There is nothing like using bad news to cover up your own mistakes.
Announcements of project cancellations in recent weeks reek
of managerial opportunism – with the plummet in commodity prices there has
never been a better time to cancel bad projects with a minimum of investor
consternation.
As a long term project and valuations specialist in mining,
clean energy and oil and has I have seen both from the inside and as an
observer just about every variation on project initiation and project death.
There is a basic rule of thumb – the bigger the hype up
front, the harder it is to kill a project. There is even a phrase for this, “the hiding hand of the market’.
Here are a few of the variations I have seen on using bad
news to allow companies and governments to kill bad projects.
- Let it die a natural death – typically expressed as ‘additional funding couldn’t be found in the current market’ – or some other variant of this. Funding is doled out over time, reducing each quarter, somehow the project never progresses, and lower and lower calibre staff and project management are brought in to flog the dead horse until it slips out of the memory of everyone. One variation on this is to put it up in a special project office away from the rest of the organisation, this makes it easier to kill off as the project office is like a leper colony in that nobody wants to know them or help them.
- Political finger pointing – ‘the carbon tax renders our project uneconomic’, or ‘the change in the royalty regime has forced us to cancel our projects here and look at opportunities overseas.’
- Supplier greed – this one is typically used by government to kill their white elephants – variations around construction contractor greed, or the greed of other financiers, etc. is used to kill a bad idea.
- Don’t blame me, it was my predecessor – typically when a new management team or government come into power there is a honeymoon period during which investors or voters will allow you to throw out stupid ideas and projects, blaming the inherent idiocy of the prior incumbents for poor decisions.
- Homeopathic approach – in the same way that homeopathic remedies dilute ingredients to the point that the ingredient is statistically unlikely to be actually present in the remedy, management and government never waste an international headline grabbing event such as 9/11 or a plane crash to slip out press releases. That way, there is so much other news and reportage happening that the chances of anyone picking up on your bad news, let alone publishing it, are close to zero. Governments in particular must have a slew of press releases ready to release in such an event. If you think I am being cynical about this, you need to have a look at press releases when such events happen – it is enlightening.
There are surely many more bad news events used to mask
press releases, and variations thereof. Any suggestions on others are welcome.
There is some truth in the excuse that it is difficult to
fund projects in this low commodity price environment. As share prices drop,
the balance sheet shrinks, and the ability to take on new debt also decreases.
Commodity price drops lowers your ability to service new debt. And bankers (as
much as I like you guys) become massively risk averse.
If a project truly is a good idea, but commodity prices
plummet, you will do whatever you can to preserve an option to pick that
project up in a few years by putting it on a drip feed, or you may still go
ahead if you believe commodity prices will recover in time for completion.
Using market conditions to kill a project is an excuse, not
a reason.
In the end, it is good for companies to kill uneconomic or
plain daft projects, but when you see rank opportunism used as the excuse to
kill a project then if you are an investor I would say it is time to agitate
for a change in the management, if not the Board.
