The Year of Team Ox
23 February 2009
Sean Russo
SITTING back and listening to one of the industry’s most entertaining presenters, rapturous audiences were left in no doubt that when it came to “The Mighty Ox” there was oodles of potential oozing from their ground and the hungry horde up north ready to snap up all they could produce. Mr Hegarty was particularly famous for his use of Barrasi quotes and Aussie Rules references to describe the Ox’s brilliant future. “It was only the third quarter and the best was yet to come.”
According to those who know about that game the third quarter is the “premiership quarter”, the quarter where games are truly won and lost. If I could, Mr Chairman, I would like to suggest that Team Ox, and for that matter it’s soon to be sister Team Zinifex, started their “premiership quarter” in front and were running with a gale at their back. How is it their dream franchise Team Oz ended up taking out the wooden spoon?
Sure they could talk the talk and didn’t the market love it, but it now seems clear they hadn’t been doing the stuff that makes champions; they hadn’t been getting the little things right. When they should have been out training, ensuring they had the legs to carry them home and drilling to make sure they did the little things right, they were already planning the end of season trip. In the end when the pressure came on they were found wanting, their game plan was flawed and they had to throw in the red towel before the final siren had even sounded.
When it comes to commodity price forecasting it seems that too many involved in mining do truly believe it is different “this time”, every time. Or perhaps less favourably, but more realistically, it is that too many industry stalwarts learn very little because the mistakes of the last down cycle are always laid at the feet of others and no one who stuffed up ever takes responsibility for their actions or inactions. Problem is you can’t learn from mistakes you won’t acknowledge. Too often they are just simply say they are the victim of unforeseen circumstances, the actions of evil bankers, short-selling hedge funds or all three and get ready to do it all again!
In 2005 I gave a slightly tongue in cheek presentation to the Sydney Mining Club on the five top reasons mining
CEO’s give for not hedging:
#5 The new accounting standards make it too hard to hedge.
#4 So and so told us not to and he’s been pretty right lately.
#3 My broker said “don’t hedge or “they” will trash your share price”.
#2 We don’t hedge because banks make too much money out of it.
#1 Our shareholders want exposure to metal price (going up).
All of which I suggested were actually lame excuses for inaction, not legitimate reasons at all. And any way on that basis when metal prices started to fall “they” would trash your share price anyway.
The simple takeaway was hedge appropriately, hedge conservatively and think of it like insurance that your price view might be wrong. Think of your mine as a business not a call option.
It was a tough crowd – the scars of Pasminco and Sons of Gwalia were still fresh and no one wanted to hear that hedging done properly and for the right reasons makes perfect sense. (Note: What SOG and Pasminco were doing was not hedging but outright speculating with derivatives, but why let the facts rob you of a prime excuse to inaction).
I realised just how tough our mission to have the industry embrace hedging would be several months later when I attended another Sydney Mining Club lunch where Mr Hegarty was the presenter. To rapturous applause from the throngs he announced that the hedging gene of “The Mighty Ox” had been removed. No banker would ever be able to pressure them to hedge, of that the faithful could be guaranteed. The crowd loved it.
The reference to bankers was important because industry stalwarts know that all bad hedging is the result of banks pressuring their clients to hedge. Of course hedging that works (and there has been plenty, it just isn’t as newsworthy as the train wrecks) is always the result of management brilliance.
I commented to a colleague at the time that the idea did have some merit as plenty of mining companies should have their hedging gene in a place that was at least hard to get to. Ideally, locked in a box so it could only be brought out when a clear plan of action was set; one that aligned hedging with their businesses needs. Rather than allowing them to “hedge” after a great Friday lunch with their friendly banker who just happened to know their metal was about to collapse.
Be prudent by all means, but why throw away the capacity to understand and sensibly manage the risk to your business of variable and volatile commodity revenues. To simply believe it will all be alright on the night is naïve if not suicidal. Unless of course you know the revenues are only ever going to go up – Stronger for Ever, Mr Chairman.
It is not the hedging gene that should have been removed from “The Mighty Ox”, and many others, the forecasting gene and the predicting gene are the ones that should have been removed. CEOs of mining companies do not have a special crystal ball giving them a clearer picture than you or I, where metal prices are going. Predicting is not what they get paid for, but shareholders pay when they are wrong. Those who believe they know should worry shareholders about all sorts of other decisions they make.
Being successful in mining is so much more than speculating on commodity prices. It’s about finding the stuff where others have already looked or never thought to look. It’s about developing and utilising cutting edge technology and so many other things. Mining made into an outright commodity punt is like playing roulette. If you win the rewards can be high but the odds are stacked against you and most players leave the table with little to show for their efforts. Assuming a punter plays with money they have already earned and can afford to lose roulette can well be described as entertainment. Play roulette with borrowed money and lose it’s a whole different story. It doesn’t matter whether you borrowed from the local loan shark or a pinstriped banker, they get funny about things when you can’t repay.
If any miner wants to be a “hedge free” zone it needs to be a debt free zone as well. Debt and hedging; one is the necessary bedfellow of the other. If I have learned nothing else in 25 years of being involved in this industry I have learned this is an immutable truth, however unpopular it might be with certain industry stalwarts.
There is no denying it is the Year of the Ox. Such a shame it didn’t turn out to be the Year of “The Mighty Ox.