A plague on all their houses

There is a definite Jacobin vibe in the air these days. By all reports a guillotine has been set up on Bay Street and all the aristos of the mining class that can be found are being hunted down, loaded into the tumbrels and dispatched to the “unkindest cut of all”. Some reports claim that 50% of the CEOs of major miners have gone under the blade in the last two years. A myriad of lesser fry have been garroted down the back alleyways of Vancouver, having been deemed unworthy of the public spectacle of their punishment.

Why is there this revolutionary mood in the air? Certainly the great and powerful of the largest miners lived large in the fat years and the milk and honey flowed their way. Some of the lesser lights though have been on a strict bread and water diet since 2008 and now find their reward is to also face an ignominious end.

Who though is the Robespierre in the current scenario? We do not see analysts baying for blood. Investment banks are too wary of calling the demise of an executive who has padded their own pockets in the past through fees and may yet survive a coup. Journalists may allude to the excesses of dumb M&A or failed projects with elephantine capexes (Pascua Lama, Tasiast etc) but they rarely name names of those who should pay the price.

There would seem to be a strange dichotomy whereby most of the greater victims of this purge are the result of board action and many of the lesser victims have fallen prey to the increasingly odious trend towards shareholder activism. The most notable, for us, of the latter trend was the ousting of management at Maudore Minerals by a group claiming superior skills that have since only excelled in gross incompetence and value destruction.

We have spoken in the past of collective responsibility of boards, particularly at the majors. Boards at juniors frequently have non-executive directors who are scarcely paid or not paid at all. Particularly inrecent years the compensation has shrunk to wads of way out-of-the-money options (which remind us of those Weimar shoppers with wheelbarrows of Reichsmarks going to buy their bread) so it is unreasonable to expect that these board members are spending vast amounts of time micromanaging the management. At the larger companies though the directors are compensated in many and various ways and yet when the cock crows three times the directors cry in unison “We didn’t approve what he was doing” and throw the CEO to the wolves. In so many of the cases the most damning thing is that the axed CEO goes on to do better things elsewhere while the replacement struggles just as much (and sometimes even worse) with a surly board and whatever inherent problems the company might have with its property or project. Ditching the CEO does not fix a project with dubious grades, funky mineralogy or defective economics. You cannot make a silk purse out of a sow’s ear.

As for the activist investors they are the plague in our time. Every trumped up holder of 5-10% can lurk under Canadian rules without disclosing themselves ready to leap out of the shadows and mug management when they want to make a power grab. Frequently they represent over 20% of the shares and take cover behind the Canadian regulators definition of “institutional managers” in the Early Warning System to NOT declare themselves insiders. They claim they are not discretionary fund managers but when push comes to shove they are voting way more shares than they ever declared publicly. They do not want to be insiders but they nevertheless heavy managements into leaking them tidbits which they then act upon (or not) as the mood takes them.

When we think activist we think of those acting to remove egregious entrenched and overweening managements. Instead now “activist” in the Canadian mining context means a lone wolf or wolf pack trying to extract added value for themselves with no advantage for the Great Unwashed on the company’s share register. To add insult to injury, when these carpetbaggers summon an EGM the whole cost of the enterprise falls upon the company (ergo the rest of the shareholders) and even an uncontested EGM request (i.e. one without proxy solicitors or legal input) costs $20,000 at least to have the share register drawn up and the voting materials dispatched. At the very least the costs of these EGMs should fall upon those that chose to call them. This would then create a cost to focus the minds of “activists” who think they can stage a coup and bill the company for the bullets.

Frankly management in the mining space is what it is… We would like to see whole boards go at badly managed majors rather than just a salutary victim “pour encourager les autres”. Collective responsibility has been replaced by collectively pushing the CEO under the bus.

As for juniors and the rash of EGMs being called by “activists” these are now becoming almost universally none too welldisguised takeovers without making an offer to minorities. Frequently the instigators have obtained their foothold via financings where they have received waivers on the 19.9% takeover threshold only to come to life as some form of pinstriped Chucky the Demon Doll eviscerating managements that trusted their benign platitudes of “support for management” which turns into a land-grab. Let’s face it, most of the mining activists these days are just clambering into the seat of power over the prone bodies of minority shareholders.

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