London Calling

London Calling

7th October 2006

Bad AIM

In early 2005, PriceWaterhouseCoopers (PWC) identified a "lack of clarity" in disclosure by the top fifty mining companies listd on AIM (London's Alternative Investment Market. When it came to disclosing their expenditures on early exploration they tended to report these as potential gains, although they might well end up as losses (echoes of the Enron scam ?)

Considering that these companies shelled out a total of US$652 million in expenses during 2004, the concern was real. And, added PWC, some of the projects on which this money was spent would have been rejected in "less buoyant times."

A year later, the UK consultancy, SRK , divulged the results of its own survey on AIM. While claiming that the transparency and accountability of AIM companies was "generally encouraging", this was hardly borne out by the group's findings.

SRK was unable to conduct an exhaustive survey of AIM's top miners: only thirty six corporate documents had been received relating to 47 listings, covering 26 countries and compiled by 19 advisors and 20 brokers, many of which were lacking in basic data, or contained accounting figures which might not have been properly audited. Only half the papers contained resource estimates, while the remainder were early exploration projects where a resource calculation would have been either impossible or "premature". Only four resource estimates and two reserve estimates had been independently assessed, while the remainder came from the mining company itself, or were "historical" figures. Five calculations didnt' even involve a visit to the minesite.

The London Stock Exchange has been worrried about its young brother for some while and promising "reforms". Now, after some recently-listed AIM oil companies chalked up losses instead of expected profits, the LSE is proposing new regulations. But it's hardly throwing the rule book - and, anyway, the provisions will have to be approved by "the market" before being introduced.

What the proposals, don't do, of course, is in any way open to further scrutiny the potential environmental and social impacts of several AIM mining companies which have featured on this site over the past year: notably Archipelago Resources in Indonesia, Monterrico Metals in Peru, and Asia Energy in Bangladesh.

Oh, but that isn't the job of the LSE! Oh, but it should be - if only on the grounds of notifying potential asset risk posed by community resistance and allegations of illegal activity. Archipelago has been accused of proceeding with its Toka Tindung project in Indonesia without a valid permit. As for Asia Energy, its prospective Phulbari coal mine in Bangladesh is on the rocks after the killings of local protestors last month. And now there are claims that its contract was null and void from the outset.

As an investor, you may not care a plugged nickel about what your company does to local people. But when it falls out of the sky for being incompetent, then that's surely another matter altogether. [Sources: PWC "Junior Mines" report, January 2005; "What you read may not be what you get" by Rhona O'Connell, Mineweb, 27 January 2006]

LSE to unveil review of Aim regulations

By David Blackwell

Financial Times

1st October 2006

The London Stock Exchange is to unveil a far-reaching review of the regulatory framework for Aim, the junior stock market that has grown from a few dozen companies to 1,600 since it was launched 11 years ago.

Two main proposals have been made. For the first time, the nominated advisers - nomads - will get their own rule book.

In addition, all Aim companies will be required to display core management and financial information on their websites.

Consultation on the proposed changes will start immediately and last two months.

If market participants agree, the new rules will take effect from the beginning of next year.

Aim has grown rapidly after successfully spreading its appeal beyond the original idea of a market for small, fast-growing UK companies.

It now embraces about 300 companies from overseas, including the US, Israel and China, as well as countries with strong links to the UK such as Canada and Australia.

The LSE and its Aim advisory group have spent several months formulating the plans. Their publication comes as fundmanagers have started to express concern about the quality of the companies arriving on the market.

The concern was reflected in a report last week by Richmond Energy Partners into the oil and gas sector, one of the biggest represented on Aim.

It pointed out that oil companies listed between 2002 and 2004 had delivered average growth of 342 per cent.

But those listed in the past two years had delivered an average loss of 5 per cent, despite higher average oil prices. The report said: "The performance of recent initial public offerings shows that the quality has become much more variable and investors need to be more selective about the companies they invest in."

The key to the lighter regulatory touch at Aim is the reliance of the LSE on its 80 or so nomads, who bear responsibility for the quality of the companies coming to market. Until now, the nomads' responsibilities have been reflected only in the rule book for Aim companies.

Now the LSE is proposing to combine existing criteria for acceptance as a nomad with elements of the Aim company rule book, which codifies best practice.

At the same time it will require all Aim companies to publish on their websites up-to-date financial information as well as allowing investors easy access to historical information, such as the admission document. More than 10 per cent of Aim companies, many of them cash shells, do not yet have a website.