Finding equilibrium between shareholders and business realities

The relationship between a public company and its shareholders can be a tenuous one at times. While both interests want the company to achieve success, each have a unique view as to how success should be gained and within what timeframe.

This difference of opinion is often magnified in the mining sector, where more often than not it takes years to see a return on investment for any given mining project.  This can create tension between mining executives and shareholders, one further complicated when shareholders are pension funds and money management firms.

To put it fairly simply, shareholders are looking for consistent growth in terms of capital and production because it translates into favourable fiscal projections. However, when it takes five to ten years for a mine to start producing ore, there’s a timeframe difference that can sometimes produce tension.

I briefly touched on this issue when I addressed Laurentian University in early 2015 (see Ian Telfer: Top 10 Mining Mistakes). As I explained, in my experience I have found keeping shareholder interest in mind is important.  However, it is equally important to find a balance between their more short-term goals and a mining company’s sustainable future. Increased pressure to focus on shareholder needs can skew perspectives and lead to hasty business decisions, poor strategic planning, and acquisitions or divestitures that backfire later.

More importantly, shareholders are compensated based on short-term price performance rather than long-term business feasibility, which can misalign the interests of both management and current shareholders with the true welfare of the company.

In the mining sector, there is often a tug-of-war between management and shareholders over the company’s capital. Investors often view extra cash on a company’s balance sheet as a possible return to shareholders in the form of cash dividends, which in turn is looked favorable by markets.

However, the company’s management teams can be hesitant to do this, and rightly so. This is because management teams are committed to sustained growth and may want to use additional capital to invest in new mining projects. Re-investing capitals in new mining initiatives is sometimes not at the top of shareholders priority list.

By no means am I saying that shareholders aren’t valued, but as my history in the mining sector has shown me, they are only one component of a much larger picture that includes the management team, the employees, the shareholders and the community. Finding the right balance between appeasing shareholder demands and promoting and protecting the future of a company is paramount in order to achieve long lasting sustainability no matter what sector or industry.