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Mining Equity Finance Stock bubbles burst . . . but markets recover . . . how to survive the pain .


This presentation was prepared by Commodity Energy Capital Limited with an ... Jennifer Lopez 'JLO' syndrome (Charles Kernot, Mining Analyst, Evolution Securities) ... – PowerPoint PPT presentation

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Title: Mining Equity Finance Stock bubbles burst . . . but markets recover . . . how to survive the pain .

Mining Equity FinanceStock bubbles burst . . .
but markets recover. . . how to survive the pain
. . .Lessons from Behavioural Finance
Dr Elena Clarici
Commodity Energy Capital Ltd
  • London, 8 December 2008

This presentation was prepared by Commodity
Energy Capital Limited with an objective of
explaining its views. The information in this
presentation is based upon management beliefs and
forecasts and reflects prevailing conditions and
our views as of this date, which are accordingly
subject to change. This presentation is
incomplete without reference to, and should be
viewed solely in conjunction with, the oral
briefing provided by Commodity Energy Capital
Limited. The presentation is proprietary to
Commodity Energy Capital Limited and may not be
disclosed to any third party or used for any
other purpose without the prior written consent
of Commodity Energy Capital Limited.
About the Speaker
  • Dr Elena Clarici
  • Elena has worked in the City of London, as an
    analyst and corporate financier for the last 13
    years. She started her career as a mining equity
    analyst in 1995, with the responsibility for
    North American junior resource sector, followed
    by top-tier investment bank where she was trained
    as an investment banker in international
    corporate finance department.
  • In 2004, Elena founded CeCap LLP, a specialist
    corporate finance boutique focussed on natural
    resources and renewable energy companies,
    typically at the pre-IPO stage. In 2006 she
    founded Commodity Energy Capital Limited, an
    investment company formed to acquire, develop and
    invest in commodity and energy related
  • Elena holds MPhil and PhD in Mining and
    Environmental Engineering from Imperial College,
    Royal School of Mines, London and BSc in Mining
    Engineering from University of Belgrade. She is
    also Treasurer of the Association of Mining

Was it a bubble or not?
  • Did bubble burst?
  • Or is it correction in the secular commodity
  • Irrelevant . . . the aftermath and pain are the
  • But let us assume it was a bubble
  • because,
  • While the object of investment affection may
    vary, bubbles and subsequent busts invariably
    exhibit a well-known, predictable pattern
  • Therefore we might have a better idea of what is
    ahead of us and how to adjust

Bubbles are as old as investing itself
Eventually the fears subside and normal market
drivers are restored, creating undervalued
opportunities for investors who remained true to
fact, not euphoria
  • No mater what the chosen asset is, the pattern of
    investor self-delusion persists
  • The bubble anatomy is always the same
  • However, what is new this time around is the
    scale of it

Ultimately some failure / shock happens prices
start to fall investors panic contaminates
even good investments
Investors justify the soaring prices by some
unique aspect of the inflated asset
Valuations become more distorted fundamental
considerations are bended
More investors (often inexperienced) are lured
into the marketplace pushing prices even higher
A sharp rise in the price of stocks / assets
sparks the interest of wider investor base
Source AllianceBernstein, 2008
Bubbles Across the Centuries
Source AllianceBernstein, 2008
Who is the guilty one?
  • We desperately need the scapegoat
  • The reality is we are ALL guilty
  • The root cause of all bubbles is not too-lax
    credit, overvaluation, too much froth,
  • but too-gullible human beings
  • Jennifer Lopez JLO syndrome (Charles Kernot,
    Mining Analyst, Evolution Securities)

The turmoil in the markets is almost certainly
the result of amoral forces Bishop of
Recovery does come eventually
  • Although the resolution of the current financial
    crisis has yet to come
  • History may offer some hope for the future
  • Recovery does come eventually

Source AllianceBernstein, 2008
  • Behavioural Finance

Behavioural Finance
  • Science where investing, economics and psychology
  • Pioneered in the 1970s by Daniel Kahneman (winner
    of the 2002 Nobel Prize in Economic Sciences) and
    the late Amos Tversky
  • Behavioural finance scientists have identified
    emotional traits of investors that ultimately
    lead to bubbles and busts
  • Human beings are poorly equipped to be investors
    our own wiring works against our very success
  • We feel pain from loss more intensely, than we
    feel pleasure from gain
  • Such extreme sensitivity to pain makes investors
    generally risk adverse, even more prominent
    during turbulent times

Behavioural Finance
  • Anchoring (emotional attachment to a good
    investment) when an investment has done
    especially well, investors become convinced that
    such performance will continue into the future
  • Another thinking trap frequent information or
    peoples tendency to be influenced by what they
    hear most frequently - Headlines become the
    truth and decision making reflects that
  • In a fast-changing world, investor opinion often
    swings rapidly from one extreme to another

Back to Basics
  • Equities are risky asset class
  • Traditionally for the bravest one
  • Importance of fundamental research
  • Investment is emotional process
  • Distance from the favourite stock (for
    investors), distance from favourite project
    (project developers)
  • Disciplined investment process, driven by
    intensive primary research, can unlock long term

  • Mining Equity Finance
  • Where do we go from here?

Change starts from oneself
  • We cannot change reality around us
  • But we can change the way we perceive it
  • Face our faulty perceptions and biased
  • Flight to quality
  • Elephants may not run, but certainly they weather
    the storm better
  • Big caps back in vogue (liquidity, strong balance
  • Death of juniors
  • Am I, really, CEOs in making?
  • Are really our projects world- class deposits
    in making?
  • Is our company really suited for public listing?

Why juniors have fallen out of fashion?
  • Victims of our own success, certainly in the case
  • Too many, too early
  • Too much promise, too much money
  • Far too high expectations
  • Surge of new mining entrepreneurs
  • Surge of new mining experts investors,
    advisors . . .
  • Horde mentality
  • Too much value destroyed, or at the best locked
  • Comparatively little delivered

Traditional Financing Sequence
Financing Sequence
Project Finance
Friends family
Seed investors
Private Equity
Secondary Tertiary . . Capital Raisings
Trade sale
Alternative Financings - Special Purpose
Acquisition Corporation aka shell - Closed
Private Corporation aka private company
Back to Basics - Listing Rationale
  • Access to a greater investor universe
  • Raise larger amounts of money
  • Get a market valuation for the company
  • Create new currency
  • Assist project finance
  • Facilitate acquisitions
  • Benefit from the commodities cycle
  • Provide exit for some shareholders / management
  • Attract quality board / management
  • Create shareholder value

Build a leading mining company