The Art (and Science) of Management Teams in Resource Companies

Gold Investing

The management teams in resource companies are critical components to the potential success of any given project.

Assessing the value of management teams of mining companies requires a careful combination of quantitative and qualitative tools.

When renowned value investor and “Dean of Wall Street” Benjamin Graham published The Intelligent Investor in 1949, key sections touched upon the nature of the management team and its impact on the success or failure of a company.

Graham criticized the lack of scientific and quantitative understanding in his day about what makes a management team successful. Graham suggested, “Until quantitative and reasonably reliable tests of managerial competence are devised and applied, this factor will continue to be looked at through a fog.” In many ways, this “fog” surrounding the management team discussion is still prevalent today.

Avoiding the wrong management team

Poor management teams have the potential to succumb to their own lack of competence, producing poor returns that could shrink the market share of the firm. The negative consequences for a firm could be expressed on a spectrum ranging from a minor dip in profitability all the way to bankruptcy. The sheer scale of management incompetence is more common than many people realize.

In recent years, Chevron’s (NYSE:CVX) Gorgon LNG project in Australia was hit with cost overruns totaling nearly US$20 billion. Audi (LSE:0FG8) was found guilty of manipulating outcomes of emissions testing on its vehicles, which has cost the company US$33 billion to date. When it comes to mining companies, Bre-X was one of the largest acts of fraud in capital markets history in the late 1990s.

Each example presents a unique set of circumstances that led to failure by a management team. From the perspective of an investor, some basic questions should be always be asked:

  • Is there a clear accountability structure to ensure information is accurately presented to investors?
  • Is there a clear division of responsibility on the management team?
  • Does the management team have a history of integrity in their personal and professional lives?
  • Are management team members suited to their roles?

Breaking down management teams

As with any type of business, mining companies must have three key areas addressed — technical, communication/marketing and operational expertise — to an extent that risk is sufficiently reduced and there is a pathway to success. Technical expertise should provide a clear understanding of resource potential, extraction and delivery to market. Engineering, geology, legal, finance and accounting professionals are there to sufficiently develop and scrutinize the opportunity from every possible angle, determining that the opportunity is economical and worthy of pursuit.

Additionally, mining companies routinely encounter opportunities to develop new business partnerships or improve upon previous agreements. For example, in June 2019, the management team at Silver Viper Minerals (TSXV:VIPR) renegotiated the terms to the company’s option agreement to purchase three concessions under the previously signed Rubi-Esperanza option agreement. The renegotiation saved Silver Viper US$1.49 million while also providing additional flexibility for the company moving forward.

Below the management teams of mining companies are communications and marketing experts that engage investors, regulators, end users and the public. Just because an opportunity may be a “no-brainer” or it receives approval from regulators doesn’t mean that investors will fund a project, nor does it mean that the public will provide their consent. Communications and marketing people promote the company to investors, sell the end product and reassure both regulators and the public that the project abides by laws and social expectations. The job of communications and marketing leaders is becoming increasingly complex, especially in the era of instant information thanks to the internet and social media platforms. One wrong move (or wrong post) could put any project in jeopardy.

Operational experts ensure projects are completed on time and within budget, and also that they deliver the product or service to market. In essence, they make the project happen. Supply chain purchasers, sub-contractor managers, labor relations negotiators and onsite supervisors are there to keep the site running properly. Their objective is to make sure the goals and objectives of the senior management team are realized.

Tools to assess a management team

It is common knowledge that a “dream team” of executives will not necessarily produce value in a firm. Assessing management team members on their own terms and how they operate within the team are both equally important. There are quantitative and qualitative elements to both.

Some of the basic questions on the qualitative side may be: What is the previous track record of management team members in their respective fields? How have they overcome the challenges they were given? Do they have a stake in the company, or “skin in the game”? Does the management team have a clear and simple vision and mission? Do they tend to mask meaning with jargon or can they communicate opportunity in clear, simple terms? Do they have a concise understanding of their company and employees? Is their compensation on par with industry counterparts? What is their overall management style and reputation? These types of questions provide a framework for understanding how success or failure occurs.

For quantitative elements, the diligent investor must asses the numbers. It is crucial to understand financial details like revenue, net income, earnings per share, price-to-earnings ratio, return on equity/assets and debt. However, these financial details also need to be assessed with a qualitative context. A management team that is brought in to steer a company back into profitability may not see positive numbers for months or even years. Likewise, less-than-stellar financial details have to be interpreted with the context of the circumstance. What an investor should look for are signs that progress is being made by the management team that points to future profitability.


The debate about what makes a management team successful will never go out of style. After all, it’s the management team that provides direction to mining companies. A combination of technical, communications/marketing and operational expertise makes the project happen. Without a competent management team, even a world-class resource project can falter horribly. Knowing the individuals on the team and how team members work together is critical to understanding whether the project is set up for success.

This article was originally published on the Investing News Network in February 2019.

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