Junior exploration businesses are in a precarious spot in the mining industry. Without revenue or production and in constant need of acquiring capital, their very existence is predicated on the level of enthusiasm that investors have for them. This creates a potent and sometimes treacherous incentive to portray resource information in the best possible light.
In this environment, not speaking can be damaging to a junior mining company. When a company stops issuing news releases, its stock price will fall and its access to funding will decrease. The pressure to continually release information creates a pressure to portray ambiguous drilling information in a positive light, to prematurely release early-stage resource information, and to make comparisons to world-class deposits based on limited information.
The exaggeration in this industry can vary on a continuum, with fraudulent activities at one end of the spectrum, as exemplified by the Bre-X scandal in the 1990s, in which there was salted gold assaying, leading to a loss of considerable investor value. On the other end of the spectrum, there is the use of permissible, albeit optimistic, communication in the selection of positive drill intercepts to be released to the market, or the non-disclosure of negative information in technical appendices, or the categorization of resources as “Inferred” when the underlying data are just barely sufficient.
Regulatory codes, such as NI 43-101 in Canada and JORC in Australia, require that a Qualified Person (QP) sign off on resource disclosures. However, this does not extend to the narrative style or content of the release, and it is in this area that there is considerable room for exaggeration in the release, as it may technically comply with the release requirements while at the same time presenting a misleading picture.
Some old timers in the business go so far as to say that optimism bias isn’t a flaw in the system; it’s the system. Without the promise of extraordinary gains, rational investors would not invest in the highly speculative and capital-intensive business of early-stage mineral exploration. In this view, a certain degree of promotional mania is necessary to keep the exploration engine humming.
The flip-side argument is that as long as hype becomes the norm, wealth transfer occurs from the retail investor to the insider selling into a hype-driven advance. And as trust in the space diminishes, the problem for legitimate companies trying to raise money becomes compounded.
Well-informed investors can protect their interests by analysing several key factors. For instance, does the press release provide actual ore width or simply report drill-hole length? Is there a cut-off grade used in the resource estimate? Are comparisons to major deposits in the past based on equivalent underlying geology? A critical attitude towards vague statements like “world class potential” or “district scale opportunity” without accompanying technical data is justified.
The phenomenon of exaggeration is certainly real and systemic in junior exploration, and it is certainly never dichotomous. The challenge facing the regulatory community, investors, and the mining industry is how to better differentiate between optimism and exaggeration or promotion. Until such time as the funding model is changed, exaggeration will remain integral to the fundamental dynamics of junior mining.
