Risk in new mining stocks

Volatility in the share prices of mining companies at the exploration stages is common in Australia, where 40% of the listed stocks are mining companies that are still junior explorers.

According to experienced mining executive Barry Eldridge, this has been the case in many Australian- listed mining companies which was similar to the recent selldown in the share prices of three Singapore-listed companies.

“It is a sort of gamble on the prospects of huge reserves and feasible production.

“Chances are probably less than one in 10, but investors still buy in as the rewards are huge if the selected mining company is successful. The risk is certainly there,” he told StarBiz recently.

However, he said things would typically settle down after the euphoria was over with these mining companies as they moves along their development stage into production, whereby the companies could be valued based on their proven resources and reserves.

Eldridge is the chairman of the Diggers and Dealers, an international annual mining conference in Australia, and he has served in various executive positions in different private and public mining companies throughout his 37 years in the industry.

“Many investors would lose money but they are punting on the chance that the mining company they selected would become a very successful and large,” he said.

“It’s almost impossible to value a mining company, but the share price would still be driven up due to speculation of earnings potential.

“For example Fortescue Metals Group Ltd (a Australian mining company). It went up to a high of A$11.90 in 2009 before slumping to A$2 in six months after it announced firm details of its mineral reserves feasible for production,” he said.

Meanwhile, there were concerns that investment brokerages could be hit by losses from margin financing following the selldown in the share prices of the three Singapore-listed companies which have mining assets. The three are Blumont Group Ltd, Asiasons Capital Ltd and LionGold Corp Ltd.

However, Alliance Research banking analyst Cheah King Yoong said as the impact on Malaysian banks was limited, it would not alter its view on the outlook of these banks.

There were market talk that Malaysian brokerages, CIMB Group Holdings Bhd, Malayan Banking Bhd and RHB Banking group might take a hit due to the massive selldown that erased S$8.5bil in market capitalisation or more than 90% of value in a matter of a few days in the said companies.

It was claimed that RHB’s unit DMG & Partners Securities might have substantial exposure to the three companies via margin financing by clients.

“There have been a lot of rumours, but in reality there’s no significant impact. We understand from RHB that its unit has only a small exposure,” he said.

Meanwhile, a Singapore-based analyst said some brokerages could be forced to answer margin financing calls following the abrupt share price crash.

“There have been no indication from the brokerages of their client exposure to these three stocks yet. But judging from the sharp fall of the share price, the brokerage could face some pressure if clients fail to pay up under margin financing rules,” he said.

However, he said the impact could be softened with the collateral pledged by clients. “These assets would mostly be in stocks or highly liquid assets, and brokerages have the right to force sell these stocks to recoup back the losses if clients can’t pay up,” he said.

Media reports said that the stocks suffered severe attacks by short sellers, which was triggered by a US-based investment bank and followed by a leading Singapore broker selling the stocks of LionGold and Blumont.

The stocks were also designated by the SGX, prohibiting investors from selling them unless they hold the same quantity of stock. Buyers must make cash payments for the transactions, according to the reports.

A report also allegedly linked corporate player Datuk John Soh Chee Wen to the three companies, with a complex web of cross-shareholdings via companies namely Magnus Energy Group Ltd, Innopac Holdings Ltd, Ipco International Ltd and Annica Holdings Ltd. However, this has not been substantiated with facts.

The Star Online

Choong En Han

17 October 2013