The other day a press release came across my desk with the following title “First Mining Issues First Tranche Of Shares To Ausenco; Pre-Feasibility Study For Springpole Gold Project Underway”.
Reading it further, it was apparent that their study consultant, Ausenco, was being paid in company stock in lieu of cash. The arrangement included an initial financing of $750k with a further $375k to follow once the pre-feasibility study was 75% complete. Upon completion of the study another share payment was due.
That press release was interesting. I personally had never seen one like this before.
Some may see independence as an issue with their fiscal arrangement. Maybe… but this blog isn’t about the need for independent QP’s. In fact I don’t recall feasibility studies having that requirement. Some 43-101 resources estimates do require independence.
An industry discussion about where independence is required would be an interesting exercise. However I will leave that conversation for a future post.
Would you work for company shares only?
I have never been in a situation where I was consulting with company shares as my compensation. Neither have I ever managed a study where outside consultants were being paid in shares. However I can see the possibility of interesting dynamics at play.
In the past I have worked as an owner’s study manager and been awarded stock options along with salary. In that role, my job was to look after the owner’s interests, pushing for cost efficiencies and optimizations.
Regarding share compensation, there are significant risks on the consultant’s side when they agree to be paid in shares. I can see both positive and negative aspects with that type of a relationship.
I am not passing judgement here on what is right or wrong. My objective is to comment on some basic issues that may arise.
Pro’s and Con’s
The positive aspects one might experience include;
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It’s easier for the company to pay for the study since there are no cash outlays from the treasury.
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The consultants might have the company’s best interests at heart since they will now be part owners of the company.
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Possibly there will be greater technical effort to produce optimal designs and cost estimating efficiencies in the drive for great economics.
The potential pitfalls of this approach might include;
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A public perception that the study is not impartial.
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There is an overhang of shares that may be dumped onto the market in the near future.
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Possibly the consultant will charge a premium for their services due to the financial risks they are taking.
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The company may be more tolerable of study cost overruns since there is no hard cash outlay.
Regarding the first item “impartiality”, in the past there have been questions raised about the impartiality of engineering firms. I first recall reading this claim many years ago in a public response to a mining EIA application. Unfortunately I cannot find the exact source now.
The concern was whether the consultant’s work would be overly optimistic, seeing that they would eventually gain as a project moved from PEA through to the PFS and FS stages. They didn’t want to kill the golden goose. The project’s opponents were making the argument to the regulators “don’t believe what the engineering company is telling you”.
I’m curious how many times this argument has been used, seeing that it’s been around for some time.
Conclusion
It would be interesting to know how many consulting firms would be willing to accept compensation solely in shares. Stock prices move up and down and the outcome of the study itself can have an impact on share performance.
Probably no worse than using an EPCM company to do your PEA or PFS. The money is in building the project and not doing the study work.
I am often concerned the EPCM team are too optimistic.
True, that was essentially the concern raised by the EIA opponents I mentioned.
The problem I see is that someone who owns shares in a company is actually a part owner of that company. If someone is in that position and has participated in a technical report on a company then they would have to publicly disclose that information, as it would be a conflict of interest. I’m not sure the OSC would accept this type of disclosure from most juniors, but they do accept it from larger operators who do their own work.
In the QP certificate, one always has to disclose whether one is independent or not. However I don’t think that means one MUST BE independent, just that the reader needs to know whether you are or not for their awareness. The issue of independence can be a bit gray sometimes.
I agree. Usually it’s something the securities exchanges will demand.