Competing for capital: breakfast with the 40 over 40
12 October 2016
While the past few years have undoubtedly been tough for the energy and mining sector, there was a tangibly upbeat vibe over breakfast last Wednesday with the 40 energy and mining companies on AIM whose market cap is over £40m - the 40 over 40 - where we discussed the role of reporting in raising investment and increasing profile.
Maybe the optimism was a result of OPEC’s recent announcement to cut production leading to oil price rises, or perhaps it was the 50% increase in iron ore prices or the 30% increase in gold prices this calendar year? Either way, some green shoots of recovery are becoming evident and with that funding is starting to trickle back into the sector. Despite the recent tough years, a large number of small cap explorers have survived, many through halting or postponing exploration programmes and cutting expenditure. As a result there remains a plethora of opportunities available to investors, but with limited funds to allocate, competition for capital is tight. In this sector geology and feasibility studies results form the backbone of investment decisions, but with so many options open for investors the ‘intangible’ elements really count - our surveys with investors have highlighted the following:
- 9/10 investment professionals agree that the quality and integrity of reporting impacts their perception of the quality and integrity of management.
- Investors voted that of all sources of information, they put more weight on the annual report than other sources of information, including dialogue with management/investor presentations.
As a result, in our view, the need for companies to clearly communicate in their annual report (a) what they do, (b) how they are performing and (c) where they are going, is critical in a highly competitive market. However, based on our analysis of the 40 over 40, there is wide diversity in how well companies communicate, with even the top reporters falling short in some areas. And it’s not just about communicating to investors. Big data and social media are increasing transparency, and holding companies to account to a much wider range of stakeholders – stakeholders that expect business values to align with their own. Licences to operate are granted by governments, but social permission is also required - the recent debates around fracking being a prime example of this.
So, with this challenging backdrop which companies will thrive in the next phase of the cycle? Unfortunately we don’t have a crystal ball but those in the room agreed the following reporting tips would help:
- Focus reporting on material information and have the courage to strip content out – graphics paint a thousand words.
- Create a more strategic narrative throughout reports and improve the linkage between key content elements.
- Move away from preparing regulatory filing documents to using communication to gain a competitive edge.
To obtain the results of our analysis of the 40 AIM energy and mining companies over £40m market capitalisation, please contact Peter Acloque.