Information goldmine but not for all
If the corporate regulator, the Australian Securities and Investments Commission, decides to bring in more rigid standards for briefings to analysts or large investors it will forever be known as the Newcrest Rules.
There is a bit of panic among the big players in the investment banking and funds management industry this week that the alleged actions of Newcrest 10 days ago - to selectively dole out price-sensitive and detailed information to some analysts days before it was broadly announced - could ultimately punish responsible information flows in the markets.
The particular circumstance of the Newcrest case is certainly extreme and worth a run-through.
An analyst (or analysts) held meetings with Newcrest management in the week leading up to an announcement, and several brokers issued reports containing uncanny insights into the company's production downgrade, which in turn led to a downgrade in earnings estimates.
Not all the analysts necessarily had a selective briefing. Some would have just read other broker reports, checked out their veracity (probably with the company) and put out similar reports the following day.
And it's no surprise that the stock price went south after the small avalanche of broker notes.
Here is a taste of some analyst reports published before the June 7 announcement by Newcrest.
From Citi Research: "Recent presentations have outlined a major change in strategy at Newcrest, with the focus shifting to returns and cash generation at the expense of production growth . . . We see lower production, earnings and NPV (net present value) materially as a result . . . downgraded to sell."
From UBS: "Newcrest has recently reiterated to investors that production growth in FY14 (full year 2014) will be 5 to 10 per cent over FY13. The production downgrade has lowered our FY14 EPS (earning per share) estimate by 32 per cent." Downgrade to sell.
From Credit Suisse: "The precipitous gold price decline will initially drive consensus downgrades to price assumptions, earnings and valuations. This will be followed by secondary downgrades to production. Newcrest's challenge has moved from achieving a satisfactory return from Lihir by growing production to shrinking production to ensure net free cash generation. Downgrade to underperform."
From Bank of America Merrill Lynch: "Maximising cash flow not production is the way forward. In essence this may result in Newcrest shelving its production growth aspirations. Buy."
The Newcrest announcement to the market on June 7 covered a lot of things, central to which were cutting costs and lowering expectations for increased production in 2014.
The analysts were sufficiently prescient that one fund manager from Platypus Fund Management wrote to Newcrest's chief executive Greg Robinson (on June 7) saying: "I was amazed by the co-incidence of the fact that the entire street downgraded your stock yesterday . . . I have not seen a more appalling example of hosing the street down selectively before informing the wider market by a large cap company in recent years."
The fund manager wasn't suffering from sour grapes. He had been given the tip the previous day.
While Newcrest management denies any wrongdoing, it is hard to imagine that ASIC, under the public glare, will not be chasing this down. Selective briefings is one of those issues that falls into a grey area.
Analysts and large investors do often speak to management - a site tour, a coffee, a lunch or in the box in a sporting event.
The line gets drawn when the company representative (the insider) informs someone of facts that are or could be price sensitive.
Fund managers and brokers should be free to speak with executives to better understand their companies. There is a lot of nitty-gritty that isn't price sensitive and lots of broader industry information is legitimate fodder for investors.
It is their job to research and analyse companies and they are paid to use their skills to assess companies' investment appeal.
For most analysts once they have published their reports the information is then publicly available. It isn't - but the audience is pretty large and if it contains anything new or noteworthy it is quickly picked up by the media, thanks to the proliferation of online business coverage.
It falls into more dangerous territory when the information fed to investors and analysts is more of a massaging process. Companies don't generally feel comfortable if the expectations for their financial performance is too high and they understand the analysts community doesn't like surprises.
In this instance the engagement between a company and analysts is more likely to be a phone call with a broad-brush suggestions that the market is looking a little tougher or that the assumptions the analyst is using (let's say a commodity price or currency) are a bit off the mark.
Plenty of companies adhere more strictly to the continuous disclosure provisions. Unfortunately Newcrest appears to be something of a disclosure dinosaur. At the very least its hamfisted processes may result in an unworkable clampdown on companies engaging with shareholders.