Small Capitalisation:

Investor’s Guide Seeking alpha from junior stocks.

CHF Investor Relations, February 2011

What defines a small cap stock?

Serves a niche market.

Serves emerging high-growth markets.

No dividend, or little dividend.

More thinly traded than large caps.

Little analyst coverage.

What is the size of junior stocks?

Capitalisation of S&P/TSX Venture Composite

Average: $ 90 million

Largest: $ 810 million

Smallest $ 10 million

Median $ 50 million

Micro-cap: Less than $10 million

(not included in the index)

What is their return?

S&P/TSX Index (large caps) in 2010 : 14,45%

CHF clients’ shares in 2010: 56,6%

1 2

3

6

11

16

<25 25-50 50-100 100-250 250-500 >500

Market Capitalisation (C$million)

Analyst coverage in the mining industry

Number of analysts per size of company

Source: capital IQ/TMX

Why are returns superior?

For the 50-year period ended December 31, 2009, $1.00 invested

in large-cap stocks would have grown to $80; the same investment

in small-cap stocks would have grown to $226.

Sources: Center for Research in Securities Prices, University of Chicago 1957-1993; Standard & Poor’s, 1957-2009. Large-cap stocks are represented by Standard & Poor’s Composite Index of 500 stocks, an unmanaged index considered representative of the U.S. large-cap stock market. Small-cap stocks are represented by the Center for Research in Securities Prices 6th-8th Decile of New York Stock Exchange from 1957 to 1993 and the S&P SmallCap 600 Index from 1994 to 2009, unmanaged indexes. Past performance cannot guarantee future results. Individuals cannot invest directly in any index.

Market mispricing

The market often misprices small capitalisation stocks due to lack

of availability of information on companies since there is little

analyst coverage.

Poor liquidity also keeps away some investors resulting in lower

valuations.

However, as the company grows and builds momentum, the

mispricing is reduced as a result of increased interest from

investors and analysts. Value also comes from take-overs as

these companies become targets for larger firms.

Bid-ask spread: 3.5/47= 7.4%

Liquidity- poorly traded stock

Liquidity- poorly traded stock

Monthly trading chart for CLB-V

Liquidity- Investor relations, before market-making

Bid-ask spread: 1/27= 3.7%

Liquidity- Investor relations & market-making

Bid-ask spread: 0%

Liquidity- Investor relations & market-making

Monthly trading chart for YNG

Canadian small caps

Mining Exploration

Mining Production

Oil & Gas Biotechnology

Green technologies Other Industries

Mining is by far the largest industry on the TSX venture. We will

therefore spend some more time discussing investments in this

sector.

TSX Venture TSX

Number of issuers 1,178 353

Total market capitalisation 42 billion 520 billion

New listings 149 59

Equity capital raised 5,3 billion 12,5 billion

Number of financings 2110 303

Volume traded 46 billion 45 billion

Value traded 22 billion 393 billion

Number of trades 6.5 million 67.6 million

Mining markets at a glance

Source: TMX December 31, 2010

December 2010

Production

Reality sets in

Production decision

Start of operations

Discovery Development

Sh

are

pri

ce

Source: Financial Times, The Gold Book, by Pierre Lassonde.

Confirmed deposit

Theory:

This chart shows a theoretical share price progression from

discovery to production from a successful discovery.

The Mineral exploration development cycle

Speculation Investment analysis Revaluation

The Mineral exploration development cycle

Theory

•Towards the end of the first exploration phase, resource, scoping and pre-

feasibility studies will be completed.

•The pre-feasibility study point in time comes close to the peak in

speculation.

•Stocks usually decline as the feasibility study is being tabled as

•reality sets in.

•Stocks are typically weak after the feasibility study, as a production decision

is made and financing is sought – mine construction would take up to 2

years.

•Stock prices should start to rise as production starts to become a certainty –

once in production stocks generally continue to rise as risk is removed and

earnings commence.

The Mineral exploration development cycle

A real life example: Monument Mining Ltd (TSX-V:MMY)

Commercial production announced

Why is a non-producing mineral property worth anything?

Why is a non-producing mineral property worth

anything?

Non producing properties represent potential for

eventual mineral production through:

•Exploration discovery

•Enhancement of existing mineral resources

•Improved circumstances

•New ownership

A market exists for non-producing mineral properties.

Some technical terms you need to know.

Ready?

What is a NI 43-101?

It is the National instrument 43-101 of the Canadian Securities

Administrators.

It sets standards of disclosure for mineral projects.

It governs resource and reserve estimates, also all exploration

information that comes out by news releases.

Four fundamental demands:

•Make disclosure of the responsibility of a qualified person.

•Fully disclose all relevant information, including data quality.

•Use recognised definitions for resources and reserves.

•Independent reports at trigger events like resource estimates and

economic assessments.

Resource and reserve definitions

Level of knowledge Resource Reserve

Closely spaced drilling, virtually

certain of size and grade Measured Proven

Mainly closed drilling, adequately

certain of size and grade Indicated Probable

Stepout drilling, size estimated on

assumption of geological continuity Inferred

Not a

reserve

A good project, key indicators

Good ore body: Large reserves, high grade, low strip ratio.

Mining-friendly jurisdiction: Stable politics, predictable and timely

permitting process, existing mining operations, attractive fiscal regime.

Infrastructure: already exists or being built: power, transport, water.

Quality of Management: knowledge in mining? Ability to make deals

for long-term development? Board and corporate governance.

Technology: proven extractive technology of ore type.

Economics: Low expected cost of production.

Potential for future expansion.

Commodity: Does the commodity in question have a positive outlook?

Where do small cap stocks fit in a portfolio?

Some clues.

Who can invest in junior stock?

Since junior stock carry a higher risk of market

fluctuations, they may be appropriate for investors

with a long investment time frame who hold a well-

diversified portfolio.

In some cases, the regulators require that only

high net worth investors be invited to participate in

financings.

Some junior stock can be added in a portfolio for

tax purposes on financing for flow-through shares.

Growth strategies

Allocating a small portion of the portfolio to small

cap stocks.

Careful selection: given the lack of research on

small cap stocks, it is of the onus of the

broker/portfolio manager to carry out a due

diligence.

Some stocks will soar, others will lag. The objective

is to target an average return.

Growth strategies

Return

Stock A 150%

Stock B 100%

Stock C 50%

Stock D 30%

Stock E 0%

Stock F 0%

Stock G 0%

Stock H 0%

Stock I -20%

Stock J -40%

Average 27%

Growth/value stocks

Small caps can change from growth to value, requiring

adjustment in portfolios. Example: Foraco (TSX:FAR)

Growth period:

Acquisitions

Buy market share

Stock:+150%

Growth stalls

Adjustment

Stock: -20%

Value

investors

step in.

Stock: +25%

Tax strategies: flow-through shares

The investment in flow-through shares is deductible from the

investor’s taxable income.

These shares are only available upon rounds of financing.

The issuer has an obligation to spend the funds in exploration

activities. Administrative costs are not allowed.

Example: $

Initial investment: 100

Investor's marginal tax rate: 40%

Tax credit (= 40%x 100) -40

Net cost of investment 60

Risk: a rush to invest in flow-through shares irrespective of the

fundamentals of the issuing company can lead to a net loss.

Any questions?

Anne Robert

Account Manager

Tel: 514 510 6338

Cell: 514 826 8121

E-mail: anne@chfir.com

CHF Investor Relations thanks you for your attention.

We would be happy to introduce you to small cap companies.

For more information, feel free to contact: