There seems to be some unrest among fund managers when it comes to resources companies and mineral explorers in particular.
At the recent Mines and Money conference in London, Black funds manager Evy Hambro accused mineral explorers of widespread dishonesty. Mr Hambro described exploration company executives as 'being economic with the truth'.
According to John Robertson, Chief Investment Strategist at E.I.M Capital Managers, Mr Hambro is just one of many fund managers concerned about shortcomings in the mining industry.
According to Mr Hambro, 90% of the companies he has met have been unable to validate the claims contained in the public filings of exploration companies during due diligence.
Back in 2013, Mr Hambro told Bloomberg that resources companies had lost investors trust, after Rio Tinto Limited (ASX: RIO) wrote down its acquisition of aluminium producer Alcan by US$14 billion. Mr Hambro said it was extremely disappointing, but it seemed to be a trend across the industry. "It's happening everywhere and it's time for it to stop. We need greater capital discipline inside these companies, we need to see companies much more diligent in their analysis, we need to see boards be accountable as well as executives for these deals."
He added, "We're getting to the point now where it's incredibly frustrating for us to see these companies be as reckless and profligate with shareholder capital they're meant to be custodians of."
I tend to agree.
Both BHP Billiton Limited (ASX: BHP) and Rio have been guilty of wasting billions in shareholders capital in the rush for greater production and control over more resources at the expense of returns to shareholders. BHP wrote down billions on its shale oil and gas acquisitions and its other assets, including US$1.9 billion in 2013, US$3.4 billion in 2012, US$1.5 billion in 2014 and US$3.2 billion in 2015.
Rio eventually wrote down US$27 billion of the US$38 billion it paid for Alcan.
They aren't the only ones, though.
Overly optimistic production forecasts seem to dog the gold sector. In early 2013, Silver Lake Resources Ltd (ASX: SLR) suggested it was on the way to producing 400,000 ounces of gold, becoming one of the largest Australian gold producers and expected to pay its maiden dividend in 2014. The most gold Silver Lake has ever sold was 217,348 ounces in the 2014 financial year, with 2015 sales sinking to 124,209 ounces, with a similar forecast for the 2016 financial year.
Shareholders have seen the share price crash by 94% since early 2013, and the gold miner has been forced to issue 130 million new shares to prop it up.
Tiger Resources Limited (ASX: TGS), a copper miner in the Congo has seen its share price decline 87% over the past five years, despite increasing production. Not all of that can be associated with the falling copper price, and I discussed Tiger's particular issues earlier this year after the CEO resigned.
Perhaps mining executives lose the focus on returns for shareholders and instead see ever greater production and expansion of their domain as their number one goal. I suspect many have forgotten that their shareholders have invested in their company expecting to see a return on their capital, either in the form of dividends, or capital gains.
It's not a charity.
Another issue that mining companies should consider is much greater transparency in all-in sustaining costs. Shareholders and investors want to know whether the company is making a profit or not. Many gold miners have adopted it for a number of years now, and iron ore miners are beginning to report their all-in sustaining costs, but it's still difficult to work out their margins and breakeven costs.
Here's a challenge. From company reports and presentations, find out what royalty rates individual Australian miners pay. If you can find it, you're doing a much better job than I.
Foolish takeaway
It might also be a good time to remind mining executives that shareholders own the company, and management has been entrusted as the stewards of that capital.
Mining company executives owe it to their shareholders to increase their focus on return on capital invested, increased transparency and a clear path laid out for shareholders to see a return on their investment.
