Why does the Board grant performance rights. Isn’t a good salary sufficient?
We continually bench mark our remuneration practices against peers and the broader industry to ensure we can attract, retain and motivate the best people.
The Board adopts currently recognised best practice in the Company’s remuneration strategy, by splitting remuneration into a combination of fixed and variable remuneration, and then further splitting the variable remuneration into short and long term incentive remuneration structures. The intent of the variable remuneration component is to align executive remuneration with short and long term shareholder experience by driving sustainable value creation.
Many other companies’ short term incentives are paid in cash. In our case, to further assist in driving the alignment of executive and shareholder interest, our short term incentive is paid as 50% cash and 50% shares.
Performance rights, rather than a straight fixed salary, provide three key benefits:
- Performance criteria can be specified to drive better returns for shareholders over the specified measurement period (1 year for Short Term Incentives and 3 years for Long Term Incentives). If the performance criteria is not met by the employee, an agreed percentage is forfeited. To illustrate this, for the last 3 years, the Long Term Incentive awards were 87% for the 2015-2017 plan, 0% for the 2015-2018 plan and 46% for the 2016-2019 plan. This indicates that these are far from being automatic payments.
- Holders are exposed to movements in the share price over the measurement period, ensuring that employees have some “skin in the game”.
- They improve employee retention. Most of the time, we are in competition with our peers for good talent and talented employees drive exceptional shareholder outcomes.
The share price is governed as much by gold prices and world share values as by individual company decisions. As demonstrated by the Royal Commission into the Banking sector incentive rights may not encourage good business practice, thus increasing shareholder risk. Is it really in the best interests of all concerned parties to grant term incentive performance rights?
The Company agrees with the statement that the Company’s share price is driven by gold prices, the share market and individual company decisions. This is why the Company has its Long Term Incentives structured into three areas:
- Company Strategy: To incentivise those things we can control to ultimately drive a better outcome for shareholders.
- Relative Total Shareholder Return: To remove the influence of gold price and other macroeconomic factors, we compare the Company’s performance against other similar sized Australian listed gold companies and reward for outperformance against these peers.
- Earnings Per Share Growth: This excludes the influence of the share market but is linked to both gold price and individual company decisions which generate better returns for shareholders.
As to whether incentive rights encourage good business practice, this is ultimately down to how they are structured and how discretion in awards are managed. The Company believes they do, and there a couple of points I’d like to highlight in regard to our structure:
- The award of incentives for Short Term Incentives (STI) includes an Environmental, Social and Governance gateway. The Board has discretion to reduce the whole or part of the STI based on an individual’s accountability.
- Any incentive award is subject to Board discretion. If the Board does not believe that shareholder value has been added, they are not compelled to award the incentive.
- This year, in line with good governance, we’ve included the ability going forward for the Board to clawback some or all incentives after award, where in the opinion of the Board, the expected performance outcomes which were intended to be incentivised have not been realised or in the case of fraud or where there has been a material adverse effect on the reputation of the Company.
The Independent and Non-Executive Directors (NEDs) firmly believe that having the right company culture and related values drives sustainable shareholder value. As highlighted earlier, I believe that the Board has demonstrated a good track record in structuring and exercising its discretion responsibly, to help ensure that a good corporate culture is achieved. I might add that all board members are shareholders in their own right.
Why does the Board dilute shareholder value by issuing performance rights?
If full award is made of the executive performance rights for which shareholder approval is currently sought, it will result in dilution of 0.14% of the current shares on issue. Additionally, for all performance rights that have been awarded in the last 3 years, there has been a dilution of 0.8% of the current shares on issue.
The Gold Road Board believes the purpose of performance rights is to create additional shareholder value rather than dilute shareholder value.
As I’ve explained earlier, the Board consider that the combination of performance rights and salary, instead of higher fixed salary, will ultimately deliver increased shareholder value.
When will a dividend be paid to shareholders?
Firstly, let me note that this question was the most asked by shareholders who submitted written questions.
Fundamentally, the Board views the Company as a growth stock and we believe that we have been very successful in delivering that growth to date. In the last 6 years, we’ve brought Gruyere from discovery into production and delivered a total shareholder return of ~1,500% since the discovery of Gruyere, as the graph provided illustrates.
Currently, we have $80M of debt on the balance sheet. As we’ve communicated previously, we will first pay down this debt and then look to build sufficient robust cash reserves. Gold Road only has one cash generating asset and there are many known and unknown circumstances which could impact on production or revenues at Gruyere, including the future gold price. The current risks associated with COVID-19 is an excellent example of the need for financial prudence, with many highly dilutionary equity raises or administration being forced upon other companies. We consider it is prudent to have robust cash reserves to weather these storms.
I mentioned earlier that the Board views Gold Road as a growth stock. What we do well is that we discover substantial gold deposits and then successfully bring them to production by appropriately managing the attendant significant risks associated with each of the many steps along the way. We have just demonstrated this with Gruyere, a deposit which we discovered just 6 years ago and have delivered on time, under budget, fit for purpose (manifested by ramping up ahead of budget) and safely (manifested by no lost time injuries during construction). Very few are able to successfully deliver a capital project in excess of $600 million in an extremely remote location like that. In fact, at around the same time, there were some notable failures of significantly smaller projects.
Our plan is to capitalise on these strengths to deliver further substantial shareholder growth. An obvious path forward to creating increased shareholder value is through our exploration and development capabilities. While we appreciate it will be very difficult to emulate another Gruyere discovery, we still have a highly unexplored belt at Yamarna and we don’t believe Gruyere is the only million ounce deposit there. Statistics tell us this is highly unlikely. These activities require funding.
Before commencing dividends, we will ensure there are sufficient funds to satisfy all these requirements, enabling a sustainable dividend into the future.
Why has no road map or policy to the payment of dividends been announced?
Please refer to the previous answer, which provides a broad road map to the payment of dividends.
What are your goals and what are your future plans?
Today’s AGM presentation provides an outline of the Company’s strategy and future plans. The AGM presentation is available on our website to watch at your convenience.
When will you update your Ore Reserves and Mineral Resources to factor the significant increase in the price of gold?
Firstly, optimising Ore Reserves and Mineral Resources at higher gold prices results in higher cost and lower margin ounces. Our strategy at Gruyere is firstly to optimise the plant and operating cost structure, which enables mining of a deeper pit to bring into account much of the 1.23 million ounces of additional Indicated Mineral Resources, which was announced earlier this year following last year’s drilling. A higher level of confidence on fresh rock performance including plant throughput, recovery, process costs, mining costs and pit slopes based on operating performance will emerge over the next 6 – 12 months. We anticipate many of these parameters will show demonstrated improvements which can then be incorporated into a review of the life of mine pit designs, potentially adding high margin ounces to Ore Reserves.
At sustained high gold prices, there is considerable optionality to consider an even deeper pit or underground mining strategies. The difference between Ore Reserves and Mineral Resources illustrates some of that optionality. However, high gold prices will not impact the mining plan and costs in the near term.
Ore Reserves and Mineral Resources are routinely updated annually in February or when there is a material change from drill results or modelling.
Why not payoff the credit facility – what is the benefit of debt?
Gold Road has determined a specified amount of cash on its balance sheet to ensure it can meet its operating needs, in particular cash calls from the Gruyere Joint Venture. Following the COVID-19 pandemic, this amount increased with the higher risk of business interruption. Some may assume that the risks associated with COVID-19 have now subsided. Our view is that it is too early to make that call and so we remain vigilant and properly funded to deal with potential future associated risks. If there is surplus cash above this amount, Gold Road will reduce its debt.
During the March quarter 2020 spot gold was priced at A$2,500-2,600 per oz. Why was gold sold at approx AUD $2,000?
The Chairman talked earlier about managing the many risks associated with bringing a large, remote gold project into production. One of those risks is financial risk and to build Gruyere, Gold Road assumed some modest debt, which of course needs to be repaid. As part of the associated risk management, it was deemed to be prudent to hedge part of the predicted early gold sales. As we come into production, these hedges need to be delivered into.
During the quarter, Gold Road sold 11,500 ounces mostly in January and February at an average spot price of A$2,349, compared to the quarterly weighted average spot price of A$2,410. 20,200 ounces were delivered into forward sales contracts, at an average price of A$1,802 per ounce, resulting in the average sales price reported of $2,001 per ounce.
With the onset of COVID-19, there are potential risks to Gruyere’s production, which could lead to a need to cash settle forward sale contracts in a rising gold price environment. As part of the 20,200 ounces delivered into forward sales contracts, 5,800 ounces were pre-delivered into hedge positions as part of ensuring the company retained a strong liquidity position in a reasonable worst-case situation.
We note the gold price has continued to strengthen during the second quarter. While the early delivery into forward sales contracts was performed to manage risk, there is a potential additional revenue benefit in a rising gold market.
Will Gold Road endeavour to maintain existing and future environmentally sustainable operations, and constantly seek innovative methods to ensure best practices in the mining industry?
As stated in our AGM presentation, Gold Road aspires to be an ESG market leader in our sector.
Gruyere has been developed to high environmental standards, including the design of the tailings storage facility and compliance to the cyanide management code. We are working towards ISO14001 certification of our environmental management systems and we are capturing the information required for GRI reporting standards.
With respect to greenhouse emissions, we operate a gas-powered processing plant at Gruyere with relatively low carbon emissions. We are at an early stage of investigating a solar power and battery solution to supplement the power station. At our Yamarna exploration camp, we are constructing a solar array with battery storage capable of powering our entire exploration camp, which will be commissioned in the third quarter.
In our 2019 Annual Report, we increased the level of ESG reporting. For 2020, we are targeting a higher level of transparency equivalent to the leading gold producers on the ASX.