In this episode you will hear from four junior mining executives regarding what constitutes reasonable junior mining company compensation for executives and board members and some things resource investors should look at and consider when analyzing compensation packages. The discussion is primarily pertinent to pre-revenue juniors not cash-flowing producers. All four contributors also serve on the board of directors of junior miners and they actively invest their own money in junior mining stocks. They are Ivan Bebek, Executive Chairman of Auryn Resources, Heye Daun, CEO and Director of Osino Resources; Hugh Agro, President, CEO and Director of Revival Gold; and Doug Ramshaw, President and Director of Minera Alamos.
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0:05 Introduction
2:02 Ivan Bebek of Auryn Resources
5:45 Heye Daun of Osino Resources
10:56 Hugh Agro of Revival Gold
14:58 Doug Ramshaw of Minera Alamos
TRANSCRIPT:
Bill Powers: What are your thoughts regarding executive compensation relative to the company’s market cap?
Ivan Bebek: If you have a market cap, say $400 million market cap, and you have one project that’s fairly self-running unless you’re just performing year after year in your share price, there’s no point to have an inflated cost just because of market cap. Right? But if that one company is, say it’s a $300 million company and it has seven projects in two different jurisdictions, that’s a lot of time out of the day. Right? So I think I’m at $270,000-something a year is my income. But I’ve put three and a half million of my own money into the company. And I like to say I take it out as principal because I work hard and I couldn’t look my wife in the eyes if didn’t get paid for showing up to work.
I think that the comment that I’d make is that managing a lot of people and managing a lot of projects and raising money and to continually, I mean this year we’re still half year-to-date and performing kind of an annual basis repeatedly. I think there’s going to be a certain level of compensation expected. What we haven’t done, Bill, is we haven’t given bonuses for over a year because people have salaries like I do myself and most certainly don’t want to take a bonus unless the company’s well-funded and performing and we’ve agreed to it that way unanimously. Right?
And if you compare us to our peers and other companies, we use a study and I forgot the name of the group that does it, I’ll find out for you. But we’re in the middle of the road and there are certain people that evaluate all the juniors and market cap wise and we like to fall in the middle, not too expensive, but we need to keep people wanting to work with us. Right?
Bill Powers: I heard you mention compensation or maybe it was bonuses based on how you’re performing relative to your peers. So I like new metrics and new ways of looking at things. So maybe you could talk about that.
Ivan Bebek: We are actually adjusting our own compensation to be compensated relative to our peer group. That would be sufficient. So if you took a bunch of companies that were good analogs to Auryn and you put them side by side, are you the number one performing one or are you the last of 10 performing ones? Right?
And I’ve heard of this, my partner Shawn and I have heard of this with some major companies and we looked at it as a very smart way because we generally outperform the entire space. It’s not because we want more bonuses, but a good way to evaluate yourself and determine how much you’re performing without bias outside of your independent compensation committee is to look at your peer group.
And I think a lot of companies, and this bothers me a lot, a lot of companies will draw a contract and they will just hold to that contract letter of the contract with expectations of it being fulfilled. Okay if you’re a producing mining entity and if your compensation is reasonable, but if you’re a junior of capitals, not coming in readily and if you’re not performing, I don’t see how you should be entitled to any kind of a substantial bonus. I think your bonus is that you continue to get supported financially and to keep your company alive a bit longer. Right?
But for our group, we’re going to switch towards this new ideology, which is to base it off our peer groups and agree to those peers and perform against them and see how we rank and that’s how we determine all of our future bonuses.
Bill Powers: I am here with Heye Daun, he is the co-founder, CEO and director of Osino Resources. One of the sponsors of this show. And Heye I’d like to get your thoughts on what is reasonable junior mining, pre-revenue executive compensation.
Heye Daun: Well Bill, you’re putting me on the spot here. I guess I’ve stuck my head out before, so I’m going to have to say something. I probably won’t give you numbers, certainly not on a radio show. But generally speaking, I think pre-mining is very important. We don’t earn cash obviously, we’re depended on investor funds. So for that reason we have to be reasonable with our compensation.
I think in the past, the mining industry did not set a good example in that regard. So at Osino what we did certainly in the early stage of the company when we were private and the early years when we were public, like up to last year, we definitely paid ourselves below market. We incentivized significantly with shares, some options. But having said that, we have also recently rectified that to some extent because the downside of underpaying or paying below market is that it’s difficult to attract people. So you got to find the right sweet spot. It’s not just by underpaying, that’s not good either. But I think generally speaking, I’m not in favor of excessive cash compensation. I believe more in alignment through equity.
Bill Powers: Now you and your co-founders have put a lot of your own money, investment dollars, into launching this company. So you’re not just employees, but you own a large share of the company. What about mining execs that maybe they were an employee for most of their career and they don’t have the capital that maybe you had when you launched this company? What would be reasonable compensation for them considering they may not have as much in terms of investment dollars when they launch their first solo project?
Heye Daun: Look, I mean if you’re hiring somebody who’s not a founder of the company, then you’re going to have to pay them because if you pay peanuts, you get peanuts.
But I think the issue that I have is that quite often especially in the junior space, it’s difficult. Well, it’s very, very difficult to find good people. But the best situation you could be in is if you find people that are truly aligned, are either invested, they are not just hired guns but that are part of the formation or the start of the company, the growth of the company like in my case.
I mean in my case, I’ve been in the industry for 25 years. If I had stayed at Anglo or one of the other blue chip mining companies that I worked for, from a cash perspective, I’d be earning a lot more than I do now. And I have to ask myself that question sometimes, “Am I doing the right thing?” There’s a significant opportunity cost involved. But I do this because I like the entrepreneurship, et cetera, et cetera. Ultimately I have to be compensated for that opportunity cost though, and like in Osino’s case, we do do that through equity issuances and so forth. I know I’m not answering your question. Maybe you must just try and nail me down more directly. But that’s how we do it.
Bill Powers: And finally Heye, what is your perspective on change of control fees? This is something that many investors that I’ve talked to are frustrated with. Especially when the management tanks the share price over two years by 50% and then they make millions when they sell it in a merger or an acquisition. What’s your perspective on change of control fees?
Heye Daun: Well, I have strong feelings. I do think they are necessary because change of control fees are there to deal with the agency problem. I’m not an economist but I mean in simple terms the agency problem is as a manager, you’re there, you have a good job but in order to look after the best interests of the shareholders, you must be incentivized to support deals if they are good and if they are accretive or if they represent value to shareholders. And that’s conceptually where these change of control of payments come from and therefore I must be in favor of it.
In fact, I’ve been in this situation myself with the last company we sold for $200 million. At the time, we had $40 million cash in the bank. We knew we had a great project. It was in 2012, we were living the dream. There was no reason for me to support the B2 Gold transaction. At the time, we had a three times change of control payment and in today’s terms I guess that would be seen to be excessive. In our case, we accepted the deal with B2 Gold and part of the reason we accepted it was because of the change of control payment.
And in the end, retrospectively speaking, it was the right thing. We did the right thing at the time. So there in that situation, the change of control payment did what it was supposed to do. But I guess the difficulty that we have not had, and what you’re referring to is that in the last few years there’s been a lot of value destruction in the industry where management teams have gotten paid quite high sums of money regardless of the value destruction and that’s obviously wrong. But that’s a problem with the structure of the compensation package, not with the change of control payment or cash compensation as such.
Bill Powers: All right. I am joined with Hugh Agro, he is the president and CEO of Revival Gold and I asked Hugh to give us his thoughts on what is reasonable junior mining and management compensation. Hugh, thanks for joining me and please share with us, because you worked for some of the major gold producers, share with us what it takes to recruit somebody that may have a nice salary and a nice position from one of these major gold producers to come and work for a junior gold developer or exploration company.
Hugh Agro: Timely question Bill. It’s a difficult thing attracting senior and capable people that you need in the space to new businesses. And I think what you really want to find is somebody who’s motivated by something other than a salary. Because in these junior businesses, unlike the senior companies where many of these people come, it’s the case that you really have to be comfortable with the risk. You really have to be comfortable with the ambiguity and you really got to love what you’re doing. So you’re there for more than just the salary, you’re there because you want to make something great happen.
Bill Powers: When an investor researches the MD&A and the circulars regarding management compensation, can you give us some guiding principles of what you consider to be reasonable? Especially for someone like we’re talking about, an experienced professional that’s been now recruited to a junior.
Hugh Agro: Equity. I think you want to see equity alignment among senior managers, executives, with shareholders. Not different classes of shares and certainly not just equity-linked compensation but actual shares, actual skin-in-the game shares bought with real cash. Not shares invented through some property arrangement or through the construction of some shell structure. But real shares bought with real money and a significant enough of them that it’s meaningful to the executive concerned.
Bill Powers: When it comes to board compensation, how do you approach that at Revival Gold and also how do you approach management compensation?
Hugh Agro: Well, it’s similar to the way a number of our peers approach the situation. At Revival Gold, we pay very basic salaries and board fees and then we encourage our board members and our executives to buy shares. And at Revival Gold we have about 13% management team ownership in the business. That’s shares that have been bought in the market, shares that have been bought as part of private placements, shares that have been bought with real cash. And that, I assure you, gives the team a lot of incentive to perform for shareholders.
Another thing I think investors need to look for is severance arrangements and some of these things can get out of whack, out of alignment with what makes sense. Often is the case that executive teams can be motivated by doing transactions just for the sake of doing the transaction as a result of these very constructive severance provisions. And the good thing is that all of this is available to investors to see in the circulars.
And in the case of Revival Gold, I think we’re probably one of the most investor-friendly. We have one of the most investor-friendly situations. The severance provisions for our team currently sit at about three months. So there is really no incentive to sell the business or transact just for the sake of transacting. We’re shareholders first. We want to see good value delivered for our shareholders and that’s job one.
Bill Powers: I am here with Doug Ramshaw. He is the president and director of Minera Alamos. And he is also a director for one of the best exploration stories in the last year, that being Great Bear Resources. Doug, thanks for joining me. And could you share with listeners what’s your perspective on reasonable board directorship compensation?
Doug Ramshaw: Hi Bill. It’s good to be with you. Well I mean personally I’m a big believer that you should be paid based on the state of your projects and not the anticipation of what a project might be. So, we’ll go into production next year and I would hope at that point that remuneration would be more commensurate with our company as a gold producer then as a gold developer. And likewise, if we were a gold explorer, I think it would be commensurate with that stage. So, I think you have to align your salary to the status of the projects that are within the company and not try to anticipate what they might be. That’s the way I look at it.
Bill Powers: And with directors of boards of junior minors that are pre-revenue, do you think that the primary compensation should be options with expenses paid? Would that be considered reasonable?
Doug Ramshaw: Yeah, I think it all depends how active you are as a director. I don’t want to be a director of a company that I’m not active and engaged to support the company in its business model. But typically, yeah, I think director fees should be very modest and really the compensation for a director is largely option-based and hopefully if you’re in at the right time, like I was on Great Bear, you’ve also got some early stock as well. That certainly makes the whole venture very rewarding should you get lucky.
Bill Powers: When an investor is looking at a potential opportunity and they’re trying to assess whether the management team is aligned with shareholders, can you talk about the breakdown of share ownership and option ownerships that you would look for?
Doug Ramshaw: I have a little rule of thumb and that’s I always want to own more stock than I have options. So when I got involved with Minera Alamos, I needed to buy my position and did so in the open market and bought now just over four million shares. I will always own more shares than I will options.
So if I want to have a large option grant at some future point, I feel like I’m going to need to put my money where my mouth is in buying the stock too. So that’s just my rule of thumb and it’s one that I’m going to stick with moving forward. So I got four million shares that I bought alongside everyone else in our market over the last year and a half and just over three million options. So, if I want to go to five million options at some point, I know I’m going to have to throw a couple hundred thousand dollars into the market. Otherwise, I’d break my rule and I don’t intend to do that.
Bill Powers: When investors are looking at a potential investment and they’re researching the founder shares of some of these exploration companies and some of the founders may have been issued shares at a penny or five cents and 10 cents and the shares could be trading at 30 cents. You have advised me in a previous conversation that don’t just look at the cost of the shares, but there is another metric or a way to look at it, if you could share that with listeners.
Doug Ramshaw: Well I think there are vehicles that are created with a lot of cheap paper and largely with a chance of moving the cheaper paper into the hands of retail at higher levels. But not all cheap paper is the same. And there are examples where people have their founder positions but they’ve put a lot of sweat equity into and maybe more sweat equity than real equity into those positions. And there is a reward commensurate with sometimes two, three years of funding stuff, personally, to get it to a point where you can attract the investment in certain pre-public rounds. So it’s tough. I think you need to ask the right questions of management or the brokers that are pitching you on these deals of what was actually done to justify some of those early positions because there are plenty of ways to compensate an executive post for public round that make it worthwhile building these things.
But I know of people that put several years of sweat equity into a deal before it even gets to that stage where they’re doing those private rounds. So I think there are vehicles out there where I’d be cautious of some of the super cheap paper that’s created. But there are examples where people have put a lot of sweat equity into it and the rewards of those cheaper rounds of paper are justified. So I think you need to ask the questions of what management has done in the lead up to when you might be looking at investing to justify those positions.
Bill Powers: What is your thinking on appropriate change of control fees?
Doug Ramshaw: I’ve only ever had one and I waived it because when I merged my company Corex Gold with Minera Alamos, I was actually staying on in this new capacity with Minera Alamos. So I didn’t feel that the change of control was justified in my case because my job wasn’t at risk. I had the opportunity to continue with the company. Yeah, there are other cases where change of control is done because the person is out of the job, he’s done his job, he’s got it to a certain point. So I certainly wouldn’t take a change of control myself if I was maintaining a position in the ongoing company. So in my case I’ve had one and I waved it, I think rightly so.
I think whether it’s change of controls or bonuses or anything, I think there should be metrics that it’s tied to in terms of there’s certain things you do that you’re paid for on a monthly basis to do and just because you do them, I don’t think it means you should automatically get an annual bonus or, so stock performance should be very important when a compensation committee, I would hope is independent from the team that are getting any additional incentive, stock performance and meeting or exceeding goals on fundraising or all that comes into play.
I think companies should have a very strict kind of compensation committee metrics that allow for due reward of maybe going above and beyond in any given calendar year for one’s efforts. And I think the same applies to change of control payment.
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