Last week at a mining investment conference a presenter confidently advised the assembled 400-strong audience to prioritise those companies where management and directors had a material stake in their company – suggesting that these companies would outperform peers in which management held lesser stakes.
No evidence was presented – and no questions were asked on the issue. The only problem with such counsel is that it doesn’t stack up in the data. During the last year, your scribe had a student work exceptionally hard to uncover such a relationship from empirical data across the junior resources sector.
The outperformance of companies in which directors hold a significant stake versus those where they do not is very hard to find indeed. No end of statistical efforts could unearth it in any way shape or form. This is not to say that such a relationship does not exist of course – but does suggest that commentators who proffer such counsel need to be careful. One day someone will ask for the data!
In some ways, the whole tenet of level of ownership is something of an insult to hardworking management and directors who do not happen to own several percent of the stock of the company. Do management teams who hold only a few shares in a company not try as hard? In Strictly Boardroom’ experience there is occasional anecdotal evidence of that from company to company – but seemingly not to the point where it shows up in the total shareholder returns data.
So until I can find it – or anyone can show me a study that illustrates it – your scribe will not issue such counsel to investors.
Take that not perhaps as the myth being busted – but certainly that the jury is still out.
That high-grade drives high-margin is another obvious investment mantra we all hear very often. Regular Strictly Boardroom readers would realise that the latest available data from the Australian gold industry show this is not the case either.
There is no relationship in the current crop of Australian gold mines – some 50 in all – between grades and cost. How do you explain that one? Actually it is pretty easy.
While grade determines whether you have a mine or not (this scribe has yet to see a gold mine with no grade), it doesn’t tell you whether it is a good mine. Only costs do that.
The grade advantage conferred by high-grade lodes is actually engineered away in the mine design. Higher-grade stopes take some getting to – which normalises their cost advantage. Of course high-gradeswithin
a mine should make for lower costs when accessed, but variations in gradebetween
mines count for little in determining competitiveness and deposit quality. Indeed, Australia’s lowest-cost gold mine at Cadia is among the very lowest in grade domestically.
Once again take this not perhaps as the high-grade myth being busted – but certainly that high grade is only an advantage in certain situations – or not in all. Once again, the jury is still out.
Let’s leave it there for now. If you cannot rely on whether management appear committed through share ownership – or that high-grade mines will outperform lower grade ones what can you actually rely upon in making mining investments? That’s perhaps is a story for another day.
Allan Trench is professor (value and risk) at the Centre for Exploration Targeting, University of Western Australia, professor of energy and mineral economics at Curtin University Graduate School of Business, a non-executive director to several resources sector companies – and the Perth representative for CRU Strategies, a division of independent metals and mining advisory CRU Group (firstname.lastname@example.org).