Daffy Gem

| August 27th, 2014

Daffy Gem
"Daffy Gem"

After all the rain we had over the winter it has been pleasantly surprising to see all the daffs and tulips popping their heads out in the garden, I had feared they might have been drowned in the biblical quantities of rain to which we have been subjected.

Not quite such a pleasant sight was seeing the smug smirking face of Jolly Roger (aka Roger Davis non exec Chairman of Gem Diamonds) staring at me from page 6 of the company’s 2013 annual report, but to be fair to him, I suppose that I am the dumbo bothering to read it in the first place.

The annual report is all of 143 pages a 17% increase since 2011.

At 143 pages, I cannot recommend anyone reading it unless they are suffering from insomnia, and, I do not propose to go into the details of their financial results, or, only in so far as they amuse me in the context of the directors remuneration and also in a rather fun comparison that I have dug up.

Of the 143 pages, 16 (pages 62 to 78) are devoted to the directors remuneration.

Needless to say, the executive directors have been handsomely rewarded with overall increases of up to 50% (in this number I have not included one director who left within the year or the director who replaced him).

Clifford Elphick’s, CEO, overall pay has increased by 42% to £776,406 or around US$1.3 million.

The average increase for ‘other employees’ was 13%.

The bonuses paid to the four executive directors was £758,422 an increase of 335%, of which Elphick’s share was £262,230, a 371% increase.

The bonuses paid to ‘other employees’ was in total £1.369 million a 48% increase over the previous year.

So the message is clear, that the ‘improved’ performance of the company was obviously pretty much all down to the input of the executive directors and their carefully mentoring by the non execs and in particular Jolly Roger.

The scheme for the executive directors pay has been changed for this year, and, the business performance element of what they term the scorecard, where 80% is given to business performance and 20% to personal performance, is split between Growth (30%), Operating performance (50%) and HSSE (Health Safety etc) performance (20%).

Of the Operating performance there are five criteria, Underlying EBITDA, Earnings per share, Waste tonnes mined, Ore tonnes treated and carats recovered.

The only one of these five criteria where our hard working executives met the threshold was Waste Tonnes mined.
Interestingly, well to me, is that on the carats recovered criteria, there is a 50% payout within the scheme if they achieve 85% of the business plan target, so as the actual performance was ‘Below Threshold’ that means that even this 85% target was not met.

As to the Waste Tonnes mined, I think we can be pretty sure that they were not personally working away with their buckets and spades to achieve this particular goal for which they have been so handsomely rewarded.

This overwhelming ‘success’ makes no mention of the share price, which I have always thought was a pretty key factor in determining success, or the measurement of success, for a board of directors.

Well, they would want to keep that one out of the equation.

The share price after these results is hovering around £1.70.

Don’t forget that the company was listed in 2007 at £9 a share and had to dilute by 100% to raise $100 million to stop itself going bankrupt a few years ago as the share price headed for £1 and that was from its all time high of around £12.

Jolly Roger at one point in his eulogy to the successful year says that there was a “substantial reduction in the executive headcount resulting in reduction of central costs from $14 million to $12 million.”

This modest 14% reduction has to be taken in the context that at the very end of 2012 Gem sold the Ellendale Mine in Australia to what is now known as Kimberley Diamond Limited (KDL).

Gem had paid A$300 million in 2007 for Ellendale and they sold it to KDL for A$3.25 million, so presumably they needed a few less executives to run their affairs, having got rid of their only other producing mine apart from Letseng.

Indeed, you would have thought that maybe they should have got rid of some of the directors as well after this well thought through acquisition and disposal?

For fun I read the KDL half year report to 31st December 2013.

The Chairman of KDL reported that in 2013 the company was the second best performing resource share on the ASX and the share price had gone from 28 cents to 95 cents (current share price is A$1.15), and they were able to make their maiden dividend payment of 2 cents a share.

Gem has never paid a dividend.

Last year a major institutional investor withheld its vote on the Directors’ Remuneration Report. There were 20,721,413 million abstentions and 425,000 votes against the Directors Remuneration Report out of a total number of votes cast of 100 million.

It is Landsdowne Partners Ltd, which own exactly 20,721,413 shares, or 14.99%, in Gem.

Rather charmingly, this year’s report says of the major institutional shareholder (the name is carefully omitted) who withheld its vote that “as they did not identify any specific aspect of remuneration as meriting criticism, the Board regarded the abstention as a general reluctance to vote in favour rather than specific approval.

It is clearly not the ‘specifics’ of the directors remuneration that are at issue and, by the way, I have not gone into all the various shares this merry gang have been awarded over the years.

It is that this board of directors are still employed let alone paid these absurd sums of money for continuous failure.

Hopefully, and I know this is a vague hope, this institutional investor will go a stage further and vote against this year’s remuneration report and be joined by all the other major investors, Graff Diamonds International, BlackRock, FIL Ltd / FMR LLC and Capital Group. In total, these shareholders control 55.9% of the shares.

The ability of Gem’s directors to pay themselves ever more for failure is sadly much less of a surprise to me than the ability of my daffs to defy the weather.

Source Polished Prices

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