Social media programmes should form an integral part of fund raising initiatives of junior mining companies and other small caps preferably long before they reach the IPO stage, according to research by Metal-Pages. Go public before the IPO A well executed social media programme initiated long before an IPO can help towards building a potential investor base and establish a stronger public profile before becoming a listed company. For companies already listed, a solid following in the social media arena can help with the success of subsequent fund raising activities such as for rights issues and private placements. Some financial advisers think the US JOBS Act will have a very significant impact on smaller listed companies, including junior mining companies, in that it will make it much easier to solicit funds from accredited investors. Accredited investors are classified as high-net worth individuals and investment firms with the ability to understand the risks involved. The new rules will likely lead to more private placement activity for small listed companies in the US and some advisers think the lower restrictions on advertising a fund raising will also drive greater use of social media. However, listed firms will still have to adhere to strict disclosure rules designed to allow investors to properly evaluate a company Metal-Pages argues that social media represents a significant shift for junior mining companies as well as other smaller listed companies looking to gain investor recognition. The smaller the market capitalisation, the more over-looked the company is likely to be by investors and hence they should benefit disproportionately from well executed investor relations related social media activities than much larger peers. Listed companies with large market capitalisations have long benefited from considerable on-going attention from the financial press, research analysts and large financial institutions. All these parties tend to overlook small caps and especially micro-caps. This relative invisibility often leads to their shares languishing with low valuations and poor trading liquidity. Metal Pages Ltd 2012 24, October 2012 1 / 11
Junior Mining Companies Embrace Social Media To Reach Small Investors Where social media is a game changer is that it is incredibly cost effective and a very powerful channel for disseminating information to potentially interested parties, including retail investors who represent an important source of funding for junior mining companies. Tell the Story Interview with Howard Lindzon, CEO of StockTwits StockTwits is ideal for investors wanting to gain an insight into listed companies. Also, it s a good platform for listed companies to spread the word about themselves. StockTwits is an investors community where ideas are shared on investing and trading in real time. It s also a place where novices can learn from and follow smart investors. Hedge funds increasingly use StockTwits to measure sentiment. Users can indicate whether they re bullish or bearish on a particular stock in their tweets. StockTwits generates heat maps on the volume of chatter about individual stocks. To build an audience at the pre- IPO stage, Twitter is definitely a better place to do that. Once listed it is worth having a presence on StockTwits, says Lindzon. When using social media executives should talk about their industry, say what it is like and tell the story. There should be plenty of links to relevant news and not just about the company. Be honest and open. It helps build trust, says Lindzon. While he acknowledges that social media can help build investor loyalty, it won t stop the share price falling if a company is badly run or is in an out of favour industry. It has long been recognised that there is a positive correlation between investor recognition and valuations of exchange traded securities. Social media is the next logical step in the democratisation of information about listed companies and for creating greater market transparency. In 1987 The Journal of Finance published a seminal paper by the economist Robert C. Merton called a simple model of capital equilibrium with incomplete information, which argued that there is a rationale for listed companies to spend on advertising to reach target investors as well as engage in public relations campaigns to generate stories in the financial press. Merton wrote: An increase in the relative size of the firm s investor base will reduce the firm s cost of capital and increase the market value of the firm. managers of the firm have an incentive to expand the firm s investor base. Metal Pages Ltd 2012 24, October 2012 2 / 11
In essence the better understood and the better known a company is to investors the more likely it will see higher levels of liquidity in the trading of its shares, tighter bid and offer spreads and the more likely its shares will trade closer to net asset value. Better liquidity and ease of access of information to all market participants simultaneously can also lead to less volatility, particularly after earnings announcements and other market moving news. More recently, the University of Michigan reached a similar conclusion, but also looked at the role of social media for information dissemination in a report entitled Firm Dissemination, Direct-Access Information Technology and Information Asymmetry, which was published in May 2011 and has since received some updates. This study concluded that social media can raise investor awareness and understanding of small companies with a positive outcome for the liquidity of shares and of valuations. The arguments put forward by Merton a quarter of a century ago about the rationale for raising investor awareness still very much apply to this day. Since the advent of the Internet and Web 2.0 raising investor awareness has potentially become easier for investor relations professionals. From Metal-Pages own research social media is increasingly recognised by investor relations professionals working with small listed firms as a highly cost effective channel for reaching and communicating with investors. Twitter and Facebook accounts, the two most popular platforms for junior mining companies, can be set up for free. Sending out communications over those platforms is also free. And the number of users for both platforms is in the hundreds of millions. Retail investors are increasingly using social media channels to share and research investment ideas and potentially to interact with the managements of listed companies. Also, social media is not just the preserve of teenagers and and their interests. In April 2012 consumer behaviour research group Experian Hitwise found that the two biggest demographic groups using the world s largest social media platform, Facebook, are 25-34 year-olds at 22.42% followed by the 55+ year-olds at 21.59%. In June 2012, Facebook had over 955 million regular users, though this has since passed the 1 billion mark. Also, social media platforms have sprung up dedicated to bringing investors together to share ideas, such as StockTwits, which is a rapidly evolving real-time micro-blogging site modelled on Twitter and currently focusses on North American listed companies only. As social media facilitates the spread of information between like minded individuals Metal-Pages believes that it represents a considerable boost for the investor relations activities of small cap companies. Social media platforms greatly enhance the efficiency of information dissemination through the investment community and this can give small caps including junior mining companies a much bigger reach and the ability to cultivate a higher profile. In effect they can build their own investor communities and cultivate investor loyalty. Metal Pages Ltd 2012 24, October 2012 3 / 11
Junior Mining Companies Embrace Social Media To Reach Small Investors Though receiving positive mentions in traditional media outlets can still have a very positive effect on the profiles and valuations of junior mining companies it is usually just an occasional event if it happens at all. The power of social media is that when done well it becomes a conversation and a continuous one at that among a group of like minded individuals with an interest in the company. Capital markets tuning into social media Stock brokerages are also doing it... Social media is not just having an impact on the visibility of small listed companies, but also on the capital markets industry itself where it is unleashing a new wave of innovation. It is no longer just a case of the relationship between the brokerage firm and the client, but also among clients themselves and their networks of contacts. In effect it is allowing brokerages to make an integrated offering combining trading, charts, news, research and increasingly social media, all from one platform. A number of brokerage firms are combining social media with their trading platforms allowing their clients to share ideas and their trades with each other. In foreign exchange (Forex) markets, a website called Currensee combines social networking and brings forex traders together allowing them to share their trading ideas. Currensee traders can link their live brokerage accounts with one of over 100 brokers supported by the platform. It explains that: Members of the trading social network can see each other s actual trades Metal Pages Ltd 2012 24, October 2012 4 / 11
and share trading strategies in real-time, all while using the unique Currensee Market Watch Social Indicators to make more informed decisions. However, Currensee is not a brokerage firm itself, but acts an introducer to forex brokers. So when it introduces a new client to a brokerage firm it earns a fee. Currensee also earns fees through introducing investors to top performing Forex traders looking to manage investors funds. It is among the many new business models springing up in the capital markets sector, which are being aided by social media and industry insiders expect many more such innovations........ The rise of social media trading platforms It is also spurring change with stock brokerages as well. For instance in Hong Kong, the online trading portal 8 Securities allows users to access their social networks on Facebook and Twitter via their trading accounts. This means trades can be published across social media networks. It also allows investors and traders using the portal to communicate and follow each others trades and exchange ideas and there is even an instant messaging service. The level of transparency permitted will enable investors to identify and follow their more successful peers as trades can be posted automatically. Also, investors with like minded strategies, such as those who specialise in small mining stocks, micro-caps and penny shares, can come together and form communities to discuss their ideas and the latest news. Successful investors who chose to share their trades are likely to rival research analysts recommendations for attention. On the other hand brokerages can opt to share their research with their clients who can then debate it and decide whether or not to trade on it. In the US an early pioneer of social media trading networks is TradeKing, which on August 1, 2012 completed a merger with similarly focussed US-based Zecco. At the time of writing the two firms were yet to merge their platforms. The Combined firm has over 500,000 accounts. TradeKing allows its users to see the hot stocks being traded on the day, to exchange ideas, explain the reasons for their trades and to discuss stocks. One interesting feature promoted by Zecco is an application that allows investors to do trades via Facebook. It also developed an Internet browser plug-in called Zap Trade making it easier for investors to execute trades without leaving the website where they conducted their research or saw a stock tip, for example. Investors information website EuroInvestor launched Cockpit, which allows users to share their screens or widgets and to create customisable views of shares and other tradable assets. Metal Pages Ltd 2012 24, October 2012 5 / 11
Junior Mining Companies Embrace Social Media To Reach Small Investors The big US brokerages are also looking to integrate social media into their offerings. Given these developments Metal-Pages believes it is all the more imperative for junior mining companies to engage in robust investor relations driven social media campaigns as early as possible in their development. These developments represent a tremendous opportunity for well run junior mining companies with financially viable projects and respected managements to gain recognition with potential investors. Also, the investment community is becoming increasingly interested in unstructured data and that includes aggregating and analysing the chatter in social media about individual stocks and other tradable securities. This basically comes down to sentiment analysis to see if market participants are bullish or bearish on a given stock. The theory goes that particularly negative or positive comment on a stock can sometimes be a precursor to a move in the share price of the company being discussed. The theory was given strong support in October 2010 when Indiana University produced a study called Twitter mood predicts the stock market. A UK-based hedge fund called Derwent Capital Markets was actually launched on this premise namely that selective interpreted sentiment readings from social media can predict future market movements. With investors and the capital markets industry itself increasingly adapting to social media it makes sense for junior mining companies to do the same. Early adopters who use web 2.0 effectively are likely to gain over their peers who ignore it in that it could result in more favourable valuations and easier access to investors........ Crowdfunding and the rise of social investing Crowdfunding is one of the latest phenomenons enabling start-ups to raise finance directly from the public primarily via Internet-based networks. It usually involves aggregating lots of small investments from many individuals and is a good way of spreading risk among a large number of investors. This approach proved popular for funding artistic endeavours, such as films or community projects but is now spilling into the investment arena. In effect it plays a similar role to angel investors and venture capitalists who have traditionally been funding sources for new start-ups, but crowdfunding socialises the process allowing the general public to get involved with very small sums of money. Entrepreneurs are certainly using crowdfunding in increasingly imaginative ways and it is enabling many start-ups to get into business that probably would not have been funded via traditional sources. Such is the growing popularity of crowdfunding that a number of jurisdictions such as the US, UK and New Zealand are now implementing legislation governing it s use. The big fear among regulators is that crowdfunding also represents an opportunity for fraudsters to scam the public. Metal Pages Ltd 2012 24, October 2012 6 / 11
There is scepticism over whether crowdfunding could prove viable for funding capital intensive businesses such as mining. Crowdfunding is generally geared to raising relatively small amounts of capital such as for opening a shop, a crafts business or for a software concept for example. However, if crowdfunding became well established it may eventually prove a good source of seed capital for very early stage mining projects before progressing them to a stock market listing once there is a stronger proof of concept. But for the time being, the main lesson for junior mining companies from the rapid rise of crowdfunding is that it represents the growing socialisation of investing. The process is becoming more interactive and the playing field is gradually becoming more levelled for small investors and even for small startups........ Using social media to widen the investor base Exponential social reach Turning back to stock market listed companies, a number of small caps have been enjoying success using social media to drive traffic to their websites and to broaden their investor bases. Increasing website traffic, Twitter followers and Facebook likes is an important precursor to increasing trading volumes in the stock and expanding the investor base. A larger investor base means Metal Pages Ltd 2012 24, October 2012 7 / 11
Junior Mining Companies Embrace Social Media To Reach Small Investors the company s share price is likely to be better supported and in turn that should translate into a deeper well to draw from when that company needs to raise finance. Just as a number of academic studies have identified a relationship between micro-caps being mentioned on Internet message boards and trading volumes in those shares, one study in particular found a similar correlation with Twitter. In December 2010 the TUM School of Management in Munich published a study called Tweets and Trades: The Information Content of Stock Micro blogs and found that there is a correlation between Twitter volumes concerning a listed company and trading volumes in its shares. Message volume can predict next day trading volume, the report says. It also found that users providing above average investment advice are more likely to have their tweets retweeted. Twitter users also have a strong incentive to provide useful information so that they are retweeted and can gain more followers, all of which amplifies their message. Though the study was referring to Twitter users tweeting financial advice, the principle holds for anyone providing information that is deemed interesting or useful by a certain group of users. For junior mining companies that comes down to becoming a source of information not just about themselves, but their industry, the community they operate in and the markets where the resources they mine will be traded and consumed. Australia-based mining explorer Iron Road has successfully used social media to raise awareness of its A$2.5 billion iron ore project with the investment community. It s messaging is targeted at companies in the iron and steel industries and the financial markets. It s tactic has been to aggregate information of interest to these groups and communicate it so it shows up under targeted search terms. However, only about 20% of Iron Road s tweets are about itself the rest focus on industry related news. Iron Road makes extensive use of blogs, Facebook and Twitter and uses an application called paper.li, which allows users to publish their own online newspaper and distribute it via Twitter. Iron Road publishes weekly using paper.li. From August to October 2012 Iron Road saw its Twitter following rise from 0 to 2,600. When accounting for retweets and other interactions its reach rose to the equivalent of 119,000 Twitter users in March from 36,500 in January, 2012. This highlights the importance of generating targeted content, which is likely to go viral and of being willing to interact with other Twitter users. At the time of writing some of the prominent followers of Iron Road include the executive director at Noble Financial Group: 16,000 followers, Noble Financial Group: 10,000 followers, Hong Kong Noble Group: 12,000 followers, Commodity trader: 22,000 followers, Iron ore network: 300 followers and Baosteel PR Senior Manager: 9,000 followers. Given China is a hugely important market for iron ore, Iron Road is now targeting Chinese social media platforms to increase its profile in that country and is using a local platform called Sina Weibo, which is Metal Pages Ltd 2012 24, October 2012 8 / 11
similar to Twitter and has over 300 million users. This allows Iron Road to reach out directly to Chinese investors and industry players who could be pivotal to the firm s growth prospects. When engaging in social media, management must ensure that their companies meet the highest standards of compliance and corporate social responsibility (CSR). Those that don t will soon get found out, often even when they don t use social media. And mining in particular is often the focus of activists always on the look out for companies that are callous in their treatment of the environment and the local communities they operate in. A successful technique for increasing reach in social media involves becoming an information / news aggregator and most experts believe that should comprise roughly 80% of communications. The other 20% communications about the company should where ever possible be original, informative and engaging, which makes people want to share it. Communications should be regular, but not overwhelming. That content can include blog posts and short videos from the management and the topics can range from commenting on a conference, an industry development or the market. Infographics, which explain and educate are also proving to be popular. However, credibility is important and that means disseminating positive and negative news to only focus on positive developments erodes credibility........ Conclusion Follow the money Using social media is very much in the spirit of Robert C. Merton s findings that increasing a firm s relative investor base can reduce its cost of capital and raise its market value. It is therefore logical to implement an investor relations focussed social media strategy as early as possible, preferably before the IPO if possible. The more investors are aware of the company the better. Also, broadening the investor base is worthwhile once listed as it potentially makes raising new capital easier. Metal Pages Ltd 2012 24, October 2012 9 / 11
Junior Mining Companies Embrace Social Media To Reach Small Investors The rapidly growing use of social media by investors to find new ideas and to monitor their investments is undoubtedly a huge opportunity for junior mining companies looking to raise their visibility with this group and even to forge new business relationships. The fact that stock brokers are linking their products with social media channels is also notable as is the rise of crowdfuding. Retail and even institutional investors are increasingly turning to social media for news and fact finding and Metal- Pages believes that investor relations professionals need to be in tune with that trend and should follow the money. And the fact that the barriers to entry are so low as well as the costs is also a huge benefit for small listed and micro-cap companies. For the first time those companies can now rely less on third parties such as publications and brokers to raise their investor-profiles and instead reach their target audiences directly via platforms such as Twitter and Facebook and build their own communities. And one of the characteristics of social media sharing information is ideal for any company looking to reach investors at the lowest possible cost. As the role of social media in investor relations becomes better understood and appreciated it could come to the stage whereby some more activist minded investors holding shares in heavily undervalued companies demand why management isn t making better use of social media channels to raise the company s profile. For value investors signs that a heavily under-valued and over-looked company is about to embark on a long-term social media campaign to raise its profile may become a buy signal. Nonetheless, social media also has its limitations. If a company is badly run, has poor prospects or is in an out of favour sector there is little social media can do to sustainably change those perceptions. If anything poorly run listed companies or ones with managements that don t comply with high standards of CSR are more likely than ever to get found out and exposed. However, even if a company is in an out of favour sector, as junior mining often is, there is still value in using social media as it is an activity, which should be done as part of the overall investor relations communication process. Stocks in sectors shunned by investors can rapidly completely disappear from view and languish with very low valuations and poor liquidity. Also, there are different types of investors, some pursue momentum strategies and are mainly interested in owning shares that are on a rising trend. Others pursue value-based or contrarian investment strategies this group of investors may well be encouraged by the fact that a company is maintaining a high profile despite being out of favour. It gives these types of investors hope that when sentiment turns towards the sector those type of companies will be quickly discovered by other investors and traders. Also, during periods when in out of favour sectors, those companies may suffer less in terms of valuation falls than those, which hardly pursue any kind of strategy to maintain their visibility. Metal Pages Ltd 2012 24, October 2012 10 / 11
Eventually it is likely that all listed companies will be expected to have some form of social media presence and at that point there will be more emphasis on smarter social media campaigns to stand out from the crowd........ Report researched and prepared by JJPAssociates on behalf of Metal-Pages Metal-Pages: A UK-based provider of prices, news and analysis on rare earths, minor metals and ferro-alloys. Prices published by Metal-Pages are used as industry benchmarks for contracts. Metal-Pages also hosts conferences and can assist with producing content. For press enquiries contact: For business enquiries contact: Justin Pugsley justin@metal-pages.com Simon Macson simon@metal-pages.com www.metal-pages.com blog.metal-pages.com Follow us on Twitter: @MetalPages Like us on Facebook Metal Pages Ltd 2012 24, October 2012 11 / 11