It’s the world’s oldest profession – except, perhaps, for the sex trade, though metals and mining have not been without their own romantic adventure: gold rushes, conquistadors and glittering diamonds. Today, and for the last few years, metals and mining have shown their gloomier side – tarnished, you might say, by sinking prices and demand. If the prime directive of investor relations is to persevere in bad times as well as good, few sectors have put the axiom to the test like this one.
‘Investor relations is a much bigger and more important role in the metals field than has heretofore been the case,’ says J Clarence Morrison of Prudential Securities, a 33-year veteran metals and mining analyst at Prudential Securities and a Wall Street Journal all-star for all seven years of the survey. ‘The reason is that all of the metals and mining companies are plagued by a very high cost factor. It’s necessary to really revamp or restructure the entire company.’
Take, for example, the recently announced merger of Asarco and Cyprus Amax, which creates the world’s largest publicly-traded copper producer. Each company has a high cash cost and higher ‘all-in’ cost per ounce of copper. ‘Put them together and they’ll be able to pull it down,’ sums up Morrison. ‘The IRO has to be able to explain this: exactly how it’s structured; how they get savings out of each division and why; how much they’re going to get next year; what the ‘run-rate’ is for cost savings; and they have to make sure they get us understanding the exploration and development.’
The analysts’ consensus is that the metals sector has risen to the challenge of hard times, with Alcoa, the US aluminum giant, singled out for special praise. ‘Alcoa is clearly the world’s leader in terms of cost cutting and restructuring, with $1.1 bn savings in the last year at a run-rate of about $250 mn on a quarterly basis,’ Morrison says, adding that overall, most companies’ earnings should move up dramatically even if metal prices do not move up.
Alcoa’s IRO, Ed Cheely, is also given high marks by the Street for his skill in negotiating the dips and turns of a cyclical industry. Indeed, as senior Argus Research analyst Jim Kelleher explains, that cyclical obstacle course is faced by any metals and mining company. ‘Because aluminum is sold in the global marketplace, such as on the LME, it is a cyclical product that reflects the economic behavior of many, many nations.’ The result is more focus on global trends in basic materials than there would be in other sectors, so a lot less certainty. And despite great progress in efficiency and cost-cutting, metal companies face a tough IR job. ‘There’s a feeling that in the next downturn all that good earnings progress will be washed away. Metals and mining IROs wage a constant battle to remind analysts that their stocks are deeply, deeply discounted considering how well they’re doing,’ says Kelleher.
With the recent rebound of copper and oil prices, Australia’s Broken Hill Proprietary has seen its stock climb too, which San Francisco-based investor relations officer Pierre Hirsch says could portend a sustained rise in commodity prices. ‘It’s like a big pendulum,’ he suggests. ‘Overlaying the realities of the physical market in copper is both the optimism and pessimism of investors on the commodities markets. A lot of times when we pay visits with investors they will want to hear where we think copper is headed. They view us as a kind of bellwether indicator, providing accurate market intelligence.’
‘But there’s more to the story for BHP,’ Hirsch adds, for the company is on the restructuring bandwagon. ‘We have a new CEO, new CFO and a new chairman, and it’s this whole new culture that is the backdrop to changes in the commodities price outlook.’ The whole team was on hand for one of the industry’s biggest annual events: Merrill Lynch’s May metals conference. Held every second year overseas, the conference was in Arizona last year and Dublin in 1999.
A much smaller and less typical mining company was also in Dublin: Colorado’s Stillwater Mining. Stillwater is unique in that it mines the world’s only pure deposit of palladium, a little-known metal used instead of platinum (which Stillwater also mines) for pollution control in vehicles. As a result, Stillwater is even owned by some green funds – almost unheard of for mining stocks – because of palladium’s pollution control applications and because the metal can be extracted from ore without poisonous chemicals like gold producers use. Another way that Stillwater is different is that it enjoys growing demand for its product.
When Gina Wilson came to the company as vice president of investor relations in 1996, she brought a career’s worth of experience in gold – a much better understood metal compared to palladium. ‘We had a hard time attracting sell-side analysts at first. People needed to begin to understand the story, so we had to go through an education process.’ After a major push last year, Stillwater’s coverage went from two sell-side firms to 16.
Wilson points out that mining is small in comparison with other industries. ‘Those of us who have been in the mining industry for a while know all the analysts, and the analysts know us,’ she says, adding, ‘and the analysts know the industry very well. It’s a very technical field and they’re often geologists or engineers. Therefore we have to be more open, and probably tend to disclose more than other industries because the analysts expect it. Mining is considered high risk so we have to be more forthcoming with our information.’
This year Wilson is focusing on an investor relations strategy that’s borrowed straight from Canada’s Barrick Gold: that is targeting investors other than precious metals funds. ‘We’ve got a growth story, so we’ve gone out and marketed our stock to growth and value investors,’ she remarks. ‘We have taken our ownership position from 60-70 percent precious metals funds down to 40-50 percent. And now we find that we’re cultivating and getting to know different types of investors.’
Golden opportunity
In this suffering industry, the hardest hit have been gold companies. ‘We’re dealing with a metal that has not only gone out of favor, but has earned opprobrium around the world in the investing community,’ bemoans Steve Lenahan, the New York-based IRO for South Africa’s Anglogold. ‘So not only do we have a challenge in selling a stock in competition with other stocks, we have a challenge in selling a product which is associated with that stock.’
On the brighter side, Anglogold has a restructuring and growth story; it has a gold marketing story; it has a positive country risk story; and a sound management story. ‘It’s those four issues which form the backdrop to our IR story,’ says Lenahan, describing how two years ago Anglogold rolled up several separate companies and listed on the Johannesburg and New York stock exchanges. ‘We consolidated management, rationalized the production machine, expanded our exploration program and introduced a market development program. We also reconfigured our board to demonstrate management independence from our principal shareholder, Anglo American, with a majority of non-executive, independent directors. While that might not be a new story in the North American investing environment, it most certainly is in South African gold mining.’
Until recently, South African gold mining companies have not had major IR programs outside their home country. ‘Now it’s become absolutely imperative that we develop a North American IR program,’ says Lenahan, who, along with Denver-based colleague Charles Carter has been doing just that in 1999. Further building Anglogold’s IR effort, Alex Buck of the London consultancy Brunswick is joining the company this summer to handle UK and European media and IR tasks full-time.
Uncovering data
You could say that metals and mining analysts like to dig deep, and one consequence is that mining company IROs are kept busy organizing site visits. ‘That’s less of an issue if you’re a bank or a telco. But we’ve got mines and smelters, and that’s the heart and soul of our business. They’re the bits that really generate the money. Naturally the people who follow the company are interested in going to see them,’ explains Trevor Shard, group manager, investor relations at Pasminco in Australia. Adds Stillwater’s Wilson, ‘It’s more of a kick-the-tires kind of industry – people want to get out and see what they’re buying.’
Twice a year Shard flies groups of analysts and investors to Pasminco’s many mines and smelters all over Australia. ‘Within Australia we’ve got a number of peer resource companies all trying to do the same thing, so we try to coordinate with each other to make sure we don’t conflict with our proposed tour dates, and where possible we try and work in with each other.’
A typical Pasminco site tour sees 10-15 analysts and investors jetting around Australia on a chartered aircraft for three or four days. They fly to a mine or smelter for a one hour presentation by the general manager, who uses a set of slides worked out with the IR group. Then they go off for a physical tour of inspection, which takes two to four hours, before a quick debriefing and back to the plane and the next site.
Although about 50 percent of Pasminco’s shares are held outside Australia, few US or European fund managers make the trek to the outback. Instead they settle for regular overseas visits by Pasminco’s popular CEO, David Stewart, and when in Australia they drop into the head office in Melbourne for half a day.
John Knowles of Australia’s North Limited is also keen on overseas shareholders. ‘We’re using e-mail, the web and other vehicles to provide northern hemisphere fund managers with information in a timely manner,’ he explains. ‘And we’ve increased communications by telephone and e-mail with a number of Asian fund managers.’
One reason for his enthusiasm is the Australian market’s short-termist thinking. ‘Aussie fund management has improved substantially,’ he says. ‘Unfortunately their time horizon is too short. Overseas fund managers generally have a longer-term time horizon, and are more prepared than the Aussie market is to take a position well in advance of a turnaround in the resources cycle.’
While Australia was once very much like Canada in its great preponderance of resource companies, the industry downturn has reduced the industry’s weighting considerably. Knowles points out that the resource sector, once 45 percent of the ‘All-Ordinaries index, is now only about 14-15 percent. And with the giant telco Telstra issuing another tranche, resources are likely to fall still further, though ‘in good times you may see them crawl back higher.’ The result, according to Knowles, is that when investors look at North they’re comparing it against companies in all industries. Because of the change in weighting of resources – which is global, not just in Australia – fund managers are now looking at return rather than industry, which means they’re comparing North against Telstra or a bank and not necessarily against its peer resources companies.
The ghost of Bre-X
Of course it’s impossible to look at metals and mining without invoking the specter of Bre-X, the Canadian gold producer that so spectacularly crashed and burned in 1997. Stillwater’s Wilson believes that analysts and investors in this sector now need a lot more hand holding. ‘Prior to Bre-X we had to disclose a lot of information,’ she says. ‘But the industry has become much more skittish, much more skeptical about junior producers and their reserves.’ On the positive side, Wilson says she doesn’t think a fraud like Bre-X’s could happen again.
Although giant BHP, which dates back to the 19th century, cannot be compared to an upstart like Bre-X, IRO Pierre Hirsch agrees ‘a great deal of credibility was lost by the sector as a whole. The Bre-X impact was greater and probably still lingers for smaller mining companies.’
Over the last few years, the metals and mining sector has been a testing ground for investor relations. Stuck in a trough, mining companies have not diverted their resources away from IR. Instead they have ramped up the effort and proactively sought to increase the flow of information. Other sectors would do well to follow their example in the event of a market downturn.
