Continuing my sharing of a little research and summarising I’ve been doing, here’s the next instalment.
Link to Part 1:
https://hotcopper.com.au/threads/general-discussion.6308522/page-9142?post_id=69327510And Part 1 Addendum:
https://hotcopper.com.au/threads/general-discussion.6308522/page-9143?post_id=69327612Information for this series is drawn from ASX announcements (for FFX/MLL/BGS primarily since 2018, LLL since 2022), company reports, public statements, government and regulator documents, legal documents, legislation, media, trade data, and social media including HC. Sources have been reasonably assumed to be good faith accurate representations and any errors and/or omissions are unintentional, and certainly not intended to misrepresent facts nor injure any reputation.
Notably in this piece there are a high level of assumptions introduced by the analysis methodology – I have sought to detail these for transparency, noting that it impacts the precision and reliability of the information presented.
Thanks again to the
many holders who have posted substantial portions of this content previously for supporting my understanding and ability to compile this summary.
Part 2: Skin in the GameAs a general observation, discussions of Director performance on HC seem to lead to two types of comments inevitably popping up, either:
- Directors are handsomely and/or overcompensated disproportionately to performance, and should be critically evaluated accordingly, or
- Directors hold shareholder interests at heart as they’re experienced experts who are significantly personally incentivised and/or invested and should be trusted accordingly
Rather than run with the general (often share price reactive) vibe, I was interested to see what the disclosed information tells us about the skin in the game and outcomes to date for recent Directors in FFX (including for those same Directors any known benefit/loss from LLL given the demerger).
To that end I’ve analysed the Directors from 2022, excluding the two short-term FFX Directors Scott and Wall who did not hold shares and received minimal remuneration.
We don’t have perfect information to operate from, so to be absolutely transparent upfront there are some very working assumptions along the way here. I’ve looked to detail these as clearly as possible at the bottom of this post so you can see how I’ve arrived at particular results (and I guess re-run them yourself with different assumptions if you were so inclined), but it’s important that you do not treat these numbers as an exact science: there are definitely approximations and assumptions in here that could be material to the results.
It is interesting to note having looked at this data how much the outputs of the methodology vary across the Board, with some having relatively modest (especially realised) returns for their duration of involvement, and some relying on a return from suspended FFX shares and/or performance rights. Of course the methodology isn't perfect, and modesty is perhaps in the eye of the beholder.
With that said, here’s where the results of applying the methodology landed.
Note the images have a lot of data so you'll have to open them up and potentially zoom around a bit: let me know if I need to repost them in another format.
OverviewThe overview of the results of methodology is illustrated in these images, and then expanded upon below.
DetailIn roughly the order of complexity for applying this methodology to.
Scott LoweLowe is very straightforward to apply the methodology to, having no equity investment and working exclusively as Managing Director.
Involvement:
- 10 months as Managing Director
His potential position after applying the methodology summarises as:
- Around $989k in monetary remuneration, treated as $524k after tax
- Net realised position = $524,219.52
- No unrealised (assuming upcoming termination benefits as realised)
- Net unrealised position = Nil
- No equity investment so no capital cost
- Net position = $524,219.52
Brad GordonGordon is one of the more straightforward to apply the methodology to, having had limited equity investment made after the demerger and working exclusively as a Non-Executive Director.
Involvement:
- 28 months as a Non-Executive Director
His potential position after applying the methodology summarises as:
- $27k invested in FFX shares
- Around $185k in monetary remuneration, treated as $98k after tax
- Net realised position = $71,037.47
- 78,947 FFX shares purchased for $27k stuck in suspension, currently valued at $0.20/share ~= $16k (representing a $11k capital loss if sold, with potential tax offset)
- 1.2M of unvested performance rights. These vest if the performance goals are achieved, there is a change of control event while Gordon is still a Director, or where Gordon ceases being a Director for a specified reason (retirement over age 60, board determines no longer need his services, disability, or death). If these vested and sold at the current value of 20cps they would be worth $240k before tax, treated as $127k after tax.
- Net unrealised position = $142,989.40
- For fair comparison, applying a 10% p.a. cost of capital. $27k invested over 2 years, treated for comparison as $6k capital cost.
- Net position = $208,352.55
Brett FraserFraser is relatively straightforward to apply the methodology to, with a few purchases pre-merger and a purchase after demerger. It is unclear if/when Fraser sold his LLL holdings, so they have been calculated as still holding for the reasons outlined in the methodology comments. Likewise any purchases in LLL, including taking up the pro rata and/or shortfall offer, are unknown.
Involvement:
- 33 months on Board (20 months as a Non-Executive Director, 10 months as Chair, 3 months as Executive Chair), in addition to consulting services
His potential position after applying the methodology summarises as:
- $217k invested in FFX shares
- Around $272k in monetary remuneration, treated as $144k after tax, noting this does not include consulting services as I have been unable to ascertain at this stage the amount received for these services
- Net realised position = ($73,705.02)
- 536,206 FFX share stuck in suspension, consisting of 336,206 shares purchased for $149k prior to demerger now treated as a $61k cost base, and 200,000 shares purchased post demerger for $69k for a total current cost base of $130k. Currently valued at $0.20/share ~= $107k (representing a $23k capital loss if sold). Potential tax offset is included in hypothetical LLL equity CGT calculation.
- 240,147 LLL shares from demerger, with calculated cost base of $88k. If held to today valued at $1.14/share ~=$274k, treated as $235k after tax.
- 1.2M of unvested performance rights. These vest if the performance goals are achieved, there is a change of control event while Fraser is still a Director, or where Fraser ceases being a Director for a specified reason (retirement over age 60, board determines no longer need his services, disability, or death). If these vested and sold at the current value of 20cps they would be worth $240k before tax, treated as $127k after tax.
- Net unrealised position = $469,842.28
- For fair comparison, applying a 10% p.a. cost of capital. On up to $218k invested over 2 years, treated for comparison as $37k capital cost.
- Net position = $359,339.44
Michael AndersonAnderson is relatively straightforward to apply the methodology to, having made a few purchases but no known sales. It is unclear if/when Anderson sold his LLL holdings, so they have been calculated as still holding for the reasons outlined in the methodology comments. Likewise any purchases in LLL, including taking up the pro rata and/or shortfall offer, are unknown given he resigned as a Director of LLL before the listing.
Anderson joined with 1 million shares, which at the time of joining were worth $230k based on the 23cps on 6 April 2021. Recently Anderson was appointed MD at Forrestrania Resources Limited (FRS) showing his commitment with an on market purchase of 1 million shares @ 13cps. It seems reasonable to me to presume Anderson did similarly on joining FFX and that his cost base is therefore around 23cps, which I have used for the calculations.
Involvement:
- 15 months as Managing Director
- 13 months as an Executive Director of Goulamina Holdings / Leo Lithium (some uncertainty around the executive nature of this role for some/all/none of the period, but inferred from reports etc.)
His potential position after applying the methodology summarises as:
- $359k invested in FFX shares
- Around $1.29m in monetary remuneration, treated as $681k after tax
- Net realised position = $322,375.87
- 1,301,724 FFX shares purchased before demerger stuck in suspension with a calculated cost base of $147k. Currently valued at $0.20/share ~= $260k, treated as $234k after tax.
- 929,802 LLL shares from the demerger with a calculated cost base of $212k. If held to today valued at $1.14/share ~= $1.06m, treated as $861k after tax.
- Net unrealised position = $1,094,350.33
- For fair comparison, applying a 10% p.a. cost of capital. On up to $359k invested over 2+ years, treated for comparison as $80k capital cost.
- Net position = $1,337,236.63
Alistair CowdenCowden is a bit more complicated to apply the methodology to, having made a number of sizeable purchases over some years, received vested performance rights, executed options, and sold some LLL shares. It is unclear if/when Cowden sold the remaining of his LLL holdings, so they have been calculated as still holding for the reasons outlined in the methodology comments, however we have some information given his continuation as an LLL Director past his time with FFX.
Involvement:
- 44 months across FFX/LLL Boards (40 months as FFX Chair, including 15 months as Executive Chair, and 34 months as a Director in Goulamina Holdings / LLL)
His potential position after applying the methodology summarises as:
- $1.1m invested in FFX shares
- $1.2m in FFX equity received at discount via performance rights, for which $573k of tax is applied
- $460k invested in LLL shares as part of the pro rata offer (in addition to shares from the demerger)
- $845k of LLL shares sold, treated as $703k after tax
- Around $927k in monetary remuneration, treated as $491k after tax
- Net realised position = $951,326.87
- 9,198,979 FFX shares purchased before demerger stuck in suspension with a calculated cost base of $954k. Currently valued at $0.20/share ~= $1.84m, treated as $1.63m after tax.
- 5,435,589 LLL shares from the demerger with a calculated cost base of $1.14m, and 657,482 LLL shares purchased in the pro rata offer with a calculated cost base of $460k. If held to today valued at $1.14/share ~= $6.95m, treated as $5.69m after tax.
- Net unrealised position = $7,321,754.18
- For fair comparison, applying a 10% p.a. cost of capital. On up to $1.57m invested over up to 3.5+ years, treated for comparison as $310k capital cost.
- Net position = $6,060,645.49
Mark HepburnHepburn is close to the most complicated to apply the methodology to, having made not only a number of purchases but also a number of sales over the years, received vested performance rights, received discounted options, and executed options. It is unclear if/when Hepburn sold the remaining of his LLL holdings, so they have been calculated as still holding for the reasons outlined in the methodology comments, however we have some information given his time as an LLL Director for a period.
Involvement:
- Around 5 months as a Corporate Development Manager
- 3 months as Interim CEO
- 57 months on the Board (including around 3 months as an Executive Director while acting as Interim CEO, the rest as a Non-Executive Director)
- 7 months on the LLL Board as a Non-Executive Director
His potential position after applying the methodology summarises as:
- $1m invested in FFX shares
- $1m in FFX equity received at discount (via performance rights and options later exercised in the money) for which $478k of tax is applied
- $142k invested in LLL shares as part of the pro rata offer (in addition to shares from the demerger)
- $1.94m of FFX shares sold, treated as $1.52m after tax
- Around $687k in monetary remuneration, treated as $364k after tax
- Net realised position = $252,812.46
- 1,500,000 FFX shares purchased before demerger stuck in suspension with a calculated cost base of $246k. Currently valued at $0.20/share = $300k, treated as $287k after tax.
- 1,071,428 LLL shares from the demerger with a calculated cost base of $356k, and 202,247 LLL shares purchased in the pro rata offer with a calculated cost base of $142k. If held to today valued at $1.14/share ~= $1.45m, treated as $1.23m after tax.
- Net unrealised position = $1,514,944.41
- For fair comparison, applying a 10% p.a. cost of capital. While up to $1.15m invested over up to 3.5+ years, the timing and size of capital returns from sales over that time is calculated to negate the capital carrying cost so treated for comparison as $0 capital cost.
- Net position = $1,767,756.87
Brendan BorgBorg is probably the most complicated to apply the methodology to, having started with a very sizeable (top shareholder) holding, made continuous purchases over the years, made some sales, received vested performance rights, and executed options.
Fortunately we have a good idea of current holdings given Borg was an FFX Director until close to the halt/suspension and being a top shareholder is still listed in the Annual Report as holding the remaining shares identified in his Final Directors Notice, in addition to being an LLL Director.
In my assessment, Borg is amongst the most highly regarded of the Directors across both LLL/FFX (at least on HC), having sizeable skin in the game himself and being historically active in shareholder action as well as HC.
Borg was already a major shareholder prior to joining the Board, at the time of joining holding 6.9m shares worth around $1.38m based on the 20cps price in November 2018.
It is difficult to ascertain a precise cost base for this holding. Borg first appeared on the major shareholders list in the June 2016 Annual Report. My research suggests Borg purchased in blocks starting at less than 8c, moved up to an average cost base around 15c for a good chunk of his holdings, and continued to buy parcels higher than that as the price rose. At the risk of underestimating Borg’s investment, but working to the information I have, my best guess is the bulk of that 6.9m holding had an average cost base of around 17c which I’ve called 20c based on the trading price in 2017 and to buffer for error. It is not impossible the cost base was higher given the price had traded higher at times (and perhaps that was an additional motivating factor in Borg joining), but I feel this is a reasonable hypothesis. I’d welcome correction if someone knows more.
He also joined with 1.5m out of the money ($0.316) unlisted options expiring 1 December 2018.
The options appear to have been originally issued in lieu of cash for services Borg performed for BGS in December 2016 (the price at the time of issue was 34cps having peaked to 50cps in the September prior).
Borg appears to have been involved with helping Birimian negotiate at least one, and I suspect both based on who else was involved and received the same options, agreements with Chinese companies (Tongdow Group and Far East First New Energy Co) in late 2016 to help support the development of Goulamina and subsequent offtake sales (
https://www.copyright link/street-talk/birimian-poised-to-announce-tieup-with-chinas-tongdow-group-20161030-gse3y8).
As an incidental, involved in both deals is Michael Langford. Langford would later lead the shareholder action group to remove BGS Directors via a 249D after the Board tried and failed to sell Goulamina for $107m to Shandong Mingrui Group in January 2017. After resignations avoided the need for the shareholder meeting, Langford joined with James McKay as Directors in March 2017, only for Langford to resign in late April 2017 due to a conflict of interest. Borg would join the Board later that year with Hepburn after a group of shareholders requested the resignations of McKay and others.
Given Borg held these options on November 2018 when he joined during a trading suspension, trading was suspended until 14 December 2018, and an Appendix 3B on 21 December 2018 does not include the unlisted options, it appears the options were never executed and quietly expired without an announcement.
With the benefit of hindsight, it therefore seems that Borg negotiated this deal without receiving fair remuneration given he was unable to exercise those options granted in lieu of cash.
Involvement:
- Around 7 years as a Top Shareholder
- A period of some months as a Consultant
- 42 months on the Board as a Non-Executive Director
- 22 months on the Board of Leo Lithium/LLL as a Non-Executive Director
His potential position after applying the methodology summarises as:
- $2.37m invested in FFX shares (noting the assumption on the cost base of the holding in the Initial Director’s Notice)
- $458k in FFX equity received at discount (via performance rights) for which $215k of tax is applied
- $1.06m invested in LLL shares including the pro rata offer and subsequent purchases (in addition to shares from the demerger)
- $2.89m of FFX shares sold, treated as $2.08m after tax
- Around $396k in monetary remuneration, treated as $210k after tax
- Net realised position = $489,498.92
- 12,000,000 FFX shares purchased before demerger stuck in suspension with a calculated cost base of around $960k. Currently valued at $0.20/share = $2.4m, treated as $2.06m after tax.
- 6,471,428 LLL shares from the demerger with a calculated cost base of $1.05m, 1,161,664 LLL Shares from the pro rata offer with a calculated cost base of $813k, and 366,908 LLL Shares purchased subsequently with a calculated cost base of $190k. If held to today valued at $1.14/share ~= $9.1m, treated as $7.3m after tax.
- 590k of LLL Director’s Options (“Company Options”) exercisable at $0.644 if Borg remains in continuous service as an LLL Director until 21 December 2024, with the options expiring 16 June 2025. If these (which isn’t possible but done for comparison) vested today and sold at the current value of $1.14/share they would be worth $293k before tax, treated as $155k after tax.
- Net unrealised position = $9,501,688.22
- For fair comparison, applying a 10% p.a. cost of capital. On up to $3.4m invested over around 7+ years, offset by return of capital through sales, treated for comparison as $1.11m capital cost.
- Net position = $8,879,912.69
Methodology and RemarksSome real limits of this kind of analysis from “outside the tent” include:
- The variation in everyone’s tax situation (I feel I’ve tended to overcalculate tax considerations, for example by taxing superannuation earnings, termination benefits, and super capital gains as normal high bracket income, although equally I have likely undertaxed some capital gains realised through company holdings)
- Uncertainty around holdings before and after the period of being a Director in a given company (for example the cost base of shares purchased before joining as a Director, and the timing and sale price of any shares sold after resigning as a Director)
- Uncertainty around which holdings were determined as sold when selling for the purposes of CGT calculation (I’ve made educated guesses for my placeholder calculations, informed where suggestive by the 3Ys, but I was surprised by some of the decisions some made against my intuition which suggests individuals very likely managed this differently than I’ve guessed)
- Lack of information on any remuneration or other benefits obtained through subsidiaries (for example, I’ve assumed individuals did not get compensated for being on the Boards of subsidiaries, or if they did that this was integrated into the consolidated Annual Report remuneration figures)
- Uncertainty around consulting fees and/or salaries earned outside declared key management positions unless integrated into the Annual Report figures
- Rounding errors (there are numerous ways these get introduced, for instance the rounded cost of shares that I’ve carried forward for later calculations rather than referring to the sum cost base: there are definitely rounding errors in here, but hopefully the results remain illustrative as a reference point)
- Potential for mistranscription and copy/paste errors (there’s a lot of data to work with here across dozens of documents, some of which don’t necessarily align with each other: while best efforts and cross-checking has been undertaken, the possibility for introducing a typo remains)
- In general the philosophical elements of how to make sense of the data, not least of which the varied hats each Director wears. Each Director has had different involvement: some have been involved for a long time, others less, some have had executive as well as non-executive roles, involvements in committees, chairing the Board and/or committees etc. There is also the fact that the major impact on outcomes comes down to the level of personal capital investment, which you might argue is irrelevant to the outcomes of involvement as a Director.
My methodology is as follows:- Determine or estimate the profit of any shareholdings known during the time as Directors. This does not include all trades prior to or after becoming a Director, but I have looked to estimate the value of any shareholding known that may have been sold after resignation. Note that this shifts the outcomes dramatically for those Directors who have purchased significant shareholdings in addition to performance rights: I leave it to the reader to determine whether this is the right way to evaluate things, or whether we should review outcomes as a Director very distinctly than outcomes as a Shareholder (both should be possible from the summarised data). This also means any benefit from FFX Directors who have not been on the LLL Board from buying LLL / taking up the pro rata or shortfall offer are unknown and therefore not included.
- Determine or estimate the value of any remuneration provided. This is based on remuneration declared in the Annual Report. Accordingly, I’ve just included it in the calculations on an arbitrary annual basis rather than on specific dates/across the year. For 2023 I’ve applied a very rough rule of thumb of around half of what I expect the Director Fees to be for the 2023 calendar year based on a quick reading of the Annual Reports: I’d imagine it’s a little underestimated.
- Split between realised and unrealised: Realised outcomes include monetary remuneration and sold shares. Unrealised outcomes include the value of equity held and performance rights.
- Apply some basic taxation rules. I considered ignoring tax, but it gives quite distorted outcomes. To try and compare apples with apples I’ve therefore applied some very approximate (and therefore somewhat inaccurate) calculations for tax based on simplified rules of thumb. This helps account for different treatment of salary/fee income vs capital gains, the tax cost of income used for after tax share purchases, equity granted at discounts etc.
- Basic tax approach applied as follows: Apply 47% tax on all remuneration and all capital gains on holdings held for less than a year. Apply 23.5% tax on any capital gain on holdings held for more than a year. Tax is applied immediately in relation to a relevant transaction.
- Basic rules applied for granted equity: Apply 47% tax on any discounted value realised from instruments granted under an employee share scheme, applied at the time of realising the instrument (either exercising an option, or vesting a performance right) with CGT deferred until the asset is later sold using the cost base at the time of realising the instrument (either the exercise cost, or the market price on the day of vesting). While noted in the summary data, discounted equity is not summed in calculations directly: the tax applied is counted as a cost, and the value is assessed as either sold or held equity at the relevant value. An interesting observation from this for something like options in particular is that the value of the option is a function of if/when it is exercised: it may have been more or less worthless when first awarded out of the money, but is deemed to be a discount if stock performance goes well and is later exercised advantageously and in that respect gets summed up more or less the same as a performance right even though it may have carried far more risk and uncertainty over that term.
- Basic approach for CGT calculation: In general look to select the highest cost parcel that is older than the 12-month CGT discount window unless there’s quite suggestive info in the 3Ys to suggest another approach was adopted (e.g. where significant recent performance rights landed with a particular indirect holder, and that indirect holder’s holdings decrease). Where there are capital losses (e.g. when doing current valuations of FFX equity) look to apply these capital losses against the hypothetical capital gains of other equity being valued (e.g. from other LLL holdings).
- Basic approach for equity: For most of the FFX holdings for these directors they’ve either sold and therefore we have a 3Y, or they’re stuck with is in suspension like the rest of us given they resigned after the halt. Borg is an exception in that he resigned before the halt, so hypothetically could have sold FFX without a 3Y. However because he is a top shareholder we know from the Annual Report that he didn’t sell any beyond that declared in the 3Ys. For LLL it’s a bit trickier as individuals who are not directors of LLL could have sold at any point. I’ve made a blanket rule if I haven’t seen a 3Y for the LLL equity to value it as still held at today’s current price (noting of course that LLL is currently in suspension too). This current price is fairly close to the ATH, which means conceivably the methodology overestimates the value of LLL equity for individual directors, some of whom may have sold it at half the price.
- Basic approach for performance rights: For vested performance rights I’ve handled them as discounted equity as detailed above. For unvested performance rights I made a call that all of the rights analysed could still hypothetically vest, and while there is uncertainty valued them at the value they would have if they vested and sold today, applying a tax on discounted equity.
- Capital invested: I was mindful of the point that some Directors have had large sums of personal after-tax capital invested for long periods of time that could presumably have been used elsewhere and attained a return. However, I didn’t want to wade into the nuances of borrowed capital and loans on equity to release capital and debt recycling etc. I decided to apply a pretty rough rule of thumb of 10% p.a. cost for capital used to buy shares, non-compounded, offset by sales returning capital. It’s not ideal and certainly not perfect, but it’s there for interest (mind the pun).
- Terminology: Have used BGS/MLL/FFX as synonymous for FFX, and have used LLL for Goulamina Holdings/Leo Lithium/LLL. Have also worked to calendar years given this was the standard applied for FFX Annual Reports.
