As globalisation continues at pace, many Australian domiciled companies have been attracted to overseas jurisdictions in their search for undiscovered minerals and energy, cheaper labour and new markets. Especially in the resources sector, it is no longer unusual to see Australian-based companies with most of their assets, if not their entire portfolio, located overseas.
While this has provided investors a wider range of investment opportunities, it has also generated the need for companies to improve their skills in communicating the additional risk that is associated with operating overseas, particularly in developing countries. Political, regulatory, cultural, health and security risks are often heightened in overseas countries, and investors need assurances that the risks are adequately managed. To attract and maintain investors, companies need to effectively address the following with regards to overseas operations and assets:
- Which risks are genuinely of concern or impact to the company
- How the company intends to manage the risks
- Why the investment proposition remains despite these risks
By way of a guide, Citadel-MAGNUS has compiled a number of key points companies should remember when communicating risk.
- First and foremost, management must acknowledge that the risks are genuine concerns to investors. Management, having the experience and context within which to frame the risks, must be able to put themselves in investors’ shoes. The ability to look at the risk from an investor’s perspective, and realise they want to know what the risks are and how management intends to manage them, is of utmost importance. Simply dismissing the risks as irrelevant is not an option.
- Management must be able to clearly explain why the country is an attractive place to do business, and that investors will be rewarded with stronger returns to compensate for the risk. To demonstrate this, companies should use like for like comparisons. If lower costs are the major benefit, be upfront about comparing operating costs to running the same business in Australia.
- The company needs to display to the market their track-record of operating in their chosen country. Displaying to investors the company’s strong in-country connections is important, as is providing examples of issues you’ve encountered in the past, and explaining how you were able to manage them. Demonstrating that management spends a significant amount of time in country is an excellent way of supporting your commitment to operating in-country and understanding the various risks.
- To further instill confidence, site-visits can be hugely beneficial in helping investors and analysts gain a better understanding of in-country risks. There is nothing more effective than getting people on the ground, seeing and experiencing the conditions and culture of the country in which you are operating in to build their investment confidence.
- If the risk profile changes, management must be proactive in acknowledging the change. Despite how well managed the risks are, and how well they have been communicated, issues can arise that change the overall risk picture. Updating the market and clearly explaining how the company intends to react will be critical.
- Finally, if you’re not affected, explain why not. Where a changing circumstance impacts the country, but not your own operation, it’s important to be proactive in understanding the change, being certain it won’t have an impact on your operations, and then clearly articulating this to the market. Investors can be quick to jump to inaccurate conclusions, particularly when being informed by the fast and furious media cycle, and this can lead to sharp falls in share price.
Investors are becoming increasingly comfortable with investing in companies with overseas operations, and these jurisdictions continue to offer significant opportunities for Australian companies to create strong, and in some cases, market leading value for shareholders. Keeping these points in mind when communicating with stakeholders should help minimise and address any uncertainties they may have, and ultimately help the company achieve a strong valuation and continued access to capital.