“The market turn for junior miners is just around the corner.”
Really? The problem is, that corner just kept moving ahead and three years into the downturn, we all still seem to be in very tough times. With gold now under US$1,200 an oz. and our seniors making drastic cost cuts, what is next? Where are those better days?
Our industry in general — and the junior mining sector specifically — has undergone a fundamental and permanent change. Regular routine financings where all you debated about was a penny here or there, or commission, are long gone. Reasonable M&A deals and fair pricing are difficult to find — if at all — those with money can demand very steep terms. I’m not sure the “good old days” will ever return.
So let’s face it head on. Companies need to accept the new reality in order to adapt and survive. It is time to face some harsh truths — cash is king and it is time to scrimp and save every dollar. Time for some tough decisions and reviews.
Three years into this downturn, investors might be surprised at how many companies have only done the window-dressing and, hoping that elusive turnaround will save them, not even attempted to cut to the bone.
Often, management and boards are unable or uncomfortable dealing with the tough questions — they are often as not human issues: who keeps a job and who doesn’t? It is about our friends and colleagues. Whose family will be out a paycheque? However, survival of the company is the ultimate goal, and must be for shareholders. Questions must be asked about how to cut costs to the bare minimum — we all must remember that the last dollar raised may in fact be the last for some time to come.
Ten points which I offer as food for thought:
1. Look beyond the obvious.
Typically, to cut costs, the battle cry is: “cut exploration, cut IR and cut director fees.” Far too many times, I have seen companies reach this conclusion while head office costs remain untouched. Rather, corporate head and site office costs should also be closely scrutinized — from personnel to professionals to frequency of press releases to third-party charges — everything. And if that’s already been done once, time to do it again. Anything that does not contribute to survival – to the drill in the ground — should be zero based, re-assessed and justified.
2. Do a line-by-line analysis.
Decisions about what stays or goes should not be based on assumptions or “the way it has always been.” Time to turn the box upside down — get out of the box and make some tough decisions. Rather than ask “why cut?” ask “why pay?”
3. Look at your payroll.
Management teams can often be stubbornly unwilling to looks inwards — especially when family members or friends depend on the company for their livelihoods. Do you need a full-time CFO at $120,000+ per annum when a corporate secretary service can do the same for a fraction of that? Should IR be full or part-time? How about that receptionist? Exactly what is your payroll? If your level of activity is way down, why do you need all these bodies?
Should management and the board take across-the-table cuts in compensation — 10-25% or more? Look at those stock options still being awarded – just maybe that sends the wrong message. Given the level of activity, what is fair these days? After all, the key consideration and driver should always be survival of the company, not those who work for it, unless their contribution is completely justified in today’s world. Job re-allocation, job sharing — spreading an individual across more than one company — lots of ideas should be canvassed.
These questions are not radical. In fact, in my view, asking them is part of the duty that directors and officers owe to their company. As is re-asking them as time passes and the treasury dwindles.
4. Have a frank discussion about professional fees.
Ask for discounts and ensure you get a cap on fees for big projects. Negotiate and debunk the mystery of professional services. Do you really need a lawyer to take minutes or draft a resolution? In well-run operations, it is even possible to have your lawyer just draft the opinion you need — and that’s about it. After all, that is what you are replying on. Internalize most of the paper. You be the secretary — not them.
The same holds true for our auditor friends. Do you need the quarter to be audited? How can you make the auditor’s job easier?
Firms that act in the industry are and should be more than willing to have a positive discussion and do their part. They cannot expect to make the same dollars in tough times, although they would certainly like to. Time to share the pain. If your professional will not have that discussion, it’s time to move on. Today is all about value-add reasonable partners.
One public company I was involved with as a director embarked on a review of legal — a complete review, re-bid and re-allocation. That resulted in a considerable cost savings and quite frankly, a better relationship with management. The company also had a candid discussion with the auditors about reducing fees and reducing quarterly service, and that firm was professional and smart enough to engage in the discussion, not avoid it.
Another public company (again, of which I was a director) had a very frank discussion about its subsidiary division, which operated a related but non-key business — lots of emotion and history. With the help of the board, a plan was devised, advisers engaged and a rational business decision made to divest — an action that some years later may well be said to have saved the parent.
5. It may be time to downsize or share office space.
Also, look at your foreign jurisdiction costs: how much is absolute and essential versus “the way it has been.” What about those JV’s — is it time to reassess the value of the play and consider divesting, or changing the deal to stem the flow of money? The line from one subsidiary company I was involved with to HQ was: “We know what we are doing, don’t ask questions, send money!” Ah. . . no.
6. Cut the travel and convention budget.
It was surprising to see a largely business-as-usual atmosphere at last year’s PDAC and other conventions at the same time the depressed treasury levels of many participants was making news. Some attendance has been down. Let’s see what happens this year. Will we see more headlines about companies with negative working capital?
7. Seek alternatives to traditional financing.
If financings are dead, what other alternatives are there? Seek royalties or streams. Speak to your neighbours. If you have done this once, ask again.
8. Seek a merger.
Many companies at this stage are surviving by merging with cashed-up companies. Such deals can be expensive, but do achieve the goal of survival. Time to look around — time to find that big company corporate saviour with an investment in juniors program. Ask your board and professional advisers for input on who to talk to quite apart from engaging one of their investment bankers.
9. Turn to your board for help.
Ensure you have good board menders and advisers who are able to help you ask the right questions, which are often tough questions. Management has a tough role of looking at unpleasant issues, and that is where your board can help.
10. Engage third-party help.
A third party can take you through a “boot-camp” — a dialogue about how your operation works that can give you an outside, objective opinion. An outsider can help spo
t problems and solutions that the company hasn’t yet noticed.
As we wait for the market turn, it’s time for these questions to be not only asked, but answered.
Many survived last year by the skin of their teeth: it is in 2015 that we may well see who really survives and who fails.
— David Poynton is president of Daycon Minerals, a private Canadian company with stratabound copper-silver exploration properties in Idaho and Montana. He is also a consultant on corporate strategy and cost reduction issues, and is chair of AEMA’S conference session on junior miners in December. He has held director and officer positions in several mining issuers, and was a partner in Toronto law firms specializing in mining law for 30 years.