Investors would be remiss not to consider the implications of the allegation that Newcrest Mining (ASX: NCM) privately briefed certain analysts prior to publicly announcing a $6 billion write-down, accompanied by a production downgrade.
Reports that analyst Cathy Moises was briefed by the company more than two weeks prior to the announcement adds fuel to the fire, because that private briefing led Ms Moises to downgrade her recommendation from neutral to negative.
Like many others, I consider BHP Billiton (ASX: BHP) to be one of the more attractive mining stocks. However, I do still wonder whether it is worthy of a spot in the average retail investor’s portfolio. If you were to buy shares in BHP today, for example, you would be buying a stock with a forecast yield of around 4% (being generous).
Most investors would be hoping for an eventual capital gain, in order to justify the investment. However, retail investors who aim to make a capital gain run the risk that by the time they know of market sensitive information, analysts, institutions and other professional investors may have already acted. If they are required to sell, they may instead make a loss.
Asides from that risk, it is notoriously difficult to predict commodity prices and currency fluctuations, both of which have a significant impact on the profitability of mining companies. Given that companies like Newcrest are extensively covered by a phalanx of well-connected analysts, what hope do “mum and dad” investors have of exiting with a capital gain? I think it is somewhat of a gamble.
I’m not sure that many Newcrest employees are losing sleep over the ASIC investigation into the analyst briefings from 4 June to 6 June, prior to the downgrade released on 7 June. It will be difficult to prove anything, assuming that information was passed verbally, and not recorded. Shareholders, on the other hand, might have a few concerns. The allegations bring to mind Mark Twain’s famous description of a gold mine as a “hole in the ground with a liar standing on top.”
It is, perhaps, worth remembering that the big miners look like saints compared to some of their smaller brethren. Indeed, the ASX has at times been fertile ground for speculative mining companies that operate some version of the classic “pump and dump” scheme. It is not uncommon for failed micro-cap resource companies to eventually change their name, acquire new tenements and attempt to, once again, raise capital.
The big end of town is not exactly squeaky clean either. For example, a former Rio Tinto (ASX: RIO) executive, John Francis O’Reilly, was convicted of insider trading in 2010. There is no way of knowing how often insider trading occurs, let alone selective briefing of analysts, but I doubt these occurrences are always brought to our attention.
This time, at least, the fund managers who weren’t briefed are kicking up a fuss. It will be interesting to see if the Newcrest board admit they did they wrong thing, even if their actions were not illegal. At the end of the day, continuous disclosure rules are essential to the integrity of the market, and it’s easy for investors to forget that there is always someone who knows more than we do.
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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article.