Maurice Newman’s review of Newcrest Mining’s disclosure and investor relations practices in the wake of the ‘’selective briefings’’ controversy that the Australian Securities and Investment Commission is now investigating is as interesting for what is says about the workings of the broader marketplace as it is for its specific conclusions about Newcrest’s own conduct.
The former ASX chairman’s review, commissioned by the Newcrest board, makes a reasonable case for clearing Newcrest of the charge that its investor relations function had selectively briefed analysts in the days leading up to the June 7 announcement of massive write-downs, lower production guidance and the absence of a final dividend. It will, however, be ASIC that makes definitive judgements about what occurred.
Newman makes some interesting and perhaps significant observations about both the limitations of his review. He had difficulty getting access to any of the analysts concerned because of the ASIC investigation and, more importantly, about the workings of the market and the difficulties created for companies once an ASIC investigation is underway.
As he says, the fact of an ASIC inquiry doesn’t imply guilt, yet adverse inferences are generally drawn by the market from the knowledge that an investigation is occurring. ASIC investigations, for good reason, take time – Newman says they can take up to 12 months – so corporate reputations are under a cloud until they are completed. He’d like to see ASIC publicly advise the market when its investigations begin and, if they are ‘’terminated,’’ when they have ceased.
While he suggests ASIC might want to review its approach to investigations, one suspects it isn’t going to see any particular reason to change its modus operandi. Nevertheless, it is a worthwhile talking point.
The review’s discussion about the detail of what unfolded around Newcrest and what happened within the broader market is of greater relevance to the question he was asked to answer.
The steep fall in the gold price that ultimately led to the June 7 announcement began in January. Newman says it appeared clear that it caught many sell-side analysts by surprise, with the fall running counter to their bullish outlook for the metal.
‘’Rather than concentrate on the falling gold price and its implications for earnings, production and other factors, most analysts seemed to be slow to adjust their research to the changed conditions, presumably on the assumption the slump would be temporary,’’ he said.
It wasn’t until Newcrest referred to the new circumstances in its March quarterly report and its investor relations team followed the report up with analysts that the research reflected the significance of the tumbling price to the company. Even then, however, out of 12 analysts reviewed, initially only one changed its outlook from ‘’buy’’ to ‘’hold’’ and one other from ‘’sell’’ to ‘’hold.’’ All the rest left their recommendations unchanged.
In the lead-up to the announcement, there was a ‘’flurry’’ of reports and significant volatility in the Newcrest share price, which led to the suggestion that there may have been selective briefings that gave analysts advance notice of the announcement's content.
Newman said he was satisfied that the investor relations function could not have been aware of the content of that announcement ahead of the meetings it had with analysts – the information had been quarantined from it -- and notes that two of the broking firms retained ‘’buy’’ recommendations in the days preceding it.
He noted that 10 major brokers published reports on Newcrest after meetings with the investor relations function and published reports, which suggested to him that they were satisfied they hadn’t received non-public material.
It was difficult to see any correlation between analysts meetings and the daily market behaviour of Newcrest shares, he said, and indeed there were days when the share price didn’t even correlate with the gold price.
Newman referred to some confusion among analysts over the lower production guidance the company had previously broadcast to the market through its announcements and presentations. In its March quarter presentation, it had also referred to the implications of the changed environment and its reassessment of all capital investment in higher-cost production.
The review suggests that part of the disconnect between what the company did say publicly and what the analysts didn’t appreciate until very late in the process was that cost-cutting within the securities industry meant analysts had to cover more companies and therefore spread their time more thinly.
There was also a view, he said, that the analysts were less experienced than before the financial crisis, and that there is a tendency for analysts to be followers and stay within the consensus view rather than risk their reputations.
Compliance costs might also affect the frequency with which reports were published, and may help explain the absence of reports on Newcrest at the point where the gold price fell dramatically.
He made the point that the volatile real-time environment that was the backdrop to the Newcrest experience illustrated the ‘’delicate’’ role played by company management and investor relations departments, and the fine judgement calls that had to be made as to when to give guidance to analysts and when to make ASX announcements.
‘’If announcements are made too frequently, they may add to market uncertainty or debase their purpose and may themselves be misleading if they are immediately made obsolete by events or other factors.
‘’This, then, is the dilemma faced by companies in meeting their continuous disclosure obligations. Decisions must be made in real time while regulatory judgements are made with the benefit of hindsight,’’ he said.
He concluded by saying that, while stifling dialogue between the company, its shareholders and the broker network which fell within the spirit and letter of the continuous disclosure regime might not be optimal for the investing public, it might be the company’s most prudent approach.
Other companies have significantly tightened their investor relations procedures since the Newcrest investigation began. One could mount an argument over whether it is necessarily in the best interests of an informed market to further restrict discussion about information that is already available.
Dr Newman’s bottom line was that the market appears to have misunderstood information that Newcrest had publicly disclosed rather than that there had been any selective disclosure, although he did recommend a series of changes to Newcrest’s investor relations policies and procedures.
The Newman review might be reassuring for Newcrest’s directors and management but, self-evidently, the events leading up to June 7 remain under a cloud until ASIC completes its investigation.
It does, however, highlight that the market appeared to miss the implications of the steep decline in the gold price, which by itself is puzzling, and also failed to appreciate the import of what Newcrest itself was broadcasting in its public statements and presentations. Continuous disclosure only works as intended if the market understands what’s being disclosed.
That’s an apparent market failure that would cause not only Newcrest to review how that could happen, but other listed companies within volatile sectors and the research departments of the broking firms themselves.