelling to and returning from London is much
quicker. Jet lag does not become a factor, as it would if he were to travel to Toronto to meet
with his investor base. Most participants agreed that this would be a minor reason for
choice of listing location when compared with other reasons such as access to risk capital
and liquidity as identified in this study.
Other participants argued that this would not be a consideration for junior mining and
exploration companies operating in South Africa, but instead these companies will list
wherever they are able to access risk capital. For this reason, these companies will
overcome the challenges of conducting business across times zones to gain access to
large capital pools (MS2, personal communication, 13 June 2008).
Goodison (1988) offered another possible benefit of listing on the LSE or AIM Exchanges.
Stock exchanges around the world favour local trading over shift work in one international
centre, which presents London, as the largest and most sophisticated exchange in Europe,
with the opportunity to be one of the three key trading centres in the world, along with
Tokyo and New York. The reason for this is that London opens for trading before Tokyo
closes and remains open after the start of trade in New York. Neither New York nor Tokyo
can match this advantage. MS9 (personal communication, 24 June 2008) agrees with this
assessment and has found this to be a consideration for companies when choosing to list
on the LSE or AIM Exchanges.
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6.7.2 Political
AA7 (personal communication, 9 June 2008) believes that a company may choose to list
on the JSE for political reasons, one of which is to demonstrate commitment to South
Africa. The CEO of a company that has chosen to list on the JSE said “as a black-owned
community-based company I felt that it was appropriate to list on a local stock exchange
where SA investors have easy access to the stock” (CEO6, personal communication, 9 July
2008).
Many of the participants interviewed in the study agreed that there are political reasons for
a company to choose either a primary or secondary listing on the JSE and AA8 (personal
communication, 9 June 2008) identified the compliance with Exchange Control Regulations
and the desire to complete Black Economic Empowerment (BEE) deals as required by the
MPRDA, as likely political reasons for the choice of listing location. These political reasons
will be explored in the following sections but will be limited to the choice of primary listing
location.
6.7.2.1 Exchange Control Regulations
In 1961, the Sharpville shootings led to a significant outflow of Capital funds and a decline
in the gold and foreign exchange reserves in South Africa. As a result the South African
government introduced a number of measures, which would ensure stricter control over
capital transfers from the country. The aim was to provide more effective protection for
foreign reserves, as well as to reduce the possible threat to domestic growth and stability by
monetary developments transferred through the balance of payments (Schaling 2005).
Restrictions were placed on South African residents as well as non-residents. The South
African Government (1961) imposed restrictions on the purchase of gold and foreign
currencies and also forced the repatriation of offshore profits by South African owned
companies. There was also a restriction placed upon the transfer of funds out of the country
by non-resident investors in South Africa. The SARB has attempted to relax exchange
controls over the years; nonetheless there are a number of restrictions that remain.
One such restriction is related to the domicile of a company where a South African
domiciled company wishing to list shares in their business to raise capital must primary list
their shares on a South African stock exchange. A foreign domiciled company with
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operations in South Africa, however, is not governed by these regulations and is therefore
free to choose its initial listing location. The aim of such regulations governing the location
of South African domiciled companies is to protect South African assets and ensure that
they remain in the ownership of South Africans (AA2, personal communication, 26 May
2008).
South African domiciled companies are therefore limited to the JSE or Alt-X Exchanges for
the primary listing of their shares. CEO5 (personal communication, 17 June 2008) said that
the convenience of a local listing and Exchange Control Regulations were the primary
factors for their choice of the Alt-X Exchange as their primary exchange. CEO7 (personal
communication, 8 July 2008) on the other hand says that his company chose a primary
listing on the Alt-X Exchange for convenience because they have currently chosen to focus
their efforts on their South African assets; they will explore their international assets at a
later date, therefore Exchange Control Regulations were not a consideration in their choice
of listing location. Companies that are regulated to primary list their shares in South Africa
may choose a secondary listing offshore at a later date with the permission of SARB,
however the controlling share of the company must remain in South Africa (AA1, personal
communication, 5 June 2008).
Some companies may, with the permission of SARB, choose to sell their assets to a foreign
mining company, which is then free to list these assets on the stock exchange of their
choice. In some cases, one of the conditions attached to this transaction is that the
company must undertake a secondary listing of their shares on a South African stock
exchange within a designated period of time (MS8, (personal communication, 23 June
2008).
Some participants have suggested that companies domiciled and listing in South Africa
may be limited to some extent in their investment decisions. In previous years there were
limitations on the value of new outward foreign direct investment by South African
companies, but in October 2004 the SARB abolished these restrictions. However,
companies must still submit an application to the South African Reserve Bank for
monitoring purposes as well as approval in terms of existing foreign direct investment
criteria (including the need to demonstrate the benefits of the investment to South Africa)
(South African Reserve Bank 2004).
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MS5 (personal communication, 3 June 2008) and MS9 (personal communication, 24 June
2008) suggest that this requirement will reduce the ability of a company to allocate its
capital efficiently, as it will be controlled by this exchange control regulation and the
approval of SARB when purchasing assets outside of South African borders, with capital
raised in South Africa. The benefit of listing on a foreign stock exchange is that it is not
necessary for a company to acquire the approval of a regulatory body when allocating
capital for international assets making the acquisition a more efficient process. However
AA8 (personal communication, 9 June 2008) did not believe that this would be critical factor
for junior mining and exploration companies when considering a foreign listing location.
6.7.2.2 Black Economic Empowerment (BEE) Deals
South African legislation introduced in 2002 requires that mining and exploration companies
must have a BEE partner that will hold a 26 percent share in a project or operation in order
to secure new order prospecting and mining rights. AA8 (personal communication, 9 June
2008) has found in his experience that junior mining and/ exploration companies will prefer
to list their shares on a South African stock exchange because investors in these markets
will better understand the BEE requirements. He suggests that South African investors will
be less hesitant than foreign investors to invest in a venture that requires 26 percent of the
project to be allocated to a BEE partner.
Foreign investors trading on stock exchanges such as the TSX and LSE will invest in
ventures that they believe will attract maximum returns. They are unlikely to understand the
political history associated with BEE but will rather consider BEE and social responsibility to
be “…a risk that you have to ring-fence. So you ring-fence that inside South Africa by
creating a subsidiary with South African assets and then you do the BEE at subsidiary level
or on the asset level” (MS9, personal communication, 24 June 2008).
MS2 (personal communication, 13 June 2008) has observed that many companies have
completed their BEE deals at the operating level not at the holding level. “What we’re
finding out is that more and more BEE companies are getting more and more cash and they
don’t like to get locked in on the bottom level; they want to be part of the bigger picture and
be a part of the company” (MS5, personal communication, 3 June 2008). There is also a
growing desire by BEE companies to increase the liquidity of their investment and there is
now a trend to incorporate BEE partners at the holding level. Companies will therefore
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choose to list on the JSE because BEE companies and individuals are South African
entities and therefore cannot own foreign listed shares (MS5, personal communication, 3
June 2008).
Both CEO5 (personal communication, 17 June 2008) and CEO8 (personal communication,
18 June 2008) agreed that one of the reasons for their choice of a South African stock
exchange was their ability to complete the required BEE deals. They have identified BEE
partners that bring skills and knowledge as well as cash rather than completing BEE deals
for the sake of complying with regulation. For this reason they believe that their BEE
partners should be incorporated at the holding level.
6.7.3 Mergers and Acquisitions
Junior mining and exploration companies will often purchase an asset, add value to this
asset by attempting to prove the economic viability of the asset, and will either sell the asset
to a major mining corporation or elect to develop the asset into a mining operation. Junior
mining and exploration companies will often take part in merger and acquisition
transactions and may elect to use a combination of cash and shares for these transactions.
If the transaction includes shares then the seller of the asset will want to ensure that they
can in time convert the shares into cash (AA4, personal communication, 6 May 2008).
AA6 (personal communication, 6 May 2008) suggests that the companies that elect to list
on the JSE will be able to complete these transactions quite easily when purchasing an
asset in South Africa, as a South African entity or person will be willing to accept South
African script. However if the company wished to acquire an international asset there may
be reluctance from an international player to accept South African script because of the
regulations that govern the trade of the shares and the currency in which the script is
issued. This may motivate junior mining and exploration companies that intend to purchase
international assets, to consider listing their shares on an offshore stock exchange.
Although this study did not include secondary listings in the scope of the research, AA5
(personal communication, 6 May 2008) proposed that the reverse of the above may also be
true where companies that chose a primary listing offshore, may elect to inward list on the
JSE to complete transactions in South Africa, using cash and shares issued in South Africa.
This is often motivated by the restrictions imposed on South Africans by the Exchange
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Control Regulations, where limitations are placed on their ownership of foreign shares. It is
therefore necessary to issue South African script to complete a transaction where a
combination of cash and shares are agreed as payment for a South African asset.
CEO4 (personal communication, 12 June 2008) experienced a similar challenge when his
company purchased a South African asset and was unable to issue their shares traded on
a foreign stock exchange to complete the transaction. His company chose to undertake a
secondary listing and issue shares to be traded on the JSE to complete the transaction.
6.7.4 Personal preference of management
If the majority of management for a junior mining and/ exploration company operating in
South Africa are, for example, Canadian or Australian nationals, the management may
have a personal preference for a listing on the TSX or ASX, respectively. “And that’s why
the companies that have a lot of Australians in it, lo and behold they seem to be listed in
Australia” (AA8, personal communication, 9 June 2008). A possible reason for this
preference is that management may better understand the psyche of the investors
providing capital in these markets and therefore perceive the task of raising equity capital to
be easier in these markets (AA7, personal communication, 9 June 2008).
Another consideration, which AA4 (personal communication, 6 May 2008) believes is
related to the personal preference of management, is where the key members of
management would want to live. For many of the junior mining companies in Africa, “the
executive decision-making or board-level guys are based in London or Toronto and the
operational guys are close to the assets” (AA6, personal communication, 6 May 2008).
The group of CEOs that were interviewed in this study consisted of South Africans and they
are all resident in South Africa, so the researcher was not able to question the CEOs as to
their direct experience of the above as neither of the above observations would apply to
their circumstances.
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7 ADDITIONAL FINDINGS
The initial scope of this research was confined to the choice of primary listing location by
junior mining and exploration companies operating in South Africa. The researcher attempted
to identify companies that had chosen a single listing location, either in South Africa or
offshore. However, due to the nature of the Exchange Control Regulations, the researcher
struggled to identify a sufficient sample of junior mining and exploration companies with a
single listing and therefore included a number of companies with multiple listings. The
researcher believes that it would be beneficial to the study to include a summary of her
findings related to the choice of secondary listing locations by these companies.
7.1 Secondary listings offshore
Many of the participants interviewed have found in their experience that the South African
capital pool is limited in size and investors are more conservative than investors on foreign
stock exchanges such as the TSX and LSE. It is also difficult to attract large institutional
investors that are located in Europe or Canada to invest in companies listed on the JSE. This
is because the managers of large funds in these jurisdictions often have instructions to invest
only in stocks listed on their local exchanges (AA1, personal communication, 5 June 2008).
Several of the CEOs interviewed during this study, with primary listings on a South African
exchange, have found raising capital in the South African markets challenging. For this
reason, these junior mining and exploration companies may find it necessary to secondary
list their shares on foreign stock exchanges where they can access larger pools of risk capital
(CEO5, personal communication, 17 June 2008). The SARB will allow companies to
undertake a secondary listing on a foreign exchange, provided that the majority of the shares
in the companies remain in South African control.
CEO5 (personal communication, 17 June 2008) also believes that along with raising a larger
amount of capital required for exploration, their stock will attract a higher rating on a foreign
stock exchange. This is a further reason for their choice of a secondary listing on a foreign
stock exchange and their intention is to achieve this in the next 12 months.
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The majority of the CEOs interviewed, with primary listing on a South African stock
exchange, are currently considering, or will in the future consider, a secondary listing on a
foreign exchange.
7.2 Inward listings in South Africa
The introduction of Exchange Control Regulations in 1961 placed restrictions on South
African residents as well as non-residents. The South African Government (1961) imposed
restrictions on the purchase of gold and foreign currencies and also forced the repatriation of
offshore profits by South African owned companies. There were also restrictions placed upon
the transfer of funds out of the country by non-resident investors in South Africa. The SARB
has relaxed exchange controls over the years where there are no longer restrictions on
foreign investors investing in South Africa; there are, however, restrictions remaining for
South African investors wishing to invest offshore.
Today private individuals are limited to a total investment of R2 million outside of the
Common Monetary Area (CMA), which consists of Lesotho, Namibia, South Africa and
Swaziland. South African institutional investors are also limited in their foreign portfolio
investments where their foreign exposure to these assets may not exceed 20 percent in the
case of retirement funds and underwritten policy business of long-term insurers. Collective
investment scheme management companies and the investment-linked business of long-
term insurers, are restricted to 30 percent of total retail assets under management (South
African Reserve Bank 2008).
For this reason foreign listed companies with assets in South Africa could not access South
African investors, who may have expressed interest in these companies. In addition, in the
past it was not permissible for foreign companies to secondary list their shares on a South
African equity or bond exchange under the Exchange Control Regulations in South Africa
(AA1, personal communication, 5 June 2008).
However, in recent years, the SARB has created a mechanism called Inward Listings where
an African company may list their shares on a South African exchange. The SARB classifies
an African company as one that is domiciled in Africa or domiciled outside of Africa with the
majority of its activities geographically located in Africa. South African corporates, banks,
trusts, partnerships and private individuals are able to invest in inward listed companies and
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institutional investors are allowed to invest an additional five percent of their total retail assets
in these companies (South African Reserve Bank 2008).
AA9 (personal communication, 24 June 2008) explained that South African companies
desiring to primary list their shares offshore require exchange control approval and the SARB
often imposes a condition where these companies must inward list shares in the companies
on the JSE within 12 months of listing on the offshore exchange. AA6 (personal
communication, 6 May 2008) found in his experience that some of the earlier inward listings
were politically motivated because for some of these companies the majority of their assets
were located in South Africa and the SARB insisted on a secondary listing on the JSE.
There are other foreign listed companies that may not require an inward listing to comply with
SARB regulations but choose to do so in order to access South African investors that are
restricted in their ability to invest offshore, including BEE partners. CEO1 (personal
communication, 25 May 2008) observed that because one of their larger assets is located in
South Africa, there was significant interest from investors in South Africa. To benefit from this
well-developed interest, combined with their desire to improve the liquidity for their BEE
shareholders, the management of this company elected to inward list their company on the
JSE.
CEO4 (personal communication, 12 June 2008) identified the primary reason for their inward
listing on the JSE as the desire to complete an acquisition transaction where the payment for
the asset was a combination of cash and shares. Because South African companies and
individuals are limited in their holding of foreign stock, it was necessary to complete a listing
on the JSE, so that shares would be available to the sellers of the asset. The access to
South African investors was also considered a reason for their decision to inward list on the
JSE.
Both CEO1 (personal communication, 25 May 2008) and CEO4 (personal communication, 12
June 2008) agreed that a second listing is very onerous and expensive for a junior mining
and/or exploration company. They both said that, if there were no restrictions placed upon
South African investors investing offshore by Exchange Control Regulations, they would not
have undertaken an additional listing.
CEO8 (personal communication, 18 June 2008) suggests that multiple listings might be
beneficial for companies. JSE1 (personal communication, 18 July 2008) also asked the
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question, “Why not have multiple listings? What is R10 million in a R500 million business
when, certainly if it’s a South African company, allows you to include your BEE partners,
allows you to use your shares as cash in transactions, gives you a better presence in the
jurisdiction in which you’re operating; all those kinds of things”. He suggests that while
Exchange Control Regulations exist, this is a solution to accessing South African and
offshore markets.
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8 CONCLUSION
8.1 Summary of findings
Junior mining and exploration companies are some of the most financially volatile and high-
risk companies in the resource industry and the greatest challenge facing these companies is
attracting finance in a capital-intensive industry. For this reason the access to risk capital is
considered the most important reason for the choice of listing location by all of the
participants. Junior mining and exploration companies will often choose stock exchanges
where there are larger pools of capital and the investors have a greater appetite for risk, for
example, the TSX, TSX Venture, LSE and AIM Exchanges.
It is also suggested that juniors will prefer to list where the majority of their industry peers
have elected to list their shares. The perception is that investors on these stock exchanges
will understand the nature of their business because they have been exposed to similar
investment opportunities in the past. Other reasons associated with this are the intention to
receive better ratings for their projects in the markets and that particular investors will have
increased appetite for particular commodities. However some participants proposed that
there are a number of juniors that may prefer to list on exchanges where there are fewer of
their industry peers and they will therefore be more conspicuous to investors.
The literature review revealed that the listing regulations and reporting codes for resources
and reserves may influence the choice of listing location by junior mining and exploration
companies. However the interviews revealed that these are not considered important
deciding factors, but rather companies will comply with the necessary regulations if they are
able to raise their capital requirements. The only possible deterrent introduced by the
participants was that of SOX Act when listing on the US exchanges.
These companies may also take into account the liquidity of their shares after the capital-
raising exercise when choosing a stock exchange. This may be a key driver in the value of
the share and increased liquidity may improve the stability of the share price. The majority of
the respondents agreed that this would be a less important factor when compared with that of
accessing risk capital.
The majority of the Alt-X Designated Advisors and mining specialists agreed that tax
incentives for investors, introduced to stimulate investment in these companies, would be a
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factor for consideration when juniors choose a listing location. However the CEOs who were
interviewed in the study said that they did not consider these tax incentives when selecting
their listing location. One CEO said that he would perhaps review these tax incentives when
selecting their secondary listing location, but this would be a minor consideration.
Additional reasons not identified in the literature review were revealed by a number of
participants during the interview phase of the study. These included geographic location of
the stock exchange, the personal preference of company management, Exchange Control
Regulations in South Africa and facilitation of BEE deals. The first two are considered minor
reasons, but Exchange Control Regulations may be a very important factor, depending on
the domicile of the company.
If a junior has opted to domicile in South Africa then their primary listing must be on a South
African exchange and for some companies domiciled offshore, with their primary listing
offshore, but the majority of their assets are located in South Africa, the SARB may insist that
the company undertake an inward listing on a South African exchange.
Companies that are listed offshore, but are not required to complete an inward listing, may
choose to do so anyway. This will allow them to access South African investors that would
otherwise not be able to invest in these companies because of the restriction placed upon
them by the Exchange Control Regulations. This enables these companies to conduct
merger and acquisition transactions involving South African assets, as well as introducing
liquidity to the shareholding of their BEE partners.
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8.2 Conclusions and recommendations for further research
There are a number of factors that may influence the choice of listing location by junior
mining and exploration companies, and the final reasons for the selection of a particular
exchange may differ from company to company. The one factor that does appear to be very
significant for all juniors is the access to risk capital; the other reasons for the choice will be
unique to each company and their financing and operational requirements.
There are two possible areas for future research. The first is a possible misinterpretation that
was identified by the researcher during the content analysis and is related to the compliance
with listing regulations. The responses from some of the interviewees may have been
influenced by their underlying assumptions. These respondents appear to have assumed that
the most popular exchanges, namely the TSX, LSE (and AIM), JSE (and Alt-X) and ASX
Exchanges, for junior mining and exploration companies, were under consideration; whereas
other respondents understood that all possible listing locations would be considered and
therefore included the example of the SOX regulation as a restriction for the US markets. The
confusion related to the underlying assumption may have resulted in skewed responses from
some of the interviewees. The researcher suggests that additional research should be
conducted to determine the validity of the final outcome in this study in connection with this
particular reason for listing location.
Another reason for the choice of listing location, identified during the study, is that juniors
believe they will attract higher ratings on particular stock exchanges. Some participants think
that this belief is based on perception rather fact. Research into whether the ratings attracted
by juniors will be different, depending on the listing location, and whether they are based in
reality or on perception would be useful.
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APPENDIX A
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Table 7 - List of similarities and differences between the most popular reporting codes used globally
Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Country South Africa Australia and New Zealand Canada UK, Ireland and Europe
Prepared by South African Resource
Committee (SAMREC) working group
JORC Committee (The Joint Ore Reserves Committee of the
Australian Institute of Mining and Metallurgy, Australian Institute of
Geoscientists and Minerals Council of Australia)
The CIM Reserves Committee published in August 2000 a revised
code based on the CMMI - CRIRSCO international definitions and corresponding closely to the
JORC Code.
Institute of Materials & Mining working group on resources and
reserves, together with the European Federation of
Geologists, Geological Society of London and the Institute of
Geologists of Ireland.
First Published March 2000 September 1999 February 2001 October 2001
Latest Edition June 2006 December 2004 December 2005
Adoption by local stock
markets
Incorporated into JSE listing requirements
Incorporate into the listing rules of the ASX and NZX.
Recognised by Canadian Securities Administrators (CSA)
Adoption by local
professional societies
The Code has also been adopted by the South African Institute of Mining and Metallurgy (SAIMM), the Geological Society of South Africa (GSSA), South African Council for Natural Scientific Practitioners (SACNASP) and PLATO, and is binding on members of these organizations.
The Code has been adopted by The Australasian Institute of Mining and Metallurgy (AusIMM) and the Australian Institute of Geoscientists (AIG) and is therefore binding on their individual members.
It is endorsed by the Minerals Council of Australia, and the Securities Institute of Australia as a contribution to good practice.
The Code has been adopted by the Institute of Materials, Minerals and Mining (IMMM), the European Federation of Geologists (RFG), the Geological Society of London (GSL) and the Institute of Geologist of Ireland (IGI) and is therefore binding on their individual members.
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Main principles
• Transparency • Materiality • Competence • Impartiality
• Transparency • Materiality • Competence
• Transparency • Materiality • Competence
Application of Code /
Applicability/ scope of code
• The Code is applicable to all solid minerals for which Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves is required.
• The Code sets out a required minimum standard for Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves.
• Reference in the Code to a Public Report a report on Exploration Results, Mineral Resources and Mineral Reserves prepared for the purpose of informing investors or potential investors and their advisers.
The Code is applicable to all solid minerals, including diamonds, other gemstones, industrial minerals and coal, for which Public Reporting of Exploration Results, Mineral Resources and Ore Reserves is required by the Australian and New Zealand Stock Exchanges.
This Instrument applies to all oral statements and written disclosure of scientific or technical information, including disclosure of a mineral resource or mineral reserve, made by or on behalf of an issuer in respect of a mineral project of the issuer.
• The code is applicable to all solid minerals for which Public Reporting of Mineral Exploration Results, Mineral Resources and Mineral Reserves may be required, including metals, gemstones, bulk commodities such as coal and iron ore, industrial minerals, stone or aggregates.
• The Code sets a minimum standard for Public Reporting.
• A Public Report refers to any report on Mineral Exploration Results, Mineral Resources or Mineral Reserves prepared for the purpose of informing investors and their advisors and/ or satisfying regulatory requirements.
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Definition of:
Competent Person (CP) /
Qualified Person (QP)
• A Competent Person is a person who is registered with SACNASP, ECSA or PLATO or a member of the SAIMM, the GSSA or a ‘Recognised Overseas Professional Organisation’ (ROPO). The Competent Person must comply with the provisions of the relevant acts.
• A CP should have a minimum of 5 years experience relevant to the style of mineralization and type of deposit / class of deposit under consideration and to the activity which that person is undertaking.
• A CP will be required to register with the SAMREC/SAMVAL Committee, in accordance with the Committee’s rules.
• A Competent Person is a person who is a Member or Fellow of The Australasian Institute of Mining and Metallurgy, or of the Australian Institute of Geoscientists, or of a ‘Recognised Overseas Professional Organisation’ (ROPO) included in a list promulgated from time to time.
• A CP must have a minimum of 5 years experience relevant to the style of mineralisation and type of deposit under consideration and to the activity which that person is undertaking.
• A Qualified person is an individual who is an engineer or geoscientist with at least 5 years of experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of these;
• A QP has experience relevant to the subject matter of the mineral project and the technical report
• A QP is a member in good standing of a professional association
• A Competent Person is a person who is a corporate member of a recognised professional body relevant to the activity being undertaken, and with enforceable Rules of Conduct.
• A CP must have a minimum of 5 years experience relevant to the style of mineralisation and type of deposit under consideration and to the activity, which that person is undertaking.
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Responsibility
• A public report concerning a company’s mineral exploration results, mineral resources and/ or mineral reserves is the responsibility of the company acting through its Board of Directors.
• Any such report must be based on and fairly reflect a mineral resource and/ or mineral reserves estimate and supporting documentation prepared by a Competent Person who will take responsibility for this report. A company making a public report shall disclose the name of the CP, their qualifications, professional affiliations and relevant experience when required to do so. The written approval of the CP is required for the parts of their work included in the report.
• A public report concerning a company’s mineralexploration results, mineral resources and/ or mineral reserves is the
responsibility of the company acting through its Board of Directors.
• Any such report must be based on and fairly reflect a mineral resource and/ or mineral reserves estimate and supporting documentation prepared by a Competent Person who will take responsibility for this report. A company making a public report shall disclose the name of the CP, their qualifications, professional affiliations and relevant experience when required to do so. The written approval of the CP is required for the parts of their work included in the report.
A technical report required under any of the provisions of the National Instrument 43-101 must be prepared by or under the supervision of a qualified person that is, at the date of the technical report, independent of the issuer
• A public report concerning a company’s mineral exploration results, mineral resources and/ or mineral reserves is the responsibility of the company acting through its Board of Directors.
• Any such report must be based on and fairly reflect a mineral resource and/ or mineral reserves estimate and supporting documentation prepared by a Competent Person who will take responsibility for this report. A company making a public report shall disclose the name of the CP, their qualifications, professional affiliations and relevant experience when required to do so. The CP’s written approval is required for the parts of their work included in the report.
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Defining Exploration Results in
Public Reports
• In Public Reports, that part of Exploration Results’ data and information relating to mineralisation not classified as a Mineral Resource or Mineral Reserve must be described as an exploration target and must contain sufficient information to allow a considered and balanced judgement of the significance of the results.
• This must include all relevant prospecting information.
• Such reporting must not be presented so as to unreasonably imply that potentially economic mineralization has been discovered. Reporting of isolated values without placing them in perspective is unacceptable.
• Any such information relating to exploration targets must be expressed so that it cannot be misrepresented or misconstrued as an estimate of Mineral Resources or Ore Reserves.
• The terms Resource(s) or Reserve(s) must not be used in this context.
• Any statement referring to potential quantity and grade of the target must be expressed as ranges and must include: 1) a detailed explanation of the basis for the statement, 2) a proximate statement that the potential quantity and grade is conceptual in nature, that there has been insufficient exploration to define a Mineral Resource and that it is uncertain if further exploration will result in the determination of a Mineral Resource.
• Exploration information includes geological, geophysical, geochemical, sampling, drilling, trenching, analytical testing, assaying, mineralogical, metallurgical and other similar information concerning a particular property that is derived from activities undertaken to locate, investigate, define or delineate a mineral prospect or mineral deposit.
• An issuer may disclose in writing the potential quantity and grade, expressed as ranges, of a potential mineral deposit that is to be the target of further exploration provided that a statement declaring that the potential quantity and grade is conceptual in nature, there has been insufficient exploration to define a mineral resource and that it is uncertain if further exploration will result in the target being delineated as a mineral resource. The statement should also include the basis on which the disclosed potential quantity and grade has been determined.
• Mineral Exploration Results include data and information generated by exploration programmes that may be of use to investors but which may not be of a formal declaration of Mineral Resources or Mineral Reserves.
• This is common in the early stages of exploration when the quantity of data available is generally not sufficient to allow any reasonable estimates of tonnage and grade to be made. Examples include discovery outcrops, single drill hole incepts or the results of geophysical surveys.
• If a company reports Mineral Exploration Results in relation to mineralisation not classified as a Mineral Resource or Mineral Reserve, then estimates of tonnage and associated average grade must not be reported.
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Defining a Mineral
Resource in Public Reports
• A Mineral Resource is a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction.
• The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge.
• Mineral Resources are sub-divided, in order of increasing geological confidence, into:
Inferred Mineral Resource Indicated Mineral
Resource Measured Resource
• A Mineral Resource is a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction.
• The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge.
• Mineral Resources are sub-divided, in order of increasing geological confidence, into:
Inferred Mineral Resource Indicated Mineral
Resource Measured Resource
• The definition used is part of the ‘CIM definition standards on Mineral Resources and Mineral Reserves’.
• A Mineral Resource is a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the Earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge.
• A Mineral Resource is a concentration or occurrence of material of economic interest in or on the Earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction.
• The location, quantity, grade, continuity and other geological characteristics of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge.
• Mineral Resources are subdivided, in order of increasing geological confidence into:
Inferred Mineral Resource Indicated Mineral
Resource Measured Resource
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Defining a Mineral
Reserve in Public Reports
• Mineral Reserve is the economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined.
• Appropriate assessments and studies must have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors.
• It differs in that it is specifically refers to Pre-Feasibility Study for a project, or a Life of Mine Plan for an operation as a minimum requirement when discussing assessments and studies than must be carried out.
• Mineral Reserves are sub-divided into: Proven Mineral Reserve Probable Mineral
Reserve Measured Mineral
Reserve
• Ore Reserve is the economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined.
• Appropriate assessments and studies must have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors.
• JORC prefers the term Ore Reserve as it allows a clear distinction between a Mineral Resource and an Ore Reserve.
Mineral Reserves are sub-divided into:
Proven Mineral Reserve Probable Mineral
Reserve Measured Mineral
Reserve
• A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined.
• The definition used is part of the CIM definition standards on Mineral Resources and Mineral Reserves.
• A Mineral Reserve is the economically mineable part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined.
• Appropriate assessments, which may include feasibility studies, have been carried out, and include consideration of, and modification by, realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors.
• Mineral Reserves are sub-divided into:
Proven Mineral Reserve Probable Mineral
Reserve Measured Mineral
Reserve
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Relationship between
exploration results, mineral
resources and reserves
Figure 6 is used to describe this relationship
Figure 6 is used to describe this relationship
Figure 6 is used to describe this relationship
Figure 6 is used to describe this relationship
Dedicated Sections
• Reporting of mineralised stope-Fill, Remnants, Pillars, Low Grade mineralization, Stockpiles, Dumps and Tailings
• Reporting of coal exploration results, resources and reserves
• Reporting of diamond exploration results, resources and reserve
• Reporting of coal resources and reserves
• Reporting of Industrial Minerals resources and reserves
• Reporting of diamonds and gemstones resources and reserves
• Reporting of Coal resources and reserves
• Reporting of diamond exploration results, mineral resources and ore reserves
• Reporting of industrial minerals exploration, mineral resources and ore reserves
• Reporting of coal resources and reserves
• Reporting of resources and reserves for diamonds and other gemstones
• Reporting of resources and reserves for industrial minerals, stone and aggregates
• Reporting of mineralised stope-fill, pillars, low-grade mineralisation, stockpiles, dumps and tailings
Preparation of technical
report
Documentation detailing Exploration Results, Mineral Resources and Mineral Reserves from which a Public Report is prepared, must be prepared by or under the direction of, and signed by, a Competent Person.
All disclosure of scientific or technical information made by an issuer, including disclosure of a mineral resource or mineral reserve, concerning a mineral project on a property material to the issuer must be based upon information prepared by or under the supervision of a qualified person.
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Detail SAMREC Code JORC Code NI43-101 The Reporting Code
Unique to code
• A technical report required under the provisions of this Instrument must be prepared by or under the supervision of a qualified person that is, at the date of the technical report, independent of the issuer
• Maintenance of Records - An issuer must keep for 7 years copies of assay and other analytical certificates, drill logs and other information referenced in the technical report or used as a basis for the technical report.
Sources:
AIM Exchange (2006) Guidance Note for Mining, Oil and Gas Companies, p. 15, London Stock Exchange
CIM Standing Committee on Reserve Definitions (2001) CIM Definition Standards on Mineral Resources and Minerals Reserves, Canadian Institute of Mining, Metallurgy and Petroleum, Canada.
JORC Committee (2004) The JORC Code: Australasian Code for reporting of Exploration Results, Mineral Resources and Mineral Reserves, The Joint Ore Reserves Committee of The Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia, Carlton, Australia.
SAMREC Committee (2006) South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (The SAMREC Code).
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APPENDIX B
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Table 8 – Comparison of the listing requirements for the stock exchanges included in the study
Category TSX & TSX Venture AIM JSE (Alt-X)
Fee Structure
Admission Fees
The Original Listing Fee is a one-time fee based on the Listing Capitalisation. The fee is calculated as follows: • Select Base Fee from appropriate Listing (or
Market) Capitalisation category • Add the variable fee calculated as the Variable Fee
Rate times the Listing (or Market) Capitalisation in excess of the Base Listing (or Market) Capitalization
Original Listing Fees: Listing Capitalisation
Base Up to Base Fee
Variable Fee Rate (%)
$0 $5 million $10,000 0.142$5 million $10 million $17,100 0.137 $10 million $50 million $23,950 0.133 $50 million $100 million $76,750 0.127 $100 million and above $140,250 0.122
Max fee is $200,000 A non-refundable amount of $10,000 must be submitted at the time of application (not required for TSX Venture applicants graduating to TSX).
Listing Capitalisation
Base Up to Base Fee
Variable Fee Rate (%)
$0 $5 million $7,500 0.10650$5 million $10 million $12,825 0.10275 $10 million $50 million $17,963 0.09900 $50 million $100 million $57,563 0.09525 $100 million and above $105,188 0.09150
Max fee is $150,000
A single, one-off payment of £4535 (Irrespective of Market Capitalisation)
The fees for the listing of securities are calculated using the table below.
Monetary value of securities listed
Listing Fee (incl. VAT)
Not Exceeding R2 million R800 Not Exceeding R10 million R5000 Not Exceeding R50 million R10 000 Not Exceeding R100 million R15000
Exceeding R150 million R20000
Original Listing Fees for international issuers:
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Category TSX & TSX Venture AIM JSE (Alt-X) A non-refundable amount of $7,500 must be submitted at the time of application (not required for TSX Venture applicants graduating to TSX). GST and other applicable taxes will be added to all fees.
Ongoing annual listing
fees
This fee is payable on an annual basis (excl. taxes) The fee is calculated as follows: • Select Base Fee from appropriate Listing (or
Market) Capitalisation category
• Add the variable fee calculated as the Variable Fee Rate times the Listing (or Market) Capitalisation in excess of the Base Listing (or Market) Capitalization
• Listing Capitalisation
Base Up to Base Fee
Variable Fee Rate (%)
$0 $100 million $10,000 0.0080$100 million $500 million $18,000 0.0075 $500 million and above $48,000 0.0070
Maximum fee is $90, 000
There will be an additional annual fee of R1, 000 for each supplementary security listed as at the last trading day of the preceding calendar year.
GST and other applicable taxes will be added to all fees.
A payment of £4535 shall be payable on an annual basis
An annual fee of R20, 000 (incl. VAT), in respect of each class of security listed, shall
be payable in February of each year.
Additional fees
There may be additional costs such as with legal fees, auditor fees, document preparation and
underwriter fees
There may be additional costs such as with legal fees, auditor fees, document preparation,
underwriter/broker and Nomad fees
There may be additional costs such as with legal fees, auditor fees, document
preparation, underwriter/broker and Designated Advisor fees
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Category TSX & TSX Venture AIM JSE (Alt-X)
Advisors / Sponsors
Sponsorship by a Participating Organization of the Exchange is mandatory for all companies that are applying to list on the TSX under the criteria for non-exempt companies. Sponsorship is not required for applicants for the TSX Venture Exchange. However sponsorship / affiliation with an established enterprise can be a significant factor in the determination of the suitability of a company, particularly where the company only marginally meets the prescribed minimum listing requirements. The weight attached to sponsorship in any particular case depends upon the financial and managerial strength of an applicant. The TSX Exchange Group considers a sponsor to be responsible for reviewing and providing comments in writing on the various listing requirements and documentation for listing on the TSX. A sponsor should also act as a source of information for the security holders of a company, provide advisory assistance to the applicant company, and assist in maintaining active and orderly trading in the market for the securities of the company. Combined, Toronto Stock Exchange and TSX Venture Exchange have over 110 Participating Organizations and Members that advise clients, underwrite new issues, provide corporate finance services and assist companies interested in becoming publicly traded.
A company must appoint a Nominated Advisor (Nomad) when applying to list on the AIM Exchange and once admitted, a company must retain the services of a Nomad. A Nomad is responsible to the AIM Exchange for assessing the appropriateness of an applicant for AIM, or an existing AIM company when appointed its nominated adviser, and for advising and guiding an AIM company on its responsibilities under these rules. If a company listed on AIM terminates the services of a Nomad, the exchange will terminate trading in its AIM securities. If the company has not appointed another Nomad within a month of this suspension the admission of the its AIM securities will be cancelled.
A company applying to list on the Alt-X must appoint a Designated Advisor (DA) in terms of a written contract and must retain the services of a DA at all times while listed on the exchange. A DA must comply with and is subject to all the provisions of the Listing Requirements of the JSE similar to a sponsor. The role of a DA is to guide and assist an applicant to the Alt-X in complying with the all conditions set out in the Listing Requirements in a competent, professional and impartial manner. The DA has the responsibility to notify the JSE if at any point an issuer does not comply with these requirements. Other responsibilities include ensuring that the applicant has completed the pre-listing agreement correctly and included the relevant documentation; the directors of the company understand their responsibilities and have the requisite expertise and experience to fulfil their new obligations. A complete list of the responsibilities of a DA is included in Section 21 of the JSE Listing Requirements. If the contract between an issuer and DA is terminated for any reason, a DA should submit a report to the JSE stipulating the reasons for termination within 48 hours of the termination. An issuer will be allowed 10 business days after the termination date to appoint a new DA otherwise the issuer will be suspended from trading. If the issuer does not correct the situation within one month from the termination, the listing may be terminated.
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Category TSX & TSX Venture AIM JSE (Alt-X)
Management requirements
The management of a company is an important factor in the consideration of an application by the TSX Group for both the TSX and TSX Venture Exchanges. Management (including the board of directors) should have appropriate experience and technical experience relevant to the company’s mining projects as well as relevant public company experience. This will demonstrate that management are able to satisfy their reporting and public company obligations. Companies will be required to have at least two independent directors, either a Chief Executive Officer (CEO) or a Chief Financial Officer (CFO), who cannot be the CEO and a corporate secretary. The above requirements should be maintained while the company is listed in the TSX or TSX Venture Exchange and may delisted should it fail to meet these requirements. The TSX Group will conduct a review of all new directors, officers, trustee or insiders and may delist the securities of a company should such as individual be found to be unsuitable as an insider of the listed company.
A company listed on AIM must notify its Nomad of any information regarding proposed changes to the board of directors, including resignations dismissals and appointments of new directors by providing draft notifications in advance. An AIM listed company must ensure that each of its directors accept full responsibility, collectively and individually for the compliance with the rules and regulations of the Exchange. Each director must also disclose without delay all information related to deals that may be conducted by directors in the company.
The directors and senior management of a company must collectively have the appropriate expertise and experience to effectively manage the company’s business. Details of such expertise and experience must be disclosed in any listing particulars prepared by the company. All directors must have completed the Directors Induction Programme (DIP) or must make arrangements to the satisfaction of the JSE to complete the Programme when undergoing the application process for listing on the Alt-X. The company listing on the Alt-X must appoint an executive financial director and at least 25 percent of the appointed directors must be non-executive. The Chief Executive Officer (CEO) may not hold the position of chairman.
Minimum share capital
The minimum share capital will vary according to the size of the company, the stage in its life cycle and which exchange the company will chose to list on. The criteria likely to affect junior mining and exploration companies have been included in Table 11
No minimum market capitalization
The applicant issuer must have share capital of at least R2 million (including reserves but excluding minority interests, and revaluations of assets and intangible assets that are not supported by a valuation by an independent professional expert acceptable to the JSE prepared within the last six months)
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Category TSX & TSX Venture AIM JSE (Alt-X)
Minimum Public
Distribution
At least 1 million freely tradable shares having an aggregate market value of $4 million must be held by at least 300 public holders, each holding one board lot or more. Board lot -100 securities with a market value of $1.00 or more per security; 500 securities with a market value of less than $1.00 and not less than 10c per security; or 1000 securities with a market value of less than 10c per security.
No minimum shares in public hands
The public shall hold a minimum of 10 percent of each class of equity securities and the number of public shareholders (excluding shares held by the DA) shall be at least 100.
Resource Reporting
Codes
The reporting of exploration results, mineral resource and reserve information must be in accordance with the National Instrument 43-101.
The reporting of exploration results, mineral resource and reserve information must be in accordance with the AIM Guidance Notes for Mining, Oil and Gas Companies.
The reporting of exploration results, mineral resource and reserve information must be in accordance with the SAMREC Code.
Other listing requirements
Must show evidence of a successful operation or where a company is relatively new and its business record is limited, there must be other evidence of management experience and expertise. The TSX Exchange places companies into one of three categories and there are specific listing criteria for each: • Industrial/(general) companies • Oil & gas companies • Mining companies The listing criteria for mining companies vary according to the size of the company, the stage in its life cycle and which exchange the company will chose to list on. The criteria likely to affect junior mining and exploration companies have been included in Table 11
• No trading record required; • No minimum earnings; • No minimum fund raising; • No minimum share price; • No pre-vetting by regulatory authority.
All applicants (including Main Board and Alt-X) must satisfy the conditions stipulated in section four of the JSE Listing Requirements. The above includes the requirements for unlisted, convertible, high and low voting securities as well as the transferability of the securities for a listed company. Section 21 of the JSE Listing Requirements includes the special listing requirements for applicants to the Alt-X, including: The issuer must produce a profit forecast
for the remainder of the financial year during which it will list and one full financial year thereafter;
The auditors or attorneys for a listed company must hold in trust 50 percent of the shareholding of each director and the DA (the relevant securities) in such company from the date of listing, and a certificate to that effect must be lodged
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Category TSX & TSX Venture AIM JSE (Alt-X) with the JSE. The relevant securities, whether new or existing, are to be held in trust until the publication of the audited results for year in which it listed after which 50 percent may be released and the balance one year thereafter. The relevant securities may only be released after notifying the JSE.
Documents required for pre-listing
When a company applies for a listing, it must prepare a Listing Application using the format set out in Appendix A of the Toronto Stock Exchange Company Manual containing certain prescribed information relating to the company, its business and its prospects. The company must also sign a Listing Agreement to formally place on record the commitment by a company to comply with the Exchange requirements for the continuance of its listing.
When a company applies for a listing, it must first send a pre-admission announcement, which will be disseminated publicly by RNS under the heading AIM. The company must also produce an AIM Admission Document, which requires detailed information about the company including the directors, its business activities and financial position as well as the details of the Nominated Advisor the company has appointed as required for the listing on the AIM Exchange. A Nomad should also complete and sign off a Nominated Advisors Declaration, which should be submitted to the Exchange administration along with the application form and fee payment. Where an Admission Document is also a prospectus, there is a duty for the prospectus to contain all such information as investors would reasonably require and reasonably expect to find within, for the purpose of making an informed assessment of the following: • The asset and liabilities, financial position,
profits and losses and prospects of the insurer of the securities
• The rights attached to those securities Formal written questions and answers with supporting documents are needed to verify that the key statements in the final prospectus are
When a company applies for a listing, it must produce a pre-listing statement containing certain prescribed information relating to the company, its business and its prospects. The pre-listing statement may promote investment in the shares of a company but is not an invitation to the public to subscribe for shares. It is rather aimed at enabling potential investors to make an informed investment decision regarding the shares of a company. If the pre-listing statement contains a public offer, it must also comply with the prospectus provisions in Section 148 and Schedule 3 of the Companies Act. The pre-listing statement will principally be drafted by the DA, however the directors of the company must accept full responsibility for the accuracy of the content. The JSE may also require responsibility to be extended to additional persons that have made specific statements in, or have made contributions to, the pre-listing statement. The key categories of information in the pre-listing statement are the following: • General information regarding the company
and its capital. • Information regarding the management and
directors of the company and the advisors
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Category TSX & TSX Venture AIM JSE (Alt-X) true, accurate and not misleading. The directors of the company must sign off the Admission document as well as the prospectus.
for the company. • Information regarding the securities to be
listed. • Information on the company's activities. • Information on the company's financial
position including profits and losses.
Corporate governance
Each listed company is subject to National Instrument 58-101 Disclosure of Corporate Governance Practices, or any replacement of that instrument, and is required to disclose its corporate governance practices in accordance with this instrument. The TSX Group will monitor the corporate governance disclosure of companies listed on the Exchange and will contact any listed companies that are not in compliance with disclosure requirements. The Exchange will assist these companies, which will be required to publish an amended disclosure in the company’s next quarterly report. The Exchange will publish the names of those listed issuers failing to comply with a request for amended disclosure. Continuing non-compliance could result in suspension and delisting. Listed issuers who illustrate a blatant and consistent disregard of the Exchange’s disclosure requirement will be referred to the Ontario Securities Commission (OSC) and may be subject to other legal proceedings.
Companies listed on AIM have been given exemption from compliance with the Combined Code, the corporate governance standards applied to all main board listed issuers to create a regulatory environment more suitable for small and medium sized companies.. However the Exchange does encourage smaller companies requesting guidance on corporate governance to make use of guideline documents such as the QCA Corporate Governance Guidelines for AIM Companies. Other institutions such as NAPF have also developed corporate governance guidelines that would assist AIM listed companies in attracting investment from large Institutional investors.
Listed companies must disclose their compliance with the following requirements in their annual report. • The company must have a policy for the
procedures for appointments to the board, which must be formal and transparent. These appointments are a matter for the board as a whole and may be assisted, where appropriate, by a nomination committee which must constitute only non-executive directors, of whom the majority must be independent;
• A company should also have a policy regarding the clear division of responsibilities at board level to ensure a balance of power and authority, such that that no one individual has unrestrained powers of decision-making;
• The chief executive officer for the company must not also hold the position of chairperson;
• A company must, in compliance with the King Code, appoint an audit committee and remuneration committee and if required, given the nature of their business and composition of their board, a risk committee and nomination committee. The composition of such committees, a brief description of their mandates, the number of meetings held
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Category TSX & TSX Venture AIM JSE (Alt-X) and other relevant information must also be disclosed in the annual report.
Reporting of Financial
Information
Every listed company must produce its annual financial statements and its management discussion and analysis (MD&A) in accordance with National Instrument 51-102 Continuous Disclosure Obligations (or National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers). Copies of these documents should be forwarded to each shareholder in the company who has requested a copy. One copy of the annual financial statements and MD&A must be filed with the TSX Group, concurrently with the filing of these materials with the OSC. Public filings through SEDAR will satisfy this requirement.
A company listed on the AIM Exchange must prepare half-yearly reports in respect of the six-month period from the end of the financial period for which financial information has been disclosed in its admission document and subsequently at least every six months thereafter. All such reports must be completed no later than three months after the end of the relevant period. The company should include annual audited accounts in this report, which must consist of at least a balance sheet, an income statement, and a cash flow statement and must contain comparative figures for the corresponding period in the preceding financial year.
A company must publish audited annual financial statements for its financial year, as specified in the prospectus or pre-listing statement, irrespective of whether the company may have subsequently changed its year-end. There may be additional and alternative requirements as set out in Section 12 (Minerals Companies) of the JSE Listing Requirements. These financial statements must fairly represent the financial position, changes in equity, results of operations and cash flows for the company. The financial statements should contain a minimum of the following:
•
• • • • • • • • • •
a narrative statement of how the principles of the King Code have been applied; borrowings; headline earnings per share; disclosure of directors’ interests; shareholder spread; major shareholders; share incentive schemes; profit forecasts; headline earnings per share; disclosure of directors’ interests; shareholder spread
The JSE and SAICA (South African Institute for Chartered Accountants) have formed a
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Category TSX & TSX Venture AIM JSE (Alt-X) panel known as the GAAP Monitoring Panel to investigate complaints and advise the JSE in relation to compliance by issuers with IFRS, the JSE Listings Requirements and the accounting practices required by the Act. If a company has not complied with the above requirements, the JSE will be able to, in its sole discretion, to instruct the company to publish or re-issue any information the JSE deems appropriate.
In addition, the JSE will refer any such non compliance to SAICA, PAAB or any other professional or relevant
Accounting standards
Financial Statements should be prepared using: •
• •
Canadian Generally Accepted Accounting Principles (GAAP) US GAAP International Accounting Standards
AIM companies incorporated in a European Economic Area (EEA) country must prepare and present Financial Accounts in accordance with International Financial Accounting Standards (IFRS). AIM companies incorporated in a non-EEA country must prepare and present their financial accounts in accordance with either:
• • • •
•
International Accounting Standards; US GAAP; Canadian GAAP; Australian International Financial Reporting Standards (IFRS); or Japanese GAAP.
Financial Statements must be prepared in accordance with International Financial Reporting Standards (IFRS) and the AC 500 Standards as issued by the Accounting Practices Board and its successor.
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Category TSX & TSX Venture AIM JSE (Alt-X)
Listing application procedure
After the Exchange has received the original listing application, the Exchange will assess whether all required documentation has been submitted in an acceptable form and the applicant company will be notified within five business days of receipt. The company will be given 75 days to submit any outstanding documentation. Should the applicant fail to submit the outstanding documentation within this period the Exchange will deem this to be a withdrawal of the application. Should the company still wish to list on the TSX, they will need to resubmit their application along with the payment of an additional application fee. The Exchange will attempt to assess the application and provide a decision as soon as possible within the 60 day period from the date of receipt of all the required documentation. The Exchange will use its best efforts to accommodate an applicant’s schedule for the filing of a prospectus and the closing of an offering of securities. The Exchange may require additional information or documentation at any time, which may extend the assessment period. Once the assessment has been completed, the Exchange will either: • Grant conditional approval for the listing
application, which will be subject to meeting specified conditions within a 90 day period.
• Defer the application for listing, pending the resolution of specified issues within a 90 day period.
• Failure to address the issues above will result in the application being declined and at least six months must pass before the company will
Part of the role of a Nomad is to take responsibility for coordinating the admission process alongside the company and other advisers, such as lawyers and accountants. The Nomad will carry out extensive due diligence to ensure the company is suitable for AIM and that all the necessary information about the company is included within the admission document. Pre-admission announcement An applicant must provide the Exchange with the information specified by Schedule One at least ten business days before the expected date of admission to AIM. If there are any changes to such information prior to admission, the applicant must advise the Exchange immediately by supplying details of such changes. Where, in the opinion of the Exchange, such changes result in the information being significantly different from that originally provided, the Exchange may delay the expected date of admission for a further ten business days. Admission Documents The applicant must produce an admission document disclosing information specified in Schedule Two of the AIM Rules for Companies. This document must be available publicly and free of charge for at least one month from the admission of the company’s securities to the AIM Exchange. There is no pre-vetting by the regulator. The application process including due diligence should be completed in a 3 to 4 month period.
The application process for the Alt-X Exchange is as follows: The DA appointed by the applicant must perform a due diligence to determine the appropriateness and suitability of the company for a listing on the Exchange. The DA will also assist in the compilation of the application letter and business plan that must be submitted to the JSE Issuer Services. The Board of Directors for the company, along with the DA will conduct a presentation of the Alt-X Advisory Committee, who will make a recommendation to the JSE Issuer Services based on the presentation. Once the JSE Issuer Services have accepted the application by the company, the appointed DA will further assist the company in compiling all documentation as required by the Alt-X Listing Requirements and other relevant legislation. This documentation will be submitted to the JSE Issuer Services for approval. Once the JSE has successfully verified the content of the documentation, a formal letter of approval will be issued. The application process may take between 8 to 12 weeks to complete and will depend upon a number of factors, including the complexity of the method chosen for the listing of the company’s securities.
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Category TSX & TSX Venture AIM JSE (Alt-X) be eligible for reconsideration.
Disciplinary procedures
The exchange has adopted certain quantitative and qualitative criteria for the suspension from trading and delisting of securities. However each situation is considered individually on the basis of relevant facts and circumstances. TSX examines the affairs and the performance of listed issuers on a regular basis to ensure that they are of a standard that will enable the continued listing of such companies. However the exchange may find that the delisting criteria have become applicable to a listed company. The TSX will notify the listed issuer and the market that the listed issuer is under a delisting review. There are two listing reviews processes, which may be undertaken, where the appropriate process will be determined by the delisting criteria under review. 1. Remedial Review Process The delisting criteria that will lead to this review process are: the financial condition and/or operating results
of the listed issuer appear to be unsatisfactory or appear not to warrant continuation of the securities on the trading list.
In the most recent year, a resource issuer has failed to carry out at least $350, 000 of exploration and/or development work that is acceptable to the TSX and has failed to generate revenue of at least $3,000,000 from the sale of resource-based commodities. Also if the issuer does not have adequate working capital and an appropriate capital structure to continue its business.
If a company or Nominated Advisor is found to be non-compliant with the rules and regulations of the AIM Exchange, the exchange will carry out the following disciplinary process. Disciplinary process A warning notice will first be issued to the listed issuer or the Nominated Advisor for a breach of the AIM rules. Where the exchange wishes to carry out disciplinary action against an AIM company or a nominated adviser, it will refer the disciplinary matter to either the AIM Executive Panel or the AIM Disciplinary Committee. In appropriate cases (including where a greater sanction than the AIM Executive Panel is authorised to impose is deemed appropriate by the AIM Executive Panel), the AIM Executive Panel may refer the case to the AIM Disciplinary Committee. The AIM Executive Panel is a panel consists of appropriately experienced senior members of staff from the AIM Exchange. Any final decision of the AIM Executive Panel (other than a decision to refer a matter to the AIM Disciplinary Committee) may be appealed to the AIM Appeals Committee. The AIM Disciplinary Committee is consists of appropriately experienced persons that are not staff member of the AIM Exchange. This committee may impose a wider range of sanctions than the AIM Executive Panel and has discretion to make its findings public. Any final decision of the AIM Disciplinary Committee may be appealed to the AIM Appeals Committee.
A company listed on the Alt-X Exchange may be suspended if it fails to comply with the Alt-X Listing Requirements. If a listed company is under threat of suspension the affected issuer shall be given the opportunity of making a written submission to the JSE in support of the continued listing its securities prior to the JSE making any decision to suspend such listing. If a listed issuer is suspended it must continue to comply with the Alt-X Listing Requirements, while submitting a monthly progress report to the JSE reporting the current state of the affairs of the issuer that led to the initial suspension. The listed issuer should also advise holders of its securities of the above affair on a quarterly basis. If a listing is suspended and the affected issuer fails to take appropriate action to enable the JSE to reinstate the listing within a reasonable period of time, the JSE may terminate the listing. When a listed issuer is under threat of termination, the affected issuer shall be given the opportunity of making a written submission to the JSE in support of the continued listing of such securities, prior to the JSE making any decision to terminate such listing.
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Category TSX & TSX Venture AIM JSE (Alt-X) In the opinion of TSX, it appears that the
public distribution, price, or trading activity of the securities has been so reduced as to make further dealings in the securities on TSX unwarranted.
A listed issuer that has been notified that it is under delisting review because of the applicability of any of the above delisting criteria will normally be given up to 120 days from the date of such notification to correct the deficiencies that have triggered the delisting review. At any time during this period the listed issuer will have the opportunity to present submissions to satisfy the TSX that all deficiencies identified in notice issued by the exchange have been rectified. If the listed issuer cannot satisfy the exchange that the deficiencies identified have been rectified, TSX will determine to delist the securities of the listed issuer. TSX will issue a written notice to the market to confirm the date that the delisting will be effective, which date will generally be the thirtieth calendar day after the issuance of such notice. 2. Expedited Review Process The delisting criteria that will lead to this review process are: when the TSX is advised or becomes aware
that a listed issuer has become insolvent or bankrupt or a liquidator or monitor has been appointed for the listed issuer or for a substantial part of its assets.
the listed issuer’s financial condition is such that, in the opinion of TSX, it is questionable as to whether the listed issuer will be able to continue as a going concern;
The AIM Appeals Committee consists of appropriately experienced persons who are not staff members of the Exchange and hears appeals against the findings of the AIM Disciplinary Committee and the AIM Executive Panel. The AIM Appeals Committee may uphold, quash or vary any decision it is asked to consider. There are a number of factors that are taken into account when considering what disciplinary action to take in relation to the breach of a rule/s: The nature and severity of the rule breach and
the duration and frequency of the misconduct How the rules breach came to light The potential market impact of the breach, as
well as any other repercussions The extent to which the rule breach was
deliberate or reckless The general compliance history of the AIM
company or nominated adviser Consistent and fair application of the rules
(considering any precedents of previous similar rule breaches)
The responsiveness and conduct of the AIM company or nominated adviser with respect to the matter under investigation.
The burden of proof will be on the AIM Exchange. The Exchange, the AIM Executive Panel, the AIM Disciplinary Committee or the AIM Appeals Committee (if appropriate) shall not find an allegation proven unless it is satisfied on the balance of probabilities. If the Exchange considers that a listed issuers has failed to comply with the AIM Rules for Companies, the exchange may implement one or
f f
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Category TSX & TSX Venture AIM JSE (Alt-X) or has expressed an intention to cease, to be actively engaged in any ongoing business or; has discontinued or divested a substantial portion of its operations, thereby so reducing its business as to no longer merit continued listing.
TSX may suspend from trading and delist the securities of a listed issuer that fails or refuses to pay any fee or charge to the exchange
When a listed issuer substantially discontinues its business e.g. through the sale of all or mostly all of its assets or materially changes the nature of its business
Failure to comply with the requirements and policies of the TSX including non-compliance with the Listing Agreement and any disclosure policies adopted by the TSX and any security laws to which the listed issuer is subject.
If in the event the TSX determines that an individual employed as a director for a listed issuer is not suitable as an insider of the listed issuer.
The issuer will be given an opportunity to be heard, on an expedited basis, where they may present submissions as to why its securities should not be suspended from trading immediately and delisted. If the listed issuer cannot satisfy TSX that an immediate suspension is unwarranted, TSX will determine to suspend the securities of the listed issuer from trading as soon as practicable after such a hearing. TSX will issue a written notice to the market to confirm the date that the delisting will be effective, which date will generally be the thirtieth calendar day after the issuance of such notice.
more of the following measures: Issue a warrant notice Fine the listed issuer Reproach the listed issuer Cancel the admission of its AIM securities;
and publish the fact that it has been fined or censured and the reasons for that action.
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Sources:
AIM Rules for companies, www.londonstockexchange.com AIM Fees for Companies and Nominated Advisors 2007, www.londonstockexchange.com AIM Disciplinary Procedures and Appeals Handbook February 2007, www.londonstockexchange.com AIM Guidance Notes for Mining, Oil and Gas Companies March 2006, www.londonstockexchange.com Alternative Exchange Listing Requirements, www.jse.co.za JSE Listing Requirements, www.jse.co.za Toronto Stock Exchange Manual June 2007, www.tsx.com Toronto Stock Exchange Listing Fee Schedule January 2008, www.tsx.com QCA Corporate Governance Guidelines for AIM Companies, www.qcanet.co.uk NAPF – AIM Corporate Governance Policy and Voting Guidelines, www.napf.co.uk
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Table 9 – Listing requirements for Exploration & Mining Companies listing on the TSX and TSX Venture Exchanges
TSX Venture TIER 2 TSX Venture TIER 1 Exploration TSX
Non-Exempt development stage / producing
Property requirements
Significant Interest in Qualifying Property (or at the discretion of the Exchange), or hold
rights to earn Significant Interest in Qualifying Property with $100,000 expenditures in the past 3 years.
By applicant issuer / sufficient expenditure incurred such that the property is a Tier 1
property (1).
Material interest in a Tier 1 Property (1). Advanced Exploration Property (3).
Minimum 50 percent ownership in the property (4)
Recommended work
programme $200,000 on the Qualifying Property as recommended by a Geological Report
$500,000 on the Tier 1 Property (5) as recommended by a Geological Report
$750,000 on Advanced Exploration Property as recommended in
Independent Technical Report
Working Capital and Financial
Resources
Adequate Working Capital and Financial Resources including:
Work Programme + 12 months general and administrative costs + 12 months Property payments to keep Qualifying Property and principal properties (2) in good
standing + $100,000 unallocated funds
Adequate Working Capital and Financial Resources including::
Work programme + 18 months general and administrative costs + 18 mos. property
payments to keep Tier 1 Property (5) and principal properties (2) in good standing +
$100,000 unallocated
Minimum of $2 million working capital, but must be sufficient to complete
recommended programmes, + 18 months general and administrative costs,
anticipated property payments and capital expenditures. No debt.
Net tangible asset No requirement $2 million $3 million
Earnings / revenue No requirement No requirement No requirement
Sponsorship Sponsor report may be required
(not required for IPOs / certain other exemptions for North American properties)
Sponsor report may be required (not required for IPOs / certain other
exemptions for North American properties)
Required (may be waived if there is sufficient previous third party due diligence)
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TSX Venture TIER 2 TSX Venture TIER 1 Exploration TSX
Non-Exempt development stage / producing
Other criteria Geological Report recommending completion of work programme
Geological Report recommending completion of work programme or positive
feasibility study or production levels exhibiting a likelihood of positive cash flow
programme
Up to date, comprehensive Technical Report prepared by independent QP with 18 month projection (by quarter) of
sources and uses of funds, must also be signed by CFO.
Distribution, market cap, and public
float
$500,000 publicly held 500,000 public free trading shares 200 public holders with
Board Lots and no Resale Restrictions 10 percent Public
Float min 20 percent issued and outstanding shares publicly held
$1 million publicly held one million free trading public shares 200
public holders with Board Lots and no Resale Restrictions 10 percent Public Float
min 20 percent of issued and o/s shares publicly held
$4 million publicly held one million free trading public shares 300
public holders with Board Lots
Notes: 1. Tier 1 Property – property that has substantial geological merit and is:
A property in which the issuer holds a material interest and, A property on which previous exploration including detailed surface geological geophysical and/or geochemical surveying and at least an initial phase of drillings or
other detailed sampling has been completed An independent Geological Report recommends a minimum $500,000 Phase 1 drilling (or other forms of detailed sampling) programme based on the merits of
previous exploration results; or an independent positive feasibility study demonstrates that the property is capable of generating positive cash flow from ongoing operations.
2. Principle properties – means any other properties of the issuer in respect of 20 percent or more of the available funds will be spent in the next 18 months 3. Advanced Exploration Property – refers to one on which a zone of mineralisation has been demonstrated in three dimensions with reasonable continuity indicated. The mineralisation identified has economically interesting grades.
4. A company must hold or have the right to earn and maintain a 50 percent interest in the qualifying property. Companies holding less than a 50 percent interest will be considered on a case-by-case basis looking at programme size, stage of advancement of the property and strategic alliances. Source: Toronto Stock Exchange and TSX Venture Listing Requirements for Exploration & Mining Companies, www.tsx.com
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APPENDIX C
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Interview Guide A
Question 1: What, in you opinion and/or experience, are the reasons given by South African junior mining and exploration companies for their choice of listing location?
If respondents do not discuss reasons identified in the literature review, the following prompts will
be used to encourage respondents to discuss their opinions on the validity of the reasons
identified in the literature review:
Prompt 1: Would you consider the preference to list on stock exchanges where there is greater
and easier access to capital to be a possible reason for the choice of listing location for such a
company?
Prompt 2: Would you consider the preference to list on stock exchanges where the majority of
the industry peers of junior mining and exploration companies have chosen to list their shares be
a possible reason for the choice of listing location for such a company?
Prompt 3: Would you consider the preference to list on larger stock exchanges offering increased
liquidity to be a reason for the choice of listing location for South African junior mining and
exploration companies?
Prompt 4: Would you consider the level of regulation and listing requirements as well as the
associated costs of compliance to be a reason for the choice of listing location by South African
junior mining and exploration companies?
Prompt 5: Would you consider the compliance with different codes for the reporting of mineral
reserves and resources on different stock exchanges to be a factor of consideration for junior
mining and exploration companies when choosing their listing location? For example, the NI43-
101 in Toronto, SAMREC Code in South Africa, JORC Code in Australia and the flexibility to
choose a code when listing on the AIM Exchange in London.
Prompt 6: Would you consider the tax incentives for investors introduced by a number of different
countries to stimulate investment in specific types of companies listed on their stock exchanges
to be a reason for the choice in listing location by South African junior mining and exploration
companies?
Question 2: Do you have anything else to add?
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Interview Guide B
Question 1: What, in your opinion and/or experience, are the reasons given by South African junior mining and exploration companies for their choice of listing location?
If respondents do not discuss reasons identified in the literature review, the following prompts will
be used encourage respondents to discuss their opinions on the validity of the identified reasons:
Prompt 1: Would you consider the preference to list on stock exchanges where there is greater
and easier access to capital to be a possible reason for the choice of listing location for such a
company?
Prompt 2: Would you consider the preferred listing location of the majority of their industry peers
to be a possible reason for the choice of listing location for South African junior mining and
exploration companies?
Prompt 3: Would you consider the preference to list on stock exchanges offering increased depth
and/or liquidity as a reason for the choice of listing location by South African junior mining and
exploration companies?
Prompt 4: Would you consider the level of regulation e.g. corporate governance and listing
requirements as well as the associated costs of compliance to be a factor in the choice of listing
location by South African junior mining and exploration companies?
Prompt 5: Would you consider the differences in compliance codes for the reporting of mineral
reserves and resources on the different stock exchanges to be a reason for the choice of listing
location by South African junior mining and exploration companies? For example, the NI43-101
in Toronto, SAMREC Code in South Africa, JORC Code in Australia and the flexibility to choose
a code when listing on the AIM Exchange in London.
Prompt 6: Would you consider the tax incentives for investors introduced by a number of
governments to stimulate investment in certain types of companies listed on their stock
exchanges to be a reason for the choice of listing location by South African junior mining and
exploration companies?
Prompt 7: Would you consider the ratings of exploration projects / price/earnings ratios for
producing mining companies to be a possible reason for the choice of listing location by junior
mining and exploration companies in South Africa?
Prompt 8: Would you consider the risk appetite of investors in a market to be a reason for the
choice of listing location by South African junior mining and exploration companies?
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Prompt 9: Would you consider the impact of exchange control regulations implemented by the
South African government to influence the choice of listing location by South African junior
mining and exploration companies?
Question 2: Do you have anything else to add?
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Interview Guide C
Question 1: What, in your opinion and/or experience, are the reasons given by South African junior mining and exploration companies for their choice of listing location?
If respondents do not discuss reasons identified in the literature review, the following prompts will
be used encourage respondents to discuss their opinions on the validity of the identified reasons:
Prompt 1: Would you consider the preference to list on stock exchanges where there is greater
and easier access to capital to be a possible reason for the choice of listing location for such a
company?
Prompt 2: Would you consider the preferred listing location of the majority of their industry peers
to be a possible reason for the choice of listing location for South African junior mining and
exploration companies?
Prompt 3: Would you consider the preference to list on stock exchanges offering increased
depth and/or liquidity as a reason for the choice of listing location by South African junior mining
and exploration companies?
Prompt 4: Would you consider the level of regulation e.g. corporate governance and listing
requirements as well as the associated costs of compliance to be a factor in the choice of listing
location by South African junior mining and exploration companies?
Prompt 5: Would you consider the differences in compliance codes for the reporting of mineral
reserves and resources on the different stock exchanges to be a reason for the choice of listing
location by South African junior mining and exploration companies? For example, the NI43-101
in Toronto, SAMREC Code in South Africa, JORC Code in Australia and the flexibility to choose
a code when listing on the AIM Exchange in London.
Prompt 6: Would you consider the tax incentives for investors introduced by a number of
governments to stimulate investment in certain types of companies listed on their stock
exchanges to be a reason for the choice of listing location by South African junior mining and
exploration companies?
Prompt 7: Would you consider the ratings of exploration projects / price/earnings ratios for
producing mining companies to be a possible reason for the choice of listing location by junior
mining and exploration companies in South Africa?
Prompt 8: Would you consider the risk appetite of investors in a market to be a reason for the
choice of listing location by South African junior mining and exploration companies?
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Prompt 9: Would you consider the impact of exchange control regulations implemented by the
South African government to influence the choice of listing location by South African junior
mining and exploration companies?
Prompt 10: Would you consider the preference of investors on certain stock exchanges to invest
in particular commodities being explored or mined by a junior company to be a reason for the
choice of listing location?
Question 2: Do you have anything else to add?
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Interview Guide D
Question 1: What, in your opinion and/or experience, are the reasons given by South African junior mining and exploration companies for their choice of listing location?
If respondents do not discuss reasons identified in the literature review, the following prompts will
be used encourage respondents to discuss their opinions on the validity of the identified reasons:
Prompt 1: Would you consider the preference to list on stock exchanges where there is greater
and easier access to capital to be a possible reason for the choice of listing location for such a
company?
Prompt 2: Would you consider the preferred listing location of the majority of their industry peers
to be a possible reason for the choice of listing location for South African junior mining and
exploration companies?
Prompt 3: Would you consider the preference to list on stock exchanges offering increased
depth and/or liquidity as a reason for the choice of listing location by South African junior mining
and exploration companies?
Prompt 4: Would you consider the level of regulation e.g. corporate governance and listing
requirements as well as the associated costs of compliance to be a factor in the choice of listing
location by South African junior mining and exploration companies?
Prompt 5: Would you consider the differences in compliance codes for the reporting of mineral
reserves and resources on the different stock exchanges to be a reason for the choice of listing
location by South African junior mining and exploration companies? For example, the NI43-101
in Toronto, SAMREC Code in South Africa, JORC Code in Australia and the flexibility to choose
a code when listing on the AIM Exchange in London.
Prompt 6: Would you consider the tax incentives for investors introduced by a number of
governments to stimulate investment in certain types of companies listed on their stock
exchanges to be a reason for the choice of listing location by South African junior mining and
exploration companies?
Prompt 7: Would you consider the ratings of exploration projects / price/earnings ratios for
producing mining companies to be a possible reason for the choice of listing location by junior
mining and exploration companies in South Africa?
Prompt 8: Would you consider the risk appetite of investors in a market to be a reason for the
choice of listing location by South African junior mining and exploration companies?
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Prompt 9: Would you consider the impact of exchange control regulations implemented by the
South African government to influence the choice of listing location by South African junior
mining and exploration companies?
Prompt 10: Would you consider the preference of investors on certain stock exchanges to invest
in particular commodities being explored or mined by a junior company to be a reason for the
choice of listing location?
Prompt 11: Would you consider the geographical location of an exchange to influence the choice
of listing location by South African junior mining and exploration companies? For example the
practicality of doing business across time zones and the travelling distance when liaising with
investors?
Question 2: Do you have anything else to add?