LONDON () -- Investors would benefit if London's AIM were to see a period of consolidation within its mining sector. Currently, there are too many underperforming companies of insufficient size to be viable in an increasingly high-cost operating environment. This is contributing to the creation of a class of disappointed investors, the existence of which is to the detriment of all AIM-listed mining companies and all their shareholders.
At the root of the problem is that the cost of competing on the global stage for a junior resources company has risen dramatically in recent years. Today's high commodity prices, coming as they do after a long period of low prices that discouraged new entrants to the industry's skilled labour pool, mean that expertise is now at a premium. Essential services are perhaps even more in demand, and therefore expensive, with rising equipment costs also biting hard.
The upshot is that the cost of meaningful project development has now risen significantly. At the same time, financing costs have ballooned, thanks in large part to the indefensibly high level of regulatory protection enjoyed by broking houses and to a clubby climate that discourages competition in the provision of what reportedly is often mediocre service.
A look at AIM's performance last year bears out my point. Last year, companies with market capitalisations in the hundreds of millions of pounds more often that not delivered superior returns to those capitalised at less than one hundred million. The big companies were, by and large, the ones to make investors serious money, confounding conventional stock market wisdom.
Two of AIM's largest stocks by market capitalisation, Yamana Gold [AIM:YAU] and First Quantum Minerals [AIM:FQM], were amongst the best performers. Both companies carry capitalisations of well in excess of one billion pounds, and their shares climbed 66% and 94% over the year respectively. Another example was Aquarius Platinum [AIM:AQP], shares in which advanced 136% over the year and which is almost a billion pound company - hardly the sprightly junior of stock market lore.
Few AIM-listed juniors delivered investors returns like these, and many saw their shares go nowhere, or worse, saddled shareholders with catastrophic losses. Of course the latter cases will inevitably occur somewhere in the junior sector - what is disappointing is the absence of cosmic performers to offset the big losers.
The strong share-price performances of many of the larger AIM-listed mining companies are partly a function of a preference among investors for producers, which in turn is partly a function of a widespread lack of agreement that the metals boom has legs. Hopefully this perception will correct itself in time.
The UK's retail investment community is picayune enough as it is compared to Canada, the U.S. or Australia. It is shame that some small investors' first discouraging experience of the mining sector will be to have lost money on some hopelessly under-funded junior. A wave of consolidation to create some companies with enough funding behind them to take their projects forward in a meaningful way and restore the faith of those investors who have lost money would be nice.