The Market Response to Exploration, Resource and Reserve Announcements by Mining Companies:

Australian Data

Ron Bird*Matthew Grosse**Danny Yeung***

AbstractThis is the first paper to study the market response to JORC

compliant announcements made by Australian mining firms. Results from an event study based on matched firms suggest that these announcements are highly value relevant, with the market reacting in a significantly positive way to both exploration and resource announcements. Larger abnormal returns are found to accrue to smaller firms, firms that use positive adjectives in the announcement headline, and where the announcement implies larger percentage increases in resource levels. We also find evidence of markets anticipating both exploration and resource announcements a few days before they are released which may be suggestive of some insider trading.

Key Words: Resource industry, market reaction, event study, mining firms.

* Paul Woolley Centre for Capital Market Dysfunctionality, School of Finance & Economics, University of Technology Sydney Quay Street Haymarket NSW 2007 Australia and the Finance Department, School of Management Waikato University, Hamilton 3240 New Zealand** School of Accounting, University of Technology Sydney Quay Street Haymarket NSW 2007 Australia*** * Paul Woolley Centre for Capital Market Dysfunctionality, School of Finance & Economics, University of Technology Sydney Quay Street Haymarket NSW 2007 Australia

The Market Response to Exploration and Reserve Announcements by Mining Companies: Australian Evidence

1. Introduction

We undertake the first empirical investigation into how share prices react to exploration, resource, or reserve announcements made by Australian mining firms. Exploration, resource and reserve announcements are defined by the Joint Ore Reserve Committee (JORC) and contain data that is important to mining firms, as they provides important insights into the company’s future geological asset base. We believe that it is important to gain a better understanding of how the market reacts to the release of this information, particularly in Australia where the mining industry represents a very important component of the economy1.

Ferguson et al., (2011a) suggest that the successful evaluation of exploration and mining firms requires that investors and equity analysts go beyond their comfort zone of financial statements, and into the analysis of complex geological reports that include metal purity levels, drilling intercepts and geochemical composition that may be difficult to decipher, leaving them incapable of effectively valuing these firms. As a consequence relevant signals released by mining firms may not be appropriately assimilated into the market price by investors. It is suggested in this paper that for the majority of pre-production mining companies, the most important corporate announcements released to the market involve the release of information relevant to the estimation of their mineral resources and ore reserves. Event studies conducted show investors quickly respond to these announcements released by mining firms, and that exploration and resource announcements are highly value relevant for exploration firms.

Key findings from this paper show that firms releasing exploration or resource announcements experience a significantly positive abnormal return of between 2.05% and 3.24% over the period from 10 trading days before the announcement to 20 trading days after the announcement. 1 In the Appendix we provide a short discussion of the importance of the mining industry with particular concentration on its importance to the Australian economy

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These results confirm that the release of this information is generally considered by the market to be good news. Significant abnormal returns are witnessed in the t-3 to t-1 window, showing a level of price anticipation of the exploration or resource results being announced, although to some extent this may be confounded by the market reaction to previous announcements. Our findings suggesting anticipation of announcements may be interpreted as being consistent with Poskitt (2005), who hypothesises that exploration stocks are likely to be prone to insider trading.

Regression results used to explain the cross sectional variation in returns at the time of an announcement suggest that exploration announcements released with an eye-catching headline containing positive adjectives are associated with larger abnormal returns. This finding is consistent with textual analysis studies undertaken by Loughran and McDonald (2010) who find that the language used by management in announcements has an impact on abnormal returns. One explanation for the favourable reaction to the positive language is that mining firms often use their disclosures as a vehicle for self-promotion (O’Shea et al (2008).

Our results differ to prior research in the Oil & Gas literature which finds that there is little or no association between reserve disclosure and share price, as investors do not react to management’s estimate of future reserves (Clinch and Magliolo 1992). Our results show a positive price response to exploration and resource disclosure, and further evidence of a positive relationship between the announced percentage increase of a firm’s resource base and the abnormal returns.

The structure of the paper is as follows. In Section 2 we summarise the limited capital market publications dealing with the mining industry and sets out predictions for the variation in announcement effects. In Section 3 the data sources and methodology used in this study are discussed. Section 4 presents the empirical results of how the market reacts to exploration, resource and reserve announcements. Section 5 provides us with the opportunity to summarise the results and suggest opportunities for further research.

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2. Prior Literature and Predictions

A review of the literature reveals a surprisingly small number of market-based studies using data from the mining industry. In fact, to our knowledge there are no studies that have examined the market reaction to the release of geological results by mining companies. However several studies have highlighted the importance of non-financial disclosure to mining firms. Ferguson et al. (2011b) document that exploration firms have significantly different operational and financing characteristics than similar sized non-resource firms, including lower profitability and higher information asymmetry. Ferguson et al. (2011a) show that non-financial information has greater value relevance to mining firms than financial information when it comes to predicting firm failure. Exploration, resource and reserve announcements are the potentially the most value-relevant disclosures made by mining firms, and to date have not been the subject of empirical research.

The literature has also emphasized a need for greater understanding of the effects of announcements in the mining sector. Several studies have shown that announcements by mining firms can have significant second order effects. Ferguson and Crockett (2003) investigate the information transfer effects when a major discovery by one miner impacted the market value of miners with nearby exploration tenements. The firms impacted mostly were those that got the most press coverage at the time, but these firms subsequently experienced the greatest underperformance. Brown and Burdekin (2000) using event study methodology found that the spectacular fraud and subsequent failure of Canadian explorer Bre-X in 1997 resulted in a large drop in value across the whole Canadian mining sector, but particularly for small miners. Magness (2009) also used event study methodology to examine the impact of an environmental accident at the Placer Dome mine on the market value of other Canadian mining companies. The impact of the disaster caused an overall decline in the value of mining companies, but was less for companies with environmentally-conscious management.

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Oil & Gas Literature

The most voluminous literature on firm disclosure within the extractive industry undoubtedly lies in studies of the accounting reporting requirements for oil and gas companies. Studies by Magliolo (1986), Harris and Ohlson (1990) and Berry et al (2005) found little or no association between the release of additional information required by the FASB on the value of proven oil and gas reserves and security prices. Clinch and Magliolo (1992) proposed that this weak association is due to investors putting much greater weight on the less encompassing but more substantive production numbers, indicating an unwillingness to act on estimates provided by management.

The institutional setting in which our study takes place, differs in key areas to that which underpins the U.S. Oil and Gas literature. As the majority of the firms in our sample are non-producers, investors will be unable to act on production numbers, leaving estimates of resources as the most significant piece of value relevant information disclosed. Additionally, the JORC code regulating resource estimations is standardised, which is expected to increase the confidence investors have in acting on the estimates provided by management. With these key differences in mind, it is hypothesised that the JORC compliant mining exploration, resource and reserve announcements will be associated with a large, positive abnormal return on the announcement day, which differs from the weak value relevance found in the US oil and gas literature.

It is important to be mindful that that there are a number of factors that made an examination of announcements by mining companies significant different to announcements by firms in other sectors. The remainder of this literature review will outline some of the other issues and factors that must be considered in a study of announcement by mining companies.

Pre-Announcement Anticipation

Poskitt (2005) recognised the important distinction between exploration firms and producing firms, and hypothesised that exploration firms would be more likely to be engaged in insider trading violations than producing firms. Findings supported this belief, showing an

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increased chance of insider trading occurring amongst smaller exploration firms. Geological results typically pass through many hands both within, and often outside a firm before being compiled and released to the public. As a consequence there is an increased likelihood of insider trading within exploration firms, therefore we expect to observe a pre-announcement anticipation of results in the event window prior to the event.

Hype

O’Shea et al (2008) found that the more frequent the disclosures made by small Australian mining companies, the greater the volatility of their shares. This led them to conclude that disclosure was often used to influence the market via repetitive announcements, or to engage in self-promotion rather than for the actual provision of information. Ferguson and Scott (2011) also investigate the self-promotion of mining firms, and find that resource presentations at conferences and mining clubs lead to short term significantly positive share price returns. Positive returns are observed despite no new information about the firm being provided to the market in these presentations. The results were broadly consistent with the spin hypothesis which proposes that when firms hype good news it will lead to a temporary increase in price which will be maintained until the release of additional evidence that allows correct inferences to be made (Ferguson and Scott 2011).

Our expectations are that some managers may use the release of exploration results to draw attention to their firm in a similar vein to that suggested by O’Shea et al (2008) and Ferguson and Scott (2011). While the precise JORC definition of exploration results is detailed in a following section, it is important to note that exploration results are preliminary estimates, and are not easily quantifiable. As such the ability to judge if exploration results are positive or negative is very difficult for the common investor. Managers may use the announcement headline to hype the announcement with the inclusion of positive adjectives. Examples of hyped headlines include ‘brilliant’, ‘outstanding’ or ‘bonanza results’, rather than the more common and plain usage of ‘drilling results’ or ‘exploration update’ as the headline. The link between managers’ word choice and abnormal returns has been shown to exist in

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Loughran and McDonald (2010) and other textual analysis studies which show that investors are sensitive to the tone of words used in financial reports. Additionally, Solomon (2011) empirically shows a positive link between the use of spin by firms hiring investor relations firms and abnormal returns surrounding announcements. In the absence of easily quantifiable data being announced, it is expected that the use of positive adjectives in the headline of the exploration announcements will be associated with larger positive abnormal returns.

Resource Estimates

Firms are required under JORC to provide resource estimates which are defined as having a ‘reasonable level of certainty regarding future extraction’. It is possible to calculate the increase in the firm’s resource base associated with each announcement. In the studies of oil and gas literature no association was found between resource size and returns due to the fact that resource levels alone do not take into account of; the different economic characteristics of the deposit, the risk associated with extraction, the time required before the project can be undertaken and numerous other technological and political risk factors (Spear, 1994). However JORC has stricter requirements as to how the level of resources is to be measured and so we would expect to see a positive correlation between the magnitudes of any resource increase extracted from an announcement and the realised level of abnormal returns.

Other Influencing Factors

Other factors that we would expect to impact on how the market reacts to announcements by mining companies include firm size and the frequency with which the firm makes announcements. Firm size is expected to be negatively associated with abnormal returns, with smaller firms having more to gain from the announcement of new exploration or resource results. Small firms will often only have a single project underway, and the announcements will result in a substantial resolution of information asymmetry relative to larger firms that may have more projects underway. Firms that have not made any exploration or resource announcements recently will be releasing more new information to the

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market, leaving scope for larger price rises. Thus we would expect a negative relationship between the frequency with which a mining firm makes announcements and the impact of the announcement on the firm’s stock price.

3. Data and Methodology

Definition of the Event

Australia has a well-structured and reliable system for the reporting of exploration results to investors which facilitates the use of event study methodology. The reporting framework that governs announcements made by firms listed on the ASX requires that companies operate under a regime of continuous disclosure. Under this regime, an entity must immediately inform the ASX of any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities (ASX, 2009). The announcements made by mining companies are subject to a code of disclosure established by the Joint Ore Reserve Committee2.

The JORC code was first released in 1989, with the latest edition being finalised and included in the ASX listing rules on the 17th December 20043. Since that date Appendix 5A of Chapter 5 of the ASX requires listed companies to prepare exploration results, mineral resources and ore reserves estimates in compliance with the JORC code. This code states that a company must disclose to the market any relevant information concerning a mineral deposit that could materially influence the economic value of that deposit, and a company must promptly report any material changes in its mineral resources or ore reserves (JORC 2004). Thus these announcements should contain information relevant to the pricing of the underlying securities.

2 This is a joint committee of the Australian Institute of Mining and metallurgy, the Australian Institute of Geoscientists and the Mineral Council of Australia.3 A recent review of the adherence to the JORC Code undertaken by the ASX found 6% non-compliance with the main failure being the absences of competent person compliance statements.

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Data Collection

The dataset used in this study uses JORC compliant exploration, resource and reserve announcements from ASX listed firms between the 17th December 2004 and 31st December 2008, this sample period is chosen to comply with the current regulatory system, as the pre 2004 JORC code provided a different framework for reporting. The JORC compliant announcements were obtained from SIRCA using a company announcement (Signal G) keyword search over the 2004 - 2008 period. The keyword used was ‘JORC’ as each announcement is required to include a statement to the effect that the report has been compiled in a JORC compliant manner. The announcements were assigned to one of three categories: Exploration Results, Mineral Resource and Ore Reserves. These categories are clearly defined in the JORC code, as explained in Figure 1. As the three stages are unique stages in the exploration lifecycle, it is important that each stage be studied as separate corporate events.

Data required for the event study and regressions was sourced from DataStream, from which we obtained daily prices, market capitalisation, turnover, market to book ratios, daily bid and ask prices and Level 6 Industry Classification Benchmarks (ICB) for all ASX listed mining companies over the sample period from 2004 to 2008 which are required given the need to choose matched firms. The ICB is a company-classification system for stocks by industries which was developed by Dow Jones and FTSE (ICM, 2009). In total, our sample companies are spread over 11 different industry categories with the most frequent being General Mining, Gold Mining, Nonferrous metals and Iron classifications. This code is used as the basis for matching companies which is an important part of our event study methodology as explained in a subsequent sub-section. Firm age and operating revenue was sourced from FinAnalysis. Data relating to the size of the resource announced, and prior firm resource levels was hand collected from the resource announcements.

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Figure 1: The 3 levels of mining firm announcements (Source: JORC 2004)

Descriptive Statistics

Descriptive statistics for each of the three categories of announcement are reported in Table 1.

Exploration Result Announcements

Exploration result announcements are defined by the JORC Code as “including data and information generated by exploration programmes that may be of use to investors” (JORC, 2004, p. 8). The data made available is generally insufficient to allow any reasonable estimates of the extent of the mineral resources. Examples of exploration results include results of outcrop sampling, assays of drill-hole intercepts, geochemical results and geophysical survey results. Exploration results are announced to the market as they become available to the firm. As such there is no forewarning of the dates on which these announcements will be made.

A sample of 1,378 exploration announcements was found consisting of drilling results, assays and other eligible announcements, with announcements coming from 307 unique firms. The frequency of exploration result announcements as shown in Table 1 was found to be increasing over the sample period, consistent with previous evidence which stated that the level of exploration tends to increase with commodity prices (Mohn 2008).

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As exploration results are the first stage in the discovery of a minable resource, the firms making these announcements can often be characterised as having low market capitalisations, poor liquidity and are relatively young firms4. The summary statistics show that the median market capitalisation of firms announcing exploration results is a tiny $33.3m. and that the median number of days on which a stock included in our sample trades is 23 days during the 31 day event window.

Mineral Resource Announcements

The JORC code defines mineral resources “as a concentration or occurrence of a mineral of intrinsic economic interest in or on the Earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge” (JORC, 2004 p. 10). As such, the reporting of a mineral resource will be made after sufficient exploration has been carried out to provide the firm with a reasonable level of confidence that they will proceed to the extraction stage.

We identified 678 mineral resource announcements made by 272 unique firms. As with the exploration sample, we find that the frequency of resource announcements increased over the sample period during which commodity prices were increasing. As mineral resource announcements are made at a later stage in the life cycle of a mining firm than exploration announcements, firms issuing resource announcements are likely to be larger. This is confirmed by the information contained in Table 1 which shows that companies making mineral resource announcements have a median market capitalisation almost twice that of companies making exploration announcements.

4 Kreuzer et al. (2007) found that the average market capitalisation of 179 Australian exploration and mining IPO’s undertaken between 2001 and 2006 was only $4m, with many of these Exploration Announcements being made by companies early in their life cycle.

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Table 1: Sample Selection & Descriptive StatisticsExploration Resources Reserves ASX300 as at 13/12/2008

Sample Selection:Initial Sample of Announcements: 1378 677 99 -Removed obs that failed liquidity requirement 118 53 15 -Final Total Observations 1260 624 84 -

Observations by Year: -2005 133 96 182006 265 124 15 -2007 441 168 21 -2008 421 236 30 -

Unique Firms: 317 278 60 300Market CapitalisationMean $194.56 $936.12 $930.05 $3157.3Median $33.37 $57.09 $201.83 $440.8Min $1.66 $2.03 $9.06 $25.7Max $43,169.09 $70,966.31 $14,595.13 $99507.7Std Dev $1,400.10 $6,323.72 $2,197.13 $9,057.50

# Trading DaysMean 22.2 25.3 25.5Median 23 27 26Std Dev 5.9 5.7 4.2

Table 1 reports the basic statistics for the sample of Joint Ore Reserve Committee (JORC) announcements over the sample period of 2004 and 2008..From the initial sample of announcements, we removed observations that failed the liquidity requirement, firms were required to have traded on at least 50% of trading days in the event window to ensure liquidity. Market Capitalisation is reported in $Millions. Trading days refers to the number of days on which the mining companies’ stocks were traded in the announcement period.

Ore Reserves Announcements

An ore reserve “is the economically minable part of a measured and/or indicated mineral resource” (JORC, 2004 p. 14). Before announcing an ore reserve, appropriate assessments and studies must have been carried out, including being justified on economic and other grounds. As ore reserve announcements are only made after resource announcements have been made, and significantly more research and exploration has been conducted. Ore reserve announcements are made much more sparingly as they are indicative that the company has mining production in mind. As a consequence, there were only 99 Reserve announcements made during the sample period by 46 unique firms. As these announcements are made much later in the life cycle of a mining company, the summary statistics show that firms making reserve announcements are on average almost four times larger than resource announcing firms and six times larger than exploration announcing firms. The reported statistics further show that reserve announcing companies’ trade slightly more frequently than companies making exploration or resource announcements.

Event Study Methodology

An event study methodology has been used to determine the stock price reaction over a period of time straddling the JORC compliant announcements. The time period over which we report in this paper is from 10 trading days (i.e. two weeks) days before the announcement to 20 trading days (i.e. four weeks) after the announcement5.

Barber and Lyon (1997) developed a methodology for conducting event studies, based on matching each firm subject to an event (e.g. making an exploration announcement) with a similar firm not subject to the event. An industry based matched firm methodology is expected to be the most suitable market model for conducting an event study in the mining industry due to the return characteristics of mining firms differing from broader market returns (Ball and Brown 1980) (How 2000). Additionally, Tufano (1998) and Twite (2002) have both found a strong correlation between mining company stock returns and underlying

5 We also investigated other event windows which did not provide any insights different to those reported in this paper.

commodity prices, thus matching is conducted within the same level 6 Industry Classification Benchmark (ICB) groups, to control for commodity price effects. The ICB level 6 classifications segregate firms based upon the general commodity in which they deal, allowing an announcing gold explorer to be matched to another gold explorer. The matched firm chosen was the closest size matched firm within the same ICB level 6 classification that traded for a minimum of 10 days over the event period.

The abnormal return (arit) for “event” stock i on event date t is then calculated each day by subtracting the return on that day for the matched firm (rmt) from the return of the “event” firm (rit):

arit = rit - rmt

(1)

The average abnormal return (ARR) on a portfolio of n stocks for event day t is the equally weighted average of the abnormal returns:

ARRt = it (2)

The cumulative adjusted aftermarket performance from event day q to event day s is the summation of the average adjusted returns:

CARq,s = t (3)

Following the method used in Ritter (1991) the t-statistic for the cumulative average abnormal return on day t, CAR q,s is calculated as:

CAR t-statistic = CAR q,s* t / {[(q-s) * var + 2 * ((q-s) - 1) • cov]^1/2}

(4)

where Nt is the number of observations, q-s represents the amount of days between event day q and event day s. Var is the average cross-sectional variance over q-s days. cov is the first-order auto covariance of the ARt series.

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4. Results

Event Study ResultsEvent studies of stock returns around the date of an exploration, resource or reserve

announcement are summarised in Table 2.

Table 2:Matched Firm adjusted abnormal returns by announcement typeEvent Window Exploration Resource Reserve

CAR CAR CAR-10/+20 3.241%*** 2.058% 2.997%-10/-1 0.949% 1.438%* 2.313%-3/-1 0.844%** 0.965%** 0.086%0 2.831%*** 2.492%*** 0.826%0/+1 1.880%*** 1.870%*** 0.285%+2/+20 0.411% -1.250% 0.399%

Table 2 presents the CAR calculated as per equation 3 over various event windows surrounding the announcement of exploration, resource and reserve estimations. Tests of whether the CAR is significantly different from 0 are reported using student t-tests adjusted for cross sectional variance and autocorrelation as per equation 4. The notations ***, ** and * represents statistical significance at 1%, 5% and 10 % level respectively

Exploration Results

Exploration results reported in Table 2 and Figure 2 indicate that the market responds in a significantly positive way to exploration announcements, with a 2.81% abnormal return observed on the day of the announcement, and a 3.2% abnormal return over the full 31-day window. As noted previously the announcement of exploration results are made early in the firms life cycle at a time when it is not possible to estimate the economic value of what has been identified. Any exploration results increasing the amount of a commodity expected to be found in a tenement is undoubtedly positive in terms of its implications for extending the commodity base of the company; however, it is not possible to identify how the announcement rates relative to the market’s expectations. Encouragingly, the concerns of Czernkowski and Ferguson (2006) do not seem to be an issue, despite the announcement containing highly technical data, the market has responded in a significant and positive manner in a timely fashion, with no significant reversion, or drift (in unreported tests, longer event windows have been examined, with no significant drift or reversion being observed post announcement). Additionally, Poskitt’s (2006) view that exploration firms are likely to be subject to increased insider trading appears to have support as the pre-

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announcement abnormal CAR is statistically significant when measured over the three days (0.844%) prior to the announcement. These findings support the existence of a significant anticipation of the announcement.

Figure 2 Cumulative abnormal returns for Exploration Results

Figure 2 displays the cumulative average abnormal returns for the sample of exploration announcements. The announcement day is denoted as t. The event window stretches from 10 day prior to the announcements {t-10} to 20 days post announcement {t+20}.

Resource Results

Resource announcements are made at a time when sufficient exploration has been undertaken to be confident that a commercially viable prospect has been identified. Such an announcement is undoubtedly positive in that it suggests that this prospect will make a positive contribution to the company’s value. Of course, we do not know whether the announcement provided any new information and how it compared to the market’s expectations. The markets response to resource announcements is presented in Table 2 and Figure 3. A significantly positive abnormal return of 2.492% is observed on the announcement day, with a 2.058% return being observed over the full 31 day (-10 to +20) window. These results are broadly similar to the results obtained in the exploration sample, with a large, timely response in share price to the announcement. Again significantly positive anticipation is observed, with a 0.965% return in the -3 to -1 period suggesting that insider trading may be occurring as information is leaked in the days prior to the announcement.

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Figure 3 Cumulative abnormal returns for Resource Results

Figure 3 displays the cumulative average abnormal returns for the sample of Resource announcements. The announcement day is denoted as t. The event window stretches from 10 day prior to the announcements {t-10} to 20 days post announcement {t+20}.

Reserve Results

Ore reserve announcements represent the end of the exploration process, when all of the work has been undertaken to proceed to extraction. The fact that we have only been able to identify 99 announcements over a four year period indicates just how rare they are in comparison to resource or exploration announcements. As seen in the descriptive statistics, the median company making a reserve announcement is much larger than the median firm making a resource announcement. Table 2 and Figure 4 display reserve announcement results. There is a positive, yet statistically insignificant abnormal return on the announcement day, with no significant returns observed during the event window. As such it would appear that very little new information is provided by the majority of reserve announcements. This is not all that surprising as a reserve announcement is an economically viable estimate based on the resource estimate of a firm, and as such there is a significant overlap between reported resource estimates and subsequent reserve estimates. This could mean that very little new information is uncovered in the majority of reserve announcements, as the market is able to estimate the reserves based on prior resource announcements. Additionally reserve announcements are often preceded by the company seeking funding during which time feasibility studies and

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other important information might be disseminated. Thus there is less surprise surrounding reserve announcements compared to exploration and resource announcements.

Figure 4 Cumulative abnormal returns for Reserve Results

Figure 4 displays the cumulative average abnormal returns for the sample of Reserve announcements. The announcement day is denoted as t. The event window stretches from 10 day prior to the announcements {t-10} to 20 days post announcement {t+20}.

To summarise the event study results, the market has responded in a positive and significant way to the release of exploration and resource disclosures by Australian mining firms. Abnormal returns in excess of 2% on the day of the announcement suggest that unlike findings in the oil and gas literature (Berry et al. 2005, Clinch and Magliolo 1992), JORC compliant exploration and resource announcements are clearly value relevant. The market has been able to quickly respond to these announcements, which suggests that despite the highly technical nature of the reports, investors are still able to quickly evaluate and react to the information content. Exploration and resource announcements experience significantly positive pre announcement returns, with the anticipation of announcements being possible evidence of insider trading. The results are consistent with Poskitt (2005) who outlines reasons suggesting that exploration firms are more likely to be subject to insider trading breaches.

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Other factors influencing abnormal returns

Multivariate analysis was conducted to provide additional insight into the cross sectional variation of the abnormal returns. This was done by regressing announcement day abnormal returns on a combination of test variables and firm controls. The full structural model used on the exploration announcement sample is specified in equation (5), while the model used on the resource announcement sample is specified in equation (6). Due to the insignificant abnormal returns and small sample size of the reserve sample, no regressions are run on that sample.

Exploration Sample:

(5)

Resource Sample:

(6)

Where: CARi,t is the cumulative abnormal return of firm i at time t calculated as per equation 3. POSADJi,t is a binary variable equal to 1 for an announcement headline containing positive adjectives6. DSE is a binary variable equal to 1 if the firm is a development stage enterprise, defined as an explorer with revenues totalling less than 5% of their market capitalisation (Ferguson et al. 2011b). AGE is a count of days between firm listing date and announcement date. CRB proxies for commodity price sentiment as measured by the percentage change in the Commodity Research Bureau (CRB) index from 20 days before the announcement day to 1 day prior. SIZE is the natural logarithm of the market capitalisation of firm i 10 days before the announcement. MB is the natural logarithm of the market to book ratio of firm i 10 day days before the announcement. TO is the natural logarithm of the average turnover of the firm in the 10 days prior to the announcement. SPREAD is 6 For a list of positive adjectives used for classification, and examples of announcement headlines, refer to Appendix 1.

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the average bid/ask spread divided by price to capture any bid-ask bounce in the period 10 days prior to the announcement. ANN is a binary variable set to 1 if the firm has made an exploration related announcement in the prior 90 days. INIT is a binary variable set to 1 if a firm is making its first resource announcement. RESINC is measured as the percentage increase in resource level from the current announcement relative to any previously announced resource level.

Exploration AnnouncementsTable 3 reports the results from the estimation of the ordinary least

squares equation (5) for the exploration announcement sample. As predicted, and in accordance with Solomon (2011) and Loughran and McDonald (2010), the use of positive adjectives in the announcement headline has a positive and significant impact on the exploration announcement abnormal returns. The fact the information provided does not enable an exact quantification of the exploration results creates a difficulty in determining whether announcements containing positive adjectives reflect either better geological results or the use by firms of catchy headlines for self-promotion purposes (O’Shea et al. 2008). However the insignificance of the POSADJ variable in the resource sample suggests that when results are easily quantifiable, there is no association between word usage and returns. This result provides an interesting insight into the regulation of exploration results with managers being confined in their ability to report geological data, but being free to describe the results as they like.

Also of significance in model (5) is the momentum of resource prices captured by CRB, suggesting that when resource prices are appreciating during the period leading up to an announcement, that the abnormal return attached to the announcement is likely to be lower in magnitude. This is likely to be due to the higher returns experienced by the matched-firm when commodity prices are escalating; resulting in smaller abnormal returns being measured. Consistent with previous predictions, smaller firms are also found to have significantly higher abnormal returns. This reflects that smaller firms are likely to have fewer projects in development and so a positive exploration announcement has a significantly greater impact on the value of the firm. Finally firms that

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experience higher market turnover in the period immediately prior to making an announcement enjoy a larger market response to the exploration announcement, which suggests that firms that receive more attention are more likely to have the new information traded on.

Resource AnnouncementsTable 3 also reports results from the estimation using ordinary least

squares equation (6) for the resource announcement sample. As resource announcements are easier to quantify, the use of positive adjectives in the headlines is much less common, and as such this sample does not see a significant response to the use of positive adjectives. It is much more common for resource announcement headlines to read ‘resource increase 75%’ or ‘resource doubles’, with the variable RESINC capturing the increased resource base that has been announced. The positive coefficient attached to the RESINC variable although not statistically significant is large and an interesting finding given the relatively small sample size. It is also suggestive that there may be a more direct relationship between the reported increase in resources and the share price movement than was found to be the case in the oil and gas literature. Spear (1994) explains that resource and reserve volumes alone are inadequate in measuring a company’s exploration success or value. Resource amounts alone do not take into account the different economic characteristics of the deposit, purity of the mineral, risk of extraction, the time required before the project can be undertaken and numerous other technological and political risk factors. Thus it was often found in the oil and gas literature that the size of reserves and reserve increases did not directly translate into predictable share price movements.

INIT is a dummy variable capturing the first time a miner makes a resource announcement. It is expected that a firm’s first announcement will resolve much of the existing information asymmetry and thus it can be seen as a positive landmark for the firm, as such the predicted relation is positive. This is confirmed in our findings that there is a significant positive relationship between the initial resource announcements and the abnormal returns realised on the announcement day. Finally, in results similar to model (5), the CRB control variable is negatively significant in model (6). We believe this is due to the higher returns experienced by the

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matched-firm when commodity prices are appreciating resulting in a smaller abnormal return being measured.

Overall the multivariate results are broadly consistent with expectations. Firms that experience the highest abnormal returns after announcements are smaller firms, firms making their first resource disclosure, firms that use positive adjectives in the headline and those that are announcing large increases to their resource level.

Timing of Announcements

We initially outlined the belief that firms that have not made any exploration or resource announcements recently could be releasing more new information to the market, leaving scope for larger price changes. Thus we expected a negative relationship between the frequency with which a mining firm makes announcements and the impact of the announcement on the firm’s stock price. The regression results in table 3 report the expected negative coefficient; however no statistical significance is attached to the finding. Table 4 reports the results of Exploration and Resource announcements conditional on whether an announcement had been made in the prior 20 days.

It would appear that the market reaction to an exploration announcements is unaffected by the release of another exploration announcement with the previous 20 working days. The same finding applied to the market reaction to resource announcements in terms of the market reaction both at the time of the announcement and during the post-announcement period where the patterns of price adjustment are unaffected by whether there had been a prior announcement or not. The one instance where we do see a prior announcement making a difference is in the reaction to resource announcements in the period immediately before the information release. This may reflect that during this period we are picking up some of the continuing reaction to the prior announcement

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Table 3:OLS regression of Day 0 Abnormal Return on Firm Characteristics and Announcement DetailsExploration Regression Resource Regression

Equation (5) Equation (6)Coeff. t-stat Sig. Coeff. t-stat Sig.

(Constant) .048 2.822 .005 -.014 -.613 .540

POSADJ .021 3.340 .001 .004 .272 .786

DSE -.001 -.052 .958 .010 .856 .392

AGE .000 .348 .728 .000 .937 .349

CRB -.112 -2.215 .027 -.145 -2.330 .020SIZE -.017 -5.328 .000 .002 .737 .462

MB .001 .289 .773 -.001 -.144 .886

TO .008 3.907 .000 .002 .845 .399

SPREAD -.053 -.916 .360 .039 .500 .617

ANN -.004 -.581 .562 -.001 -.111 .912

INIT .018 1.844 .066

RESINC .002 1.445 .149

Adj R2 .044 .003

F 5.890 1.158

Table 3 reports the results of the Ordinary Least Square regression on the announcement day abnormal returns. For the sample of Exploration and resource announcements, we regressed the equation (5) and equation (6) respectively:

(5) (6)

Where: CARi,t is the cumulative abnormal return of firm i at time t. POSADJi,t is a binary variable equal to 1 for an announcement headline containing positive adjectives. DSE is a binary variable equal to 1 if the firm is a development stage enterprise defined as an explorer with revenues totalling less than 5% of their market capitalisation. AGE is a count of days between firm listing date and announcement date. CRB proxies for commodity price sentiment as measured by the percentage change in the Commodity Research Bureau (CRB) index from 20 days before the announcement day to 1 day prior. SIZE is the natural logarithm of the market capitalisation of firm i 10 days before the announcement. MB is the natural logarithm of the market to book ratio of firm i 10 day days before the announcement. TO is the natural logarithm of the average turnover of the firm in the 10 days prior to the announcement. SPREAD is the average bid/ask spread divided by price to capture any bid-ask bounce in the period 10 days prior to

the announcement. ANN is a binary variable set to 1 if the firm has made an exploration related announcement in the prior 90 days. INIT is a binary variable set to 1 if a firm is making its first resource announcement. RESINC is measured as the percentage increase in resource level from the current announcement relative to any previously announced resource level.

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Overall we would conclude that based on the regression results and subsequent event study, the timing of announcements does not have a substantial impact on the market reaction to exploration and resource announcements. Some firms may release regular exploration updates, consistent with O’Shea et al (2008) to try and build momentum in their share price and keep their firm in the spotlight, while others will release results in a slower and less regular fashion resulting in a larger resolution of information asymmetry and price movement upon release, with these two explanations averaging out. Another interpretation of our findings is that there is only very limited evidence of our overall findings being contaminated by the release of information in the period immediately prior to the one for which we are gauging the market reaction. However the evidence that we do have suggests that for resource announcements some of the anticipation of the announcement may be explained by a reaction to a previous announcement which would bring into question whether there is any significant anticipation of these announcements.

Table 4: Exploration and Resource Results subsequent to prior announcements.

Exploration ResourcesAnnouncement

in prior 20 days

No announcement

in prior 20 Days

Difference Announcement in

prior 20 days

No announcement

in prior 20 Days

Difference

Event Window

CAR CAR CAR CAR

-10/+20 1.12% 2.52%* n.s. 8.18% 1.19% n.s.-10/-1 1.02% 0.27% n.s. 5.66% 0.16% **-3/-1 0.59% 0.51% n.s. 6.18%* 0.37% **0 2.81%*** 2.71%*** n.s. 3.73%* 2.53%*** n.s.0/+1 1.94%** 1.82%*** n.s. 1.15% 2.42%*** n.s.+2/+20 -1.84% 0.44% n.s. 1.37% -1.39% n.s.Table 4 compares the CAR from 2 subsamples of the data; namely announcement with prior announcement in last 20 days (contaminated) and announcement no prior announcements (uncontaminated). Tests of whether the CAR is significantly different from 0 are reported using student t-tests adjusted for cross sectional variance and autocorrelation as per equation 4. The notations ***, ** and * represents statistical significance at 1%, 5% and 10 % level respectively.

Figure 5 Cumulative abnormal returns for Exploration and Resource results conditional on an announcement being made in the prior 20 days.

Figure 5 displays the cumulative average abnormal returns for the sample of Exploration and Resources announcements, conditional on whether an announcement was made in the prior 20 days. The announcement day is denoted as t. The event window stretches from 10 day prior to the announcements {t-10} to 20 days post announcement {t+20}.

5. Summary Conclusions

We made the point earlier that there appears no way of determining in advance the markets expectation as to the information content of exploration announcements by mining companies. Our proposition is that the market will respond in a positive way to the exploration, resource and reserve announcements by mining companies as we believe that they are akin to good earnings announcements made by non-mining companies. Our findings confirm the importance of these announcements to investors as the market responds very positively to the release of both exploration and resource announcements. Our inability to detect any market response to reserve announcements may simply reflect that our sample size is inadequate to unearth any relationships. Alternatively, it may be that all that reserve announcements do is affirm information that is already in the market place due to the high overlap between the information contained in resource announcements and reserve announcements.7.

We examined several mining company and market characteristics to evaluate how they both impact on the market reaction to exploration and resource announcements. For exploration announcements, we found that the greatest excess returns were associated with announcements made at a time of low market sentiment for mining companies by relatively small companies that have recently been enjoying high turnover and that use very positive language to promote their claims. In the case of resource announcements, the greatest market reaction occurs for firms making their first resource announcement, again at a time when general market sentiment is low.

There are two particular findings from our analysis which might be of particular interest to the regulators. First we do have some evidence to suggest that the market might be able to anticipate the release of exploration and resource announcements. This finding is consistent with the proposition by Poskitt (2005) that mining companies will be subject to more insider trading than is the case with non-mining companies. With geological information having to pass through multiple hands within and sometimes outside the firm before being released to the market, there is a great potential for the information to be leaked prior to the results being released. Second, we have 7 The text of several reserve announcements suggests that this is the case. In addition, in the case of junior mining companies, it is highly likely that they have had to make much of the information “public” in the process of trying to raise funds to develop the reserves.

the finding that the language used when making exploration announcements has a significant impact on the extent of the market reaction. The JORC code provides a strict framework for reporting geological information, but no guidance as to the words used in the information release thus leaving management free to put a positive spin on their results. As a consequence, the regulators may be well advised to pay more attention to the market activity during the period immediately before the release of exploration and resource announcements and to give consideration to changing the JORC code to provide more guidance as to the descriptions provided in such releases.

Overall, our findings suggest that the current regime for the release of information by mining companies is well appreciated by the investment community as indicated by their willingness to react to these information signals. However, we have identified two areas of potential concern to the regulators which might suggest the existence of grounds for either changing the JORC code and/or tightening its implementation. However, it must be recognised that this is only the first study of what is an important area for investors and the Australian economy. Therefore, we would encourage further research into the release of geological information by mining companies and, in particular, into the two areas identified as being of particular concern.

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Ball, R., Brown, P., 1980. Risk and return from equity investments in the Australian mining industry: January 1958-February 1979. Australian Journal of Management 5, 45-66

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JORC, 2004, ‘The 2004 Australasian Code for Reporting Exploration Results, Mineral Resources and Ore Reserves’, prepared by The Joint Ore Reserves Committee of The Australian Institute of Mining and Metallurgy, Australian Institute of Geoscientist and Minerals Council of Australia.

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O’Shea P., Worthington, A., Griffiths, D., and Gerace, D. 2008, Patterns of disclosure and volatility effects in speculative industries, Journal of Financial Regulation and Compliance, vol 16. pp. 261 - 273.

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Appendix A

Table A1List of words found in announcement headlines used to create POSADJ binary variable. Anomaly Excellent High Quality Positive Spectacular VisibleBest Exceptional Impress Promising Strong Bonanza Expands Major Robust Substantial Discovery Extends Massive Shine Success Encouraging High Grade Outstanding Significant Tremendous

Examples of announcement headlines describing exploration announcements found in the sample:

“Outstanding Drilling Results”“Bonanza Grades at Shallow Depth”“Best Ever Uranium Intersection at Oban”“Excellent Copper intercepts at West Whundo”

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Appendix B

Background on Mineral Explorations

With commodity prices and global mineral demand increasing, we saw rapid growth in exploration during the expansionary period from 2002 to 2008 (Hellbling and Blackman 2008). Figure B1 shows the growth and magnitude of exploration budgets worldwide over the period from 1991 to 2009, and demonstrates how it is closely related to the level of commodity prices.

Figure B1: Estimated Global Nonferrous Exploration Budgets and Relative Metals Prices, 1989 - 2009

The worldwide boom in commodity prices and exploration expenditure has been particularly important for Australia which is home to over 14% of the world’s exploration expenditure as shown in Figure B2 (Metals Economics Group, 2009). With many listed companies conducting exploration overseas while being listed on the ASX, it is possible that in excess of 20% of the world’s exploration budget amounting to US$2.5B is being spent in Australia and/or by Australian companies

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With the significant majority of exploration research being funded by equity markets as shown in Figure B3 (Metal Economics Group 2009), Australian capital market researchers should be particularly interested in how the market values these exploration projects, and how it responds to their success or failure. The Australian Stock Exchange (ASX) consists of over 1700 listed companies, of which nearly 800 are Mining, Energy and Exploration companies (ASX, 2009). These companies represent over 20% of the total capitalisation of the ASX, making the ASX second only to the Toronto Stock Exchange as the largest market for listed mining firms. The Australian mining industry was the largest contributor to Australian EBITDA, earning $48.9bn in 2007-2008, which represented 15.7% of total market earnings (ABS 2008).

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With over US $25 billion in equity raised for mineral exploration since 2004, the importance of how these firms perform in the wake of announcing exploration success is becoming increasingly relevant to market participants.

References for Appendix

ABS, 2008, ‘Australian Bureau of Statistics, Australian Industry 2007-2008’,

Hellbling, T. and Blackman, V. 2008, ‘Commodity Price Moves and the Global Economic Slowdown’, IMF Survey Magazine: IMF Research, 20th March 2008, viewed 11th November 2009, http://imf.org/external/pubs/ft/survey/so/2008/RES032008A.htm

Metals Economics Group, 2009, ‘World Exploration Trends’ viewed 5th October 2009,

<http://www.metalseconomics.com/pdf/PDAC%202009%20World%20Exploration%20Trends.ppd>

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