THE REPUTATION ISSUE, Companies in the mining industry experience a lot more volatility

January 02, 2018, Source: IR Magazine

Companies in the mining industry experience a lot more volatility in response to the value of their reputation and what that implies for helping maintain stability and share price, explains Simon Cole, founder of London-based consultancy Reputation Dividend. ‘A typical assumption is that companies in the sector go for a ‘show the numbers and let the rest speak for itself’ approach,’ he says. ‘The result is that when the numbers are good, their reputations tend to ride high and when the numbers are bad, they flop down again.’

This is because, as with other extractive industries such as oil and gas, mining firms tend to display ‘one-dimensional’ reputations, in contrast to other sectors where there is more ‘breadth and richness,’ Cole says. ‘It’s less about the work and more about what else is going on.’

Heavyweights such as Rio Tinto or Glencore, for example, currently have pretty good reputation ratings, but this hasn’t always been the case. ‘Earlier this year, Glencore’s reputation asset was providing sufficient confidence among investors to account for about 43 percent of the total market cap – it carries a lot of weight,’ explains Cole. ‘And that’s despite the investment community thinking these are ‘messy’ businesses, with all sorts of stereotypical negatives attached to mining companies. Rio’s reputation asset was even higher, about 48 percent.’

This compares with Glencore’s and Rio’s 2015 figures, respectively standing at 16 percent and 15 percent when commodity prices were collapsing. ‘They’ve been up and down a lot compared with other sectors. Pharmaceutical companies, for instance, benefit from a fuller, wider reputation that becomes more robust when things start to chip away at it.’

Sustainability is a relatively small driver of corporate value but it is an increasingly important one, according to Cole. Another one is a company’s ability to attract talent. ‘Companies without a sustainability program don’t benefit from that mark-up,’ he points out, adding that these need to be ‘realistic, honest programs. Then it’s a case of ensuring skepticism from the outside audience is countered, and promoting the sustainability program as part of the reputation of the company.’

Larger firms have an advantage in that they are better understood and the matters influencing investors are already well known, Cole adds. ‘When you go down to smaller companies, investors spend more time examining them because their reputation doesn’t speak for them. My advice to mining firms is to address the wider issues – it’s about being understood and open.

Don’t lose out on a value gain by not spending the time telling people about the good things you’re doing. There’s still room in this world for ‘messy’ businesses if they’re operating well.’

This article appeared in the Winter 2017 issue of IR Magazine