There are two key themes in small-cap mining at the moment. One is that fund managers are gradually becoming less enthusiastic about parting with their millions, and the other, a more long-running theme, is consolidation. The connection between the two, however, is growing more marked.
Fund managers are becoming increasingly frustrated with holding illiquid shares. This is partly because many are sitting on large paper gains, but know that if they attempt to off-load at the quoted market price, the price itself will drop. And it gets worse. In meeting redemptions, fund managers find it easier to sell the more liquid companies in their portfolios, and these tend to be the better-quality companies. This has meant that over time there has been much furring of the arteries, as decent companies get bought and sold, but the ones that underperform, and trade infrequently, remain on fund managers' books. The Alternative Investment Market (Aim) has never been known for liquidity, but there's still a limit to how much illiquidity a fund manager can stomach.
Many companies get round this by dual listing, either on the Canadian or on the Australian markets, and there ought to be more dual listings in 2008. But more marked, perhaps, will be a relative decline in new issues on the mining side on the Aim market. The recent listing of Central Rand Gold was quite well supported, but although the company wouldn't have looked out of place on Aim, it went straight onto the main board.
Meanwhile consolidation, a theme we highlighted last year, has been very much in evidence in 2007, and ought to continue to be so in 2008. Part of that will be driven by success, but there will be an increasing number of Aim companies who struggle to get re-financed, and who will be pushed into deals. Under those circumstances some of the more canny players in the sector may be able to pick up some bargains.
