Reasons for foreign listings by South African junior mining and exploration companies

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
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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
v

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
- 7 -

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
Tonnes
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 2006
Govt / 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
2,658
1,969
537 503 468 493
0
2,000
4,000
6,000
8,000
10,000
12,000
TSX-TSX
Venture
LSE -
AIM
HKGSE ASX Russian
SE
NYSE Sao
Paulo
Other
Stock Exchange
US$millions
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).
- 27 -

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.
- 29 -

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).
- 30 -

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
- 31 -

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
Index
180
170
160
150
140
130
120
110
100
88
A M J A S O N D F MJ J
2006 2007
Alt-X Index
All 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.
- 35 -

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 -

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