Small cap metals explorer Mariana Resources (MARL: AIM) has slumped by 14% to 3.88p after revealing a shift in strategy. The company has sold its story to investors for many years on the potential for large gold and copper discoveries in Argentina. The risks of resource nationalism and failure to get market recognition for its drill results has now prompted Mariana to switch focus to Peru.

Judging by the share price reaction, investors do not like the new strategy one bit. The sharp drop can be attributed to several factors. Firstly, it implies that the Argentinian assets will be sold for minimal value. Secondly, the decision to drop its Canadian listing means the Aim-quoted shares will no longer be eligible for inclusion in an Isa. Many investors only want to hold stocks in this tax wrapper, so they will become forced sellers once the TSX delisting is complete. Thirdly, it represents sheer frustration from shareholders who thought they were holding the stock for exposure to Argentina's rich geology.

Valuable lessons can be learned from Mariana's situation. Regular Shares readers will know that we have always thought the company to have held too many projects. It lacked focus and made it difficult for outsiders to truly understand the company's plans.

The initial flurry of interest came in 2010 when it declared the Las Calandrias project in Argentina to be a major gold discovery. The drill results initially looked interesting and Mariana hitched a ride on a takeover bandwagon benefiting all the miners in the region. A bid war for Andean Resources that year made the region a hotspot for investors who speculated that everyone else, including Mariana, would also be taken over. Alas the hype soon died away.

Around the same time, Mariana chased opportunities in Chile with managing director John Sutcliffe switching to non-executive director so he could concentrate on the search for base and precious metals in the country. Nothing of substance came out of this; neither did a joint venture prosper with Cliffs Natural Resources (CLF:NYSE) looking at iron-oxide-copper-gold prospects. Mariana ended up selling its 20.6% stake in the venture two months ago for $250,000 following disappointing drill results.

Countless Aim miners have added a secondary listing in Canada over the past five years, all believing that it was the golden ticket to getting a better valuation. It is hard to recall any success stories, which is why Mariana will not be the only one to cancel a TSX listing this year. If the additional exchange doesn't generate stock liquidity then the costs of listing are unjustified.

The big question is whether Mariana is right in abandoning Argentina. Although the stock market announcement (click here) says work will continue, you can assume that exploration will only be minimal until it can find a buyer for the assets. Yes, there are risks that the government will take a bigger stake in the country's mines but this applies to so many countries around the world. If a project is good enough quality and the company undertakes the appropriate measures to work with the local community and government, to ensure they benefit from mining activities, then there remains a logical case for continuing project development.

What we do not like is Mariana's grumbling about exploration results in Argentina failing to 'achieve significant share price uplift'. Management should not make reference to share price performance in stock market announcements; this is a conversation for behind closed doors. Their focus is to generate value through exploration, not to let share price movements influence their corporate strategy. If a project is good enough then it will, in time, trigger the appropriate value uplift for a company.

We are also surprised that the company has been allowed by its nominated adviser to include the following line about the Condor del Oro prospect: 'Positive drill results will potentially leverage the Company's share price and could facilitate funding for ongoing drilling.' It is implying that drill results will push up the stock valuation so it can issue new shares at a high price. While everyone knows that is a typical tactic for miners, you don't explicitly state this in stock market announcements. Mariana can expect to have its knuckles rapped by the London Stock Exchange for such language.

The company says one of the reasons for switching focus from Argentina to Peru is difficult market conditions for junior exploration companies. Regardless of where it operates, this situation will not change. Yet if it can produce good exploration results, get better at communicating its story and streamline its asset holdings, then financiers might be more willing to provide necessary funds.

As it stands today, with the shares trading at a fraction of its 51p peak (Jan '11), Mariana has a serious credibility problem which it must address in order to win back the market's favour.

Issue Date: 05 Feb 2013