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Posts Tagged ‘market value’

Mining Week 17/’12: The sense and nonsense of stock prices

April 22, 2012 Comments off

April is traditionally the month in which the major diversified miners present their annual results. BHP Billiton closes its fiscal year in the mid of the calender year, but joins its main competitors in giving an update of its performance in an investor meeting in this month. One of the key objectives of the executives presenting their numbers to an audience that will listen to each of the presentations in the course of a couple of weeks is to make the company look good, or at least better than competitors.

Managing the expectations of investors serves a twofold purpose: in the first place the goal is to make sure the investors know what they are investing in and what the perspectives for the company are – as a result the stock price should reflect the true performance and potential of the company; in the second place the goal is to keep the shareprice high or make it go higher – often referred to ironically as ‘reflecting the true value of the company’.

Why care about stock prices?

  • Market value matters in the first place from a financial point of view. The higher the market price, the easier and cheaper it is to raise debt, giving flexibility to invest.
  • The second important reason to care about the share price is the mergers and acquisitions arena. An undervalued company is an acquisition target, and having a strong share price makes doing paper acquisitions (pay with shares instead of cash) attractive.

Why not care about stock prices?

  • Market value does not matter because an executive should not be driven by short term stock price fluctuations, which are typically mainly the result of market conditions and events the executives do not have a hand or a say in. In the long term good management will lead to a distinct outperformance of competitors, but short term movements are too erratic to say much about management performance.
  • An executive should not be driven by the market price (i.e. the shareholders interest) alone, but should take the interests of other stakeholders (employees, society), which are often not directly or fully included in the share price, in account too.

©2012 | Wilfred Visser | thebusinessofmining.com

Massey’s board probes safety

May 6, 2010 Comments off

“Massey Energy Co.’s board is investigating how the mining company’s management handled federal safety violations over the past two years, stepping up pressure on Massey’s top executives.
Bobby R. Inman, Massey’s lead independent director, said in an interview that the directors launched their probe following last month’s mine disaster, in which an explosion killed 29 miners. …

Massey, of Richmond, Va., faces lawsuits by shareholder groups alleging that the company failed to enact promised safety improvements or to inform investors of risks related to safety issues, and by at least two families of miners killed in the accident, seeking damages under West Virginia’s wrongful-death statute.”

Source: The Wall Street Journal, May 5 2010

Observations:

    Massey Energy

  • The explosion on April 5 2010 killed 29 miners, making it the worst mining disaster in the USA in 40 years.
  • Massey’s shares dropped approx. 9%, corresponding to a market value decrease of over $400 million on the day after the mine disaster.

Implications:

  • Shareholders & WSJ seem to find the $400 million dollar loss more important that the lives of the 29 miners killed in the accident.
  • Shareholders complain about not being informed about the risk related to safety issues. Arguably the shareholders were more concerned about their financial gains than about the safety of the miners. Hopefully shareholders around the world will pressure the managers of ‘their’ companies to pay more attention to safety and less to short term profits.
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