Breaking the market’s golden rules

Penalties totalling $1.2 million that Newcrest has agreed to pay to settle an Australian Securities and Investments Commission probe into its disclosure debacle last year will if confirmed in court be the heaviest levied for a continuous disclosure breach. Leighton runs a distant second after paying $300,000 in 2012.
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For big companies, $1.2 million is still basically a rounding error, and ASIC isn’t taking action against Newcrest executives or directors. It also isn’t alleging that Newcrest deliberately broke the law.

Directors and investor relations executives should take the time to read the narrative that accompanies the Newcrest settlement, however. There are lessons in it for them, in the way the goldminer wandered off the continuous disclosure reservation, and its overconfidence that it had not done so when it began to be queried.

The events that ASIC probed climaxed on June 7 last year when Newcrest announced that it would be booking asset writedowns of between $5 billion and $6 billion in the June year and cancelling its final dividend. A $6.2 billion write-down was eventually taken.

Newcrest’s shares fell ahead of the announcement amid a rash of broker reports, several of which initiated sell recommendations.

The ASX queried Newcrest on the day the announcement came out, and on June 12 Newcrest came out swinging. It had only become aware of the write-downs and other negative developments on June 7 because the board had approved management’s new budget and business plan on that day, it said: and because it had only become aware of the information then, an earlier trading halt – something the ASX had suggested – was ”neither required nor appropriate”.

Newcrest and ASIC have now filed an agreed statement of facts and a joint submission to the Federal Court proposing that Newcrest be fined $1.2 million for two continuous disclosure breaches. The statements confirm that ahead of its announcement Newcrest told stockbroker analysts that their forecasts for both gold production and capital expenditure were too high, because Newcrest’s outlook had deteriorated.

The group’s new budget was not approved by the board when the briefings occurred, but it was being hit by a plunging gold price and a stubbornly strong Australian dollar. Drafts of the new management plans existed, and they contained gold production and capital expenditure numbers that were below those analysts were forecasting.

Newcrest wanted to bring the broker forecasts back into alignment, and that was standard practice. What is known as ”negative surprise” is sharemarket poison, the single biggest catalyst for a sudden share price slide. Companies do what they can to avoid it. The Newcrest narrative shows how such realignment should not be achieved, however.

Newcrest’s chief executive, Greg Robinson, spoke on May 14 last year at a mining conference in Barcelona. His presentation was posted on Newcrest’s website, but not posted with the ASX. That was mistake number one.

Inside the company there was also discussion about changes Robinson was thought to have made to his speaking notes for the Barcelona conference. In the background, the new management budget forecasts were taking shape.

Analysts were guided from May 28 onwards towards a gold production scenario that made the average broker report look too optimistic by about 300,000 ounces or 13 per cent. On June 5 analysts were given guidance on capital expenditure in 2013-14 that was about $400,000 or 28 per cent lower than the average analyst estimate.

The briefings were mistake number two. The analysts did downgrade their estimates, and ASIC alleges and Newcrest now agrees that they were selectively briefed. The new information was price-sensitive: as soon as the analysts had it, Newcrest was obliged to broadcast it by posting it with the ASX.

Newcrest’s initial overconfidence that it had not breached the continuous disclosure rules was mistake number three. Its view was grounded on convention. Companies routinely brief analysts, and see them as a supplemental link to institutional shareholders.

The Newcrest case confirms, however, that while analysts can be contacted to reinforce and background existing guidance, they cannot be an exclusive conduit for new guidance.

Market-sensitive news has not been published if they are the only ones informed, or if information is only posted on a company website.

An earlier internal report into Newcrest’s debacle by former ASX chairman Maurice Newman did not conclude that Newcrest had broken the law. ASIC’s inquiry did, but it was able to cast a wider investigative net.

Newman’s conclusions hold, however. The key one is that if you have something new and price-sensitive to say, don’t finesse it. Announce it on the ASX platform first: it isn’t rocket science.

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