Seeking good management is crucial to investment success

I work for Van Eck Management, a money management firm specializing in mining investments. You may recognize the names International Investors and Gold Resources, mutual funds with over a billion dollars invested in gold shares.

I am going to leave details of financing exploration and development to our friends in the underwriting business. From our investor perspective, we seek the maximum exposure to success, which is provided by pure equity investment. Unsuccessful investments all turn into equity anyway. Mining exploration and development is a high reward but high risk business in which most projects do not return the capital invested. Individual projects succeed or fail, but good managements persist. The investor’s best bet is to select his managements carefully. I’m going to comment on some of the things we look for in management and also on some of the things managements might do — and others they might avoid doing — to make themselves more attractive to investors.

In evaluating a management, we look for professional capability and study the past record in each field, such as exploration and operation. However, great exploration or great operation is not enough alone. Successful management must also include good corporate managers and deal makers. I think of such people as corporate engineers and architects. To maximize shareholder reward management must also dedicate proper attention to promotion. The beneficial effect of promotion goes beyond the direct effect on share price. If the shares are not adequately priced, further financing is difficult without damaging the shareholders.

We do not view promotion as a negative activity. The correct communication of the company’s story is as essential to the investor looking for opportunities as it is to maximizing financial return to the existing shareholders.

On the subject of communication, we react negatively to managements which engage in the misleading release of partial information, so often seen in “selected exploration results”, and to managements which do not reveal the geological details necessary to the understanding of the significance o f the results. The investor should note, when a property deal is announced, is the whole story told? Are other interests in the property, such as owner royalties and finder interests revealed? Are we told of potential dilution to the common shares such as from options granted to the vendors, or do we have to find out such things from our friends? In announcing the project, does management give the entire capital need? Is the full time requirement revealed, or does the promoter plan to finance the project in stages, making the investors feel each financing will be the last, then springing the next requirement on them?

Another point on communication: is vital information revealed to just close friends and backers of the promoters or is it revealed to all shareholders? Does the company dedicate sufficient time to people from the media to insure proper dissemination of information?

The way a company deals with bad news can be even more important than good. Is the bad news communicated, or does management make the investors find out from the rumor mill? This point is fairly obvious when it comes to exploration results, but much more difficult for management to deal with during the period of mine break in, when problems are common and the temptation is strong to hope problems can be resolved before they have to be revealed. In any case, investors will more readily forgive management for an unsuccessful project when communication has been good.

We do not object to managements which float several different companies; this common structure is simply a necessity arising from the “poor odds” nature of the business and the frequent difficulty of obtaining financing. However, needless to say, the interrelationship of those companies presents perils. Investors may react very negatively to cash being switched from one company to another through the purchase of shares; also, to properties or property interests being transferred, especially when it turns out that the property or an interest in it is being transferred to another vehicle in which management and their friends have a larger interest. Another unfortunate practice is the splitting of properties among several different companies. Since the stock market is generally not attracted to small ventures or minority interests, such splitting can result in none of the companies reaching a correct valuation.

In structuring companies under the same management, it is preferable to have clear definitions of activity to differentiate the various companies in a group; by geographical area or by commodity are two possibilities. This same problem can extend to major mining companies with publicly owned subsidiaries. Often, the management of both companies is effectively identical and the distinction between the interests of both shareholder groups is not convincing. Even the personal objectives of individuals within the management web may be equally unclear to the shareholder.

As to corporate structures, the simpler the better. Investors are simple-minded, analysts lazy and portfolio managers try to do too much. The same doctrine of simplicity should be applied to structuring financings.

Investors generally dislike any arrangements which tend to entrench management, allowing it to ignore the problems of maximizing shareholder benefits through corporate development and assuring proper share valuation. There are many such artifices, including the popular ones, poison pills and golden parachutes. However, I must add that it is the duty of management to protect the shareholders against creeping takeovers and we like to see a strong identity between management and shareholder interests. This identity usually manifests itself in large share positions significant in terms of the individual manager’s net worth. In larger companies stock option programs or significant financial incentives beyond straight salary can take the place of large share positions. We expect successful managements to make money and to sell shares, we do it too. But one thing the investor doesn’t like is to be abandoned, and that includes abandoning one set of backers for another in mid- stream. “Making the original investors whole” because they squawk, may ease a promoter’s conscience, but if it doesn’t treat all shareholders fairly, it will leave the investors with an uneasy feeling. Whether a project is successful or not, and whether or not management sells its shareholdings, it must continue to do its best for the shareholders. Management must not abandon the vehicle by selling its share position to another promoter or another company, or by simply ignoring the company because another more attractive opportunity has presented itself.

Investors have long memories and professionals talk to each other. It is more common for them to “go away mad” than to communicate their reactions to managements. I hope my observations on some of the things which attract and repel investors may prove helpful to you.

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