Once again, the Mines and Money crew put together a well-oiled and comprehensive three-day programme of presentations and discussion. Companies, investors and analysts explored the state of the global mining industry. The gathering enabled many hundreds of meetings which would not have otherwise occurred.

The undiscussed elephant in the room was the pachyderm proportioned mismatch between what equity investors are prepared to pay and what mining companies think their assets are worth.

Unbridgeable spreads between bids and offers for industry assets have been a repeating theme in recent international investment meetings. Little progress appears to have been made in narrowing the differences.

Value should not be conceded lightly in a commercial negotiation but liquidity keeps the industry alive. Ready liquidity offers opportunities for new entrants and exits for companies looking to regroup around alternative businesses. A consensus on value adds industry vitality. Infrequent transactions deter interest.  

It might be slightly unfair to single out Mines and Money for failing to confront the value gap head-on. Its business success will require balancing relationships with a diverse array of industry stakeholders. Company directors in a state of denial about their valuation credentials are more likely to respond positively to concerted ego stroking than a blast of reality.

There is, however, motivation for change. Eventually, the Mines and Money franchise will suffer if it neglects to challenge the resulting conspiracy of silence. After all, why attend if one of the most fundamental strategic problems confronting the industry goes unaddressed?

On the first of the three conference days, each of the participants on the assembled panel outlined their criteria for investing in mining. Each also said he had investible funds. One of the panellists referred to kissing many frogs but, despite their evident willingness and ability, none had concluded a recent transaction.

"Hopefully, the Mines and Money programme writers can find a way to create more head-to-head debate with fewer panels comprising like-minded individuals from similar backgrounds agreeing furiously with one another"

Interestingly, neither did any of the participants volunteer why there had been such a dearth of transactions. Prodded to address the question, they agreed that potential targets have typically exaggerated the quality of their offerings. This apparently widespread shortcoming only becomes evident once an independent assessment of projects can be concluded.

On day two, fund managers on another panel slammed companies promoting projects with inflated price tags. Discount rates well below what equity investors are prepared to accept were being used to generate misleadingly hefty valuations, according to this group.  

Discount rates consistent with those used to value well established and profitable industrial companies are constantly being applied to the peculiar combination of operational, regulatory, environmental, financial market and commodity cycle risks defining the mining industry.  

Inappropriate quantification of risk results in expectations about investment outcomes that cannot be met and, subsequently, industry damaging investor disillusion.  

Companies will often say it is open for investors to choose discount rates and alternative assumptions to frame valuations reflective of their own circumstances. It follows that companies should use a range of valuations that would encompass a realistic representation of investors, not pick one.  

The humble and often inconspicuous discount rate makes a big difference to how attractive a project may appear. A 100,000 ounce per annum gold project, for example, with a cash margin of US$500/oz and production extending over seven years requiring a relatively modest $70 million initial capital spend could be valued at anywhere between $75 million and $200 million depending on the choice of discount rate between 20% and 5%.  

Mostly, companies default to the lower discount rate/higher valuation combination but, wishful thinking aside, offer little reasoning for the choice. In reality, valuations are used in the public marketplace to attract attention.

In this connection, industry consultants and their professional associations who portray themselves as experts on valuation are conspicuously absent from the conference speaking circuit and these debates. Their low profile comes despite their work ultimately informing the inflated valuations stifling industry progress toward agreement on investment terms.

One can more easily accept the motivation of company directors and project promoters than the potentially unscrupulous provision of unjustifiable valuations cloaked as expert opinion in exchange for payment.

While the discussion about valuation was happening, the companies being complained about were in another room at the Hong Kong Convention Centre, obliviously trying to promote their wares to the passing traffic of conference attendees.

Hopefully, the Mines and Money programme writers can find a way to create more head-to-head debate with fewer panels comprising like-minded individuals from similar backgrounds agreeing furiously with one another. 

Altering the format would encourage miners and investors to confront their differences. Miners might have to adjust their expectations, in some cases. In others, investors may have to concede that their judgments had been too harsh. Both would benefit from the changed perceptions. Everyone’s interests would be served by a different approach.

The challenge for the conference organiser, and the source of its potentially beneficial impact on the fate of the industry, is to get the two parties into the same room to resolve their differences.  Without that, transactions will remain stalled. Liquidity will remain stifled.

The value of the Mines and Money franchise comes from bringing the miners face to face with the money managers, not keeping the two apart. The franchise remains a vital part of the industry by fostering the maximum possible number of transactions.

By modifying its approach at the margin, Mines and Money will deserve bigger audiences and credit for helping to revitalise a flagging industry too used to having a cyclical turn in commodity prices hide its problems to drag itself unaided from its current value funk.

*John Robertson is a director of EIM Capital Managers, an Australia-based funds-management group. He has worked as a policy economist, business strategist and investment-market professional for nearly 30 years, after starting his career as a federal treasury economist in Canberra, Australia