ASIC's Newcrest decision is a step towards better market integrity

The $1.2 million 'settlement' reached by Newcrest and the Australian Securities and Investment Commission over Newcrest’s disclosure practices last year underscores what a minefield communications between companies and the analysts who follow them can be.

While ASIC doesn’t allege that Newcrest knowingly or intentionally contravened its continuous disclosure obligations, Newcrest has conceded that it did breach them in a series of briefings to analysts in the lead-up to its June 7 announcement of massive write-downs, lower production guidance, lower forecasts for capital expenditures and the decision not to pay a final dividend.

It is apparent from the detail of Newcrest’s dealings with analysts just ahead of that announcement that the company was led into providing increasingly specific guidance. This included involving non-public information by the inability of the analysts to interpret the signals the company had given publicly about its future production and capital expenditures.

The context for the briefings was the precipitous fall in the gold price earlier in the year, which caused Newcrest to budget for the significantly lower gold production and capital expenditures and a major cost-reduction program that was formally disclosed on June 7.

In the days ahead of and immediately after a public disclosure of the production guidance at an investor briefing on May 30, Newcrest’s investor relations manager Spencer Cole had meetings and conversations with analysts in which he progressively guided them towards the numbers in Newcrest’s budget.

It is those conversations that ultimately led to the settlement and the proposed $1.2 million of fines.

It has been one of the more bemusing aspects of the Newcrest saga that despite the implosion in the gold price, the analysts were so slow to appreciate its implications for Newcrest or how the company might respond by shutting down higher-cost production and trying to conserve cash and capital. It is particularly puzzling given Newcrest did try more than once to get the message across to the market.

In his company-commissioned review of Newcrest’s disclosure and investor relations practices last year, Maurice Newman proffered a possible explanation. He suggested that analysts tend to be less experienced and stretched more thinly than they were before the financial crisis and more inclined to remain with the consensus view than risk their reputations by departing from it.

In any event, the settlement underscores another of Newman’s insights. He said that the volatile real-time environment in which Newcrest’s management were operating illustrated the delicate role played by managements and investor relations departments and the fine judgement calls they have to make as to when to give guidance to analysts and when to make public announcements.

It is pertinent that ASIC isn’t alleging that Newcrest knowingly or intentionally contravened the continuous disclosure laws. It believed at the time that its communications with analysts were within the boundaries of the disclosure regime. ASIC isn’t taking any action against any of the individuals involved at Newcrest, although it is still investigating the analysts who received the information.

In the aftermath of Newman’s review, Newcrest has changed its investor relations policies, practices and structures. Inevitably, other companies will look to tighten their approaches too.

The ASIC action related to a period of just over a week: between May 28 and June 7 last year. During that period, more than 40 million Newcrest shares with a value of more than $600m were traded.

While the Newcrest share prices was always going to fall heavily once the market properly appreciated the impact of the fall in the gold price for its operations and earnings, selective disclosures do create at least the potential for some investors to fare better than others. They undermine perceptions -- and perhaps the reality -- of the market’s integrity.

That makes ASIC’s investigation of one of the market’s blue-chip companies and the outcome of greater importance than the financial penalties involved, which are inconsequential for a company of Newcrest’s size.

It does have the potential to cause companies to re-think their relationships with analysts and institutions, which is a good thing for a market whose integrity is based on the continuous disclosure regime.