@NFC69 It seems a fairly well designed compensation package. For...

@NFC69 It seems a fairly well designed compensation package. For the directors/management to realise value they need to lift the share price. Their interests are best served by finding value and successfully executing and thereby getting a higher share price.

Taking Neil Herbert as an example, he has a base payment of $200k and got a cash bonus of $52.5k. This is a modest amount for a good-sized public company. Options with a high face value were provided. The valuation of these options was $2.945m meaning that 92% of compensation was equity based. For the other three high compensation values highlighted, most of this also came from options. This is what you want, most of the value provided being tied to performance.

I have no major concerns with non-executive directors being paid $60k/yr, if they bring skills and experience to the board table that helps create a more successful company.

There were two sets of options granted during the year to directors and employees (I'd have preferred one, but...). The valuation in the first set used an underlying price of 20.35p. Options were granted on 18 August 2021 had a strike price of 30p, 40p and 50p. Management needed to deliver almost a 50% return before the options even started to have value. If management didn't get a good-sized lift in the share price, none of this value would transfer to management (because they didn't meet the criteria to warrant it). Across 2019 to that point in 2021, the share price never even traded at 30p. These are good stretch targets in the option exercise price setting.

The second set of options granted were on 22 April 2022. For these options the closing share price of 22 April was used in the valuation (57.20p). Anyway these options are again significantly above the then current share price of 70p, 75p and 80p. From Yahoo finance graphs, the recent high of 68p was an LTH. For the options to have value, directors need to achieve a new ATH share price. This is exactly what you want as a shareholder. Even the bottom tier of these exercise bands (70p) required delivering a 22% return for shareholders. Getting any value from the 80p options requires delivering a 40% return for shareholders. Some may quibble about these targets but they aren't stupid.

The value is being calculated through the Black-Scholes option pricing formula. This is what I expected because its the accepted industry practice. What is however odd is the volatility input into the option pricing. Normally shares have a volatility much lower than that being seen recently in the lithium space. This means the input might be 20% or 30%. Due to the extreme recent volatility in Atlantic's share price (or pretty much any lithium stock for that matter), a volatility input of 79.5% has been used. This massively increases the value of the options, even although they are out-of-the money and not excessively long at only two years. So most of that high compensation figure comes from the high volatility figure punched into the option pricing formula.

So looking at the recently depressed share price of about 35p. Unless it improves over the next two weeks all the 40p and 50p options should expire worthless. A 5p/share gain will accrue to the 30p options. While the options were valued at 1.2m pounds the actual value gained (at 35p) would be 350k [7,000,000 * (35p-30p)].

The second set of options are due to expire on 23 April 2024. For management and directors to get any value from these options they will need to get the share price to over 70p (Circa A$1.16). The options were valued at 19.6-21.7p so to get this value they need to get the share price up to around 95p. If They do get the share price up to around this level in 16 months time, I think a lot of shareholders will say well-done you deserve this payment. If they don't get it to at least 70p, the options will expire worthless.

Also its worth considering that these aren't free options. They are options with an exercise price that needs to be paid to Atlantic. If the share price is above 80p and they are exercised, the directors/management need to find 15.6m pounds to exercise the options. This may result in some immediate sales to find the cash but it also means if the share price is above this level, Atlantic will be receiving cash close to the current funding gap between what Piedmont is paying and what the capex is anticipated to cost.

While the annual report notes a high options value, it appears designed well. Not all options schemes are!!


The disclosures are pretty good because you can see the various inputs used for the Black-Scholes option pricing