Sunday, October 16, 2011

Reading a Gold Mining Company Prospectus

Reading a gold mining company prospectus can be a little daunting if one does not understand the terms or the importance of various factors relating to gold mining and in order to invest in a gold mining company it is important to understand the prospectus issued by the gold company. It is the main document on which one bases a decision to buy or not buy shares in the company and so should be looked at with care and understanding.

A gold mining company prospectus should be professionally presented and clearly written. It should contain a number of sections including:

A Chairman's Letter
The Details of the Offer
The Capital Structure
Information on the board and management
Usually a director’s view of the project or projects
Exploration budgets and programs
An independent geologist's report
A solicitor's report (or sometimes called an independent review of the tenements)
An independent account's report
Information on the corporate governance
The risk factors listed
A glossary of terms and a corporate directory, as well as the application for shares in the company.

A Chairman's Letter
Usually a welcome and introduction to the prospectus with some information about the prospectus, who the company is and what they are doing and so forth.

The Details of the Offer
This should list how many shares are on offer and what the starting price is. Usually a company is seeking to raise a certain amount of capital and this is the favourite way of do so. By offering shares a company can obtain the capital it requires to fund its projects and the shares holders get a share of the profits obtained thereby.

Usually there is a minimum and a maximum number of shares which can be subscribed to and all the shares are what are called fully paid ordinary shares.

There is also an opening date and closing date for the purchase of shares.

Here should be shown the purpose of the share issue. This is normally to raise funds for a number of or a specific project relating to either exploration or mining or both. Specifics should be written. An example of a specific here might be, "To convert gold prospects within the specified tenement (tenement: a specific block of land the company has rights to mine on and in) into advanced mineralised projects with defined mineral resources."

The application must show what the minimum number of shares an individual or company can purchase and a how to apply section should detail this and refer to the application form elsewhere in the prospectus.

Some information regarding types of investors, overseas, local, and some disclaimers regarding taxation and legislation regarding shares and share ownership is often included in this section.

The Capital Structure
The Capital Structure is simply a basic listing of the number of shares after issue. This can include over subscriptions. Here is an example:

Source: Silver City Minerals Limited Prospectus

Board and Management
This should list the board members and any important management figures. There should be a name including any letters after the name. a title such as CEO or managing Director, or director for example.

A short bio of each board member's history such as their profession and where they have worked before should be included. In the gold mining industry you would expect to see at least one experienced geologist. Often there will be more than one.

Also a company secretary financially experienced, preferable in the mining industry although this is not necessary, and certainly should have extensive experience in being a company secretary of listed companies.

A Directors Review of the Project or Projects
This is likely to be the largest section of the prospectus. This should contain extensive detail regarding the actual exploration/mining done and proposed.
Usually it starts off with a company profile. Some information about the company, how it started, its history and so forth. Its rationale and strategy should also be included.

Detailed information about the tenements including the name, title number, how long it lasts if it is a lease. The area of the tenement(s) and the annual commitment in dollars to the tenement. Usually there will be varying types of maps that show the area and tenement in detail in terms of the deposits, lode and other information. The information here should be extensive and detailed and sufficient for a reader to make a good assessment of the potential of the mine in terms of profitability and duration.

Details of exploration activities and the results of these should be specified and any other information, such as other minerals or precious metals found should be mentioned.

How much gold or metal that is expected to be obtained should be clearly stated. That is how much in grams per tone is expected form the ore. How big the lode or lodes are and how much in total is expected to be dug annually and over the life of the mine.

Spread sheets should present all this information in a readable form so that anyone can understand it.

In short, this section should provide all the information about what the company is mining and how and what can be expected as a result.

Exploration budgets and programs
This section should detail how much is to be spent in the various activities, drilling, geophysics (The physics of the earth and its environment), any other exploration and the cost of the IPO, administration costs and working capital for each tenement. There should be a breakdown in spreadsheet form and it should be projected over two or three years.

An independent geologist's report
An independent geologist should report on their findings on the technical information contained in the prospectus. This is to ensure that the prospectus is found to be accurate when it comes to the gold or other metal or mineral mining. The report should be primarily non technical and simply show in detail what was found in the tenement or tenements if there is more than one which is often the case.

A solicitor's report (or sometimes called An Independent Review of the Tenements)
A solicitor's report may or may not be included and is simply to verify the legal authenticity of the company and the legality of the tenements. Does the company actually have rights to mine in the area and so on? Sometimes there are provisions or issues regarding native title and it should be shown that the company has legal rights in relation to mining where these exist.

Detailed information regarding legal issues, titles, renewals of leases etc should be specified here. You want to be certain that the company has full rights to explore, mine and remove ore and minerals from the tenement.

In some countries, such as the African countries, there are also risks in that governments can arbitrarily impose regulations after the company has started production. Zambia is an example where the government has decreed that foreign companies mining in Zambia must relinquish over 50 percent of the shareholding to native Zimbabweans.

An independent accountant's report
The independent accountant's report should detail the financial position of the company as determined on a specific date.

The minimum information that should be offered is, the assets and liabilities of the company in some detail should be outlined with the total equity over a period of years shown. This should include a historical consolidated as well as the scenario for minimum and a maximum subscription.

There should be a statement of the income and the issued capital on the basis of minimum and maximum share issue as well as a pro forma statement of the financial position with the proposed number of shares issued.

If finance is not your strong point it is a good idea to consult with your financial advisor to better understand the financial reports of a company. In any event one should not participate in any share offering without consulting with ones financial advisors.

Information on the corporate governance
Corporate governance is often overlooked in a gold mining company prospectus but it is just as important as the rest of the information given. It concerns how the company is run in terms of strategy, ethics, competence and purpose. This can affect the share price just as much as the profitability of the company or the gold price. What if the company embarks on a different strategy and gives up gold mining? Or is found to be not as competent as was first thought? Or issues with ethics or remuneration, for example.

There should be clear statements regarding the Board structure. How it is laid out, how many directors are there and their duties.

A code of conduct as regards ethics and responsible decision making should be included.

Integrity in financial and board direction reporting is vital and a statement on that should be present.

Having a committed disclosure regime. I.e. if there is anything the shareholders need to know the board has a responsibility to ensure that information is disclosed. Of course this includes respecting the rights of shareholders.

Recognising and managing risk. This is important in a mining company. Health and safety and costs are the two major risk areas and these, poorly executed, can cause additional expense and legal issues for a company.

These are all factors that can affect the share price in the market and need to be well understood by all parties involved.

The risk factors listed
This brings us to risk. General risks encompass exploration and development, development and acquisition opportunities. Also valuation of tenements, Exploration License, Health and Safety and environmental risks to name but a few. The important issue is that the company is aware of such risks and can make and show a good risk assessment and has the capability of handling and reducing the consequences of such risks.

That covers most of the information you will find in a gold mining prospectus. Of course there should also be a glossary of terms and a corporate directory, as well as the application for shares in the company.

The last word on a gold mining company prospectus
One should be aware that the projections of gold mining companies are estimates only and offer no guarantee of profitability regardless of how bright the company and its potentials are expressed. If one has any hesitancy about buying shares in gold mining companies one should stick, instead, to buying gold from gold dealers. There is a wealth of information on buying gold on this website.

Understanding the above will help one to read a gold mining company prospectus and understand what the company is about and if it is a viable proposition for an individual to invest in the company through the buying of shares.

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