Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Friday, October 11, 2013

The mark of regulatory failure

It isn't news that the market for junior mining companies is bad.

And we all have our reasons for it--ranging from poor performance in commodities in general to extreme and horrifying fears of a general collapse in society into barbarism. But if the latter were imminent, wouldn't we expect to see everything else performing just as badly? The rest of the market isn't great, but it isn't as awful as the junior golds.

After the Bre-X affair (portions of the Bre-X files are here), regulatory officials created a set of regulations to guide technical reports. The goal was to make the type of fraud that Bre-X represented impossible.

Unfortunately, there are still types of fraud that go on in the markets, which are not affected by the regulations.

There are good companies run by competent management, with competent geologists and good properties. Sadly, these are in the minority. There are companies with well-meaning, but incompetent management or poor properties. These are more common. They raise money, spend it properly, but lose your money. Maybe you don't feel so bad because the guys were at least trying.

Then there are the criminals. There are lots of these. The current regulatory regime has eliminated some of them--the ones that manipulated their share prices by faking their sampling results by numerous methods which need not be elaborated here.

But the regulations have done nothing to eliminate the more insidious criminals which run companies purely for the benefit of raising money through share issuances and directing the proceeds to themselves either as salaries or as private billings. Arguably, the regulations have enhanced these companies, because they provide a checklist by which diligient, but criminal, management can maximize their credibility on the markets for a minimum of exploration expense.

If your plan is to raise a whole lot of money in order to pay yourself, the blessing of Canadian market regulators officials gives you the credibility you need to keep at it. Such companies can be called "lifestyle companies"--as they exist solely to maintain the lifestyle of their management.

How did it come to this? The regulations were designed to solve a different problem--one of criminal management expressing its criminality through manipulation or misreporting geological information (although see this). As for the lifestyle companies, as long as they satisfy the various listing requirements, the regulators have plausible deniability, and the exchanges can happily collect their fees.

A lot of money came into the junior mining sector since the advent of the new regulations. A lot of money. And there has been little exploration success to show for it.

The poor performance of the junior exploration sector is a crushing indictment of the regulatory regime in the Canadian markets. The retail investor has judged the NI 43-101 regulations and they have been found wanting.

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