Investors are being warned to research the legitimacy of resource companies before placing their money on the table, as figures compiled by ASX provider Makcorp show almost a third are spending more on staff than their actual projects.
Makcorp collated the data based on four quarterly Appendix 5B (cashflow) reports over the last 12 months from 622 ASX-listed resource companies.
The report revealed out of the 622 companies, 198 have spent more than 50% on staff and administration costs versus an average of 31.88% on project expenditure.
Speaking with Small Caps, Makcorp executive chairman Steve Rosewell said a lot of these companies, which spend far more on their own people than drilling into the ground, fall into a category referred to as “lifestyle” companies.
Without revealing any identities, Mr Rosewell mentioned one executive that has been operating a mining company for around 16 years with not much to show for it.
“They haven’t even got a JORC [resource] yet or done a scoping study … yet, he spends a lot of money travelling to world mining events claiming he’s trying to get investors when really, he’s using the company money to travel,” he said.
“There’s too many questions raised,” Mr Rosewell added.
Not all are doing the wrong thing
However, Mr Rosewell said it was important to note that not everybody is doing the wrong thing.
For example, some companies with advanced-stage projects could be waiting in limbo for approvals but still need to pay their workers.
He said some legitimate reasons why staff and admin spend could be higher than project spend is because companies are awaiting finance, mining licence or tenement approvals, environmental approvals, or they have no current projects and are currently on the hunt for new projects.
“Out of the 198, there’s going to be some that are legitimate. Obviously, they’re still paying their staff while the project is waiting for things to be done,” Mr Rosewell explained.
However, he said there should be “no excuse” for this in the case of exploration companies.
“More than likely, 80-90% or more, it’s lifestyle,” Mr Rosewell said.
So, who are these lifestyle players? Makcorp would not point out any specific companies, stating it was not its role to identify the dodgy ones but rather, to provide information for investors to make their own decisions.
However, looking at the report, Canterbury Resources (ASX: CBY) is one mineral explorer which has spent a total of $415,000 on staff and admin and absolutely zilch on projects from March 2018 to March 2019.
Gold and silver explorer Auking Mining (ASX: AKN) also reportedly spent close to 100% on staff and admin costs versus a minimal $3,000 on projects.
Another exploration company, Dreadnought Resources (ASX: DRE), spent $407,000 on admin over the past year versus only a mere $1,000 on projects.
However, the company just this week announced plans to acquire Newmont Goldcorp’s underexplored but “drill-ready” Illaara gold project in Western Australia.
Dreadnought is now looking to raise $1.1 million which it claims will be used to fund the acquisition and a drilling program, as well as an exploration program at its Tarraji-Yampi copper-nickel-gold project.
So, looking for a new project focus could be one of those legitimate reasons for the difference in expenditure.
In contrast, other explorers Musgrave Minerals (ASX: MGV), Oklo Resources (ASX: OKU) and European Cobalt (ASX: EUC) are up there as high project spenders, spending more than $5-$12 million on projects while staff and admin ratios sit between 7-11.5%.
Don’t follow the herd
Mr Rosewell called on investors to be proactive with their research to make sure their hard-earned money was going to the right places.
“Before just following people and getting used and abused with your money, really do some research … open up the quarterlies, work out where their spend is and ask questions,” he said.
Mr Rosewell said one of the reasons he started up his data collation business was to show investors where they were putting their money.
“It helps people to look more closely at the companies they’re investing in to make sure their focus is their project,” he said.
“That’s their business – it should be the project – and if it’s not, then there should be a legitimate reason that they can make the market aware of,” Mr Rosewell added.
Another thing he warned investors to be mindful of was dodgy directors who move to another company, noting one director who has been involved in three businesses that went under.
“I’ve got a ‘don’t buy’ list of companies that I won’t touch and the list is close to 300. Some of these companies’ prices will go up, but they’re pump and dumps,” Mr Rosewell said.
He said investors should look at patterns and history and if you can see that a company has never really spent money on projects, directors could be trying to pull the wool over investor’s eyes and get them to support their lifestyle.
“Not everything goes right and people can make mistakes. Nothing’s guaranteed to work, but when there’s more than one, that’s huge alarm bells for me. This gives investors the information to question directors,” Mr Rosewell said.