Taking junior miners to the next level
The mining boom’s sheer force and its effect on the economy are well known. Less considered is whether governance standards in small and medium-size miners are keeping up. My view is they are not. The risk is that the two-speed economy could resemble a two-tiered governance system: listed companies serious about good governance and those that are not.
I recently saw two shocking examples of governance in the junior mining sector. A small explorer joint ventured with a listed shell company over some of its ground. Investors would normally expect the explorer to spin the assets into the new company and give the explorer’s shareholders an entitlement in the venture. None was forthcoming. Meanwhile, the explorer’s directors bought shares in the listed shell company and watched its share price soar. This happens too often.
Another small explorer announced a non-binding memorandum of understanding based on a large, non-Joint Ore Reserves Committee (JORC) compliant resource estimate. Closer inspection showed the estimate was based on soil sampling – drilling was absent. The press release trumpeted the news, turnover soared and the share price doubled. How could the company’s board release such material?
Granted, these are extreme examples. But the junior mining sector has never been a good governance exemplar. This is a shame because some small miners work hard to maintain or improve governance standards and investor relations practices. They have some excellent mining examples to follow, with companies such as BHP Billiton among the better-governed companies.
To be fair, some miners have been thrust into the gaze of fund managers, superannuation funds and proxy advisory firms faster than anybody expected. Rising commodity prices and exploration discoveries have catapulted them into the top 200 and 300 listed companies – indices that big investors, and increasingly, index funds, scrutinise. By my count, 12 resource-related companies have been included in the S&P/ASX 200 index in the past 18 months.
Some may be unprepared for the governance standards and investor relations practices required of large companies. One proxy adviser recently told me: “I tend to see two types of mining companies. Those that are serious about improving governance standards as they get much bigger and those that refuse to stop running the enterprise like it is privately owned.”
The upshot is that institutional investors must suddenly deal with explorers that have small boards for their size and too few independent directors. Board composition may need to change as the venture moves from exploration to financing and production. The miner may have paid directors with slabs of equity to preserve cash – a practice governance experts frown on. There may be a large controlling shareholder. And, the company may have a culture of aggressive promotion, a common practice for small explorers constantly in capital-raising mode.
Mining data presents another problem, especially for investors unfamiliar with geological terms. The onus is on explorers to present this information sensibly and accurately and to comply with the JORC Code. Yet too many announcements look like they are written by publicists who think they are concocting newspaper headlines. Another governance challenge is more Australian miners operating overseas in exotic locations, such as Africa. More miners could join them following the Federal Government’s plans for a tax on super profits from resource projects.
Clearly, more governance work in this part of the market is overdue. I am not suggesting heavy governance structures are imposed on junior explorers with only enough cash to last a few years. Sector nuances must be understood. Most small explorers cannot afford large boards, lots of independent directors or several board committees. Nor do they need them. Their focus is rightly on preserving cash and maximising exploration to get results that help raise capital.
My hope is the junior mining sector takes advantage of this once-in-a-generation mining boom to lift its governance to the next level – and that it gets help from large organisations with a vested interest in mining. The stakes are high. The Australian Securities Exchange (ASX) has more than 1,000 material, energy and mining-service companies – almost half the market by volume. Most new float activity, and thus listed-company board formation, is from resource-related ventures. That is a huge number of boards and thousands of company directors. It is too big an area to neglect.
The ASX and Australasian Investor Relations Association’s launch of a free national one-day investor relations course for small to medium-sized enterprises is a good development. An even stronger focus on governance training and education for directors of small explorers, especially before they float, would also help. We must get boards of all mining companies thinking carefully about governance, how it may change as the venture grows and the value that good governance creates. Directors must also know how good boards function when companies fail, as so often happens in this sector.
Some junior miners I speak to think deeply about these issues. But many do not, to the detriment of a resource industry that deserves much better.
Tony Featherstone is a former managing editor of BRW and Shares magazines