Stung by Falling Prices, Mining Companies Take Ax to CEO Pay

   By Rhiannon Hoyle 
 

SYDNEY--As cutbacks across the mining sector intensify, companies with operations in Australia, Brazil and other resource-rich countries are taking aim at a new target: pay packets awarded to their top brass.

Falling commodity prices and soaring costs of producing raw materials like coal and gold are shackling resources firms that had, until recently, been riding high on a what Australian policymakers described as a once-in-a-century mining boom. Over the past year, companies have been forced to make deep cuts, slashing jobs and spending on exploration for new mineral deposits, right through to dumping free coffee machines and barbecues for staff.

Now, the ax is falling on wages of company management and directors, in a move that underscores how an industry that at its peak was paying truck drivers sometimes as much as US$200,000 a year is adjusting to weaker demand from China.

"Like a lot of businesses, we got a bit fat, dumb and happy," said Peter Harold, managing director of Panoramic Resources Ltd. (PAN.AU), a nickel miner with operations in Canada and Australia.

Panoramic Resources has cut the pay of its top executives and board members by 10%, soothing ties with staff and contractors who are bearing the brunt of cost cutting across the business after slack demand from China drove nickel prices to a four-year low.

"You can't ask suppliers to make cuts if you, at the top level, aren't willing to take some pain yourself," Mr. Harold said.

Mining companies have vowed to strip billions of dollars in costs from their operations as China, a top buyer of many commodities, steps up efforts to control property speculation and cool its economy. Rio Tinto PLC (RIO), the world's biggest producer of iron ore, wants to save more than US$5 billion through cost cutting by the end of next year.

In the boom times, cutting executive pay would have been unthinkable. Management with a track record of delivering returns to shareholders were as hard to find as the commodities they were looking for.

But even the biggest companies, like BHP Billiton Ltd. (BHP), have been tightening their belt when it comes to pay. Andrew Mackenzie, who became BHP's chief executive in May, agreed to a base salary roughly 25% below that of his predecessor Marius Kloppers and accepted a more restrictive bonus package.

In Australia--the world's biggest exporter of iron ore and coking coal-wages have risen sharply as the economy notched up 21 years of uninterrupted growth. According to advisory firm Ernst & Young, the base salaries paid to chief executives at Australia's top 100 companies rose every year in the decade to mid-2012. Median annual increases topped 11% some years, although wage growth slowed when the global financial crisis rattled world markets and companies turned to more incentive-heavy remuneration schemes.

Toronto-listed Troy Resources Ltd. (TRY.T), which owns mines in Brazil and Argentina, recently joined peers cutting boardroom pay. Last month, it said chief executive Paul Benson will take a 25% cut in his base salary in the fiscal year from July 1. Wages for other senior Troy executives and directors were lowered by 10%, and incentives will be paid in equity rather than cash.

"When the gold price took a large drop in early April, we started thinking about how we would react to that changing environment," said Mr. Benson, who received a base salary of 500,000 Australian dollars (US$464,000) in the fiscal year through June 2012, along with almost A$300,000 in bonuses and benefits like pension payments.

"I had a strong view on this and felt I had to show leadership to illustrate how serious this is," he said.

Gold prices have fallen 24% since January, putting global miners on the back foot. Newcrest Mining Ltd. (NCM.AU), Australia's largest-listed gold producer, last month warned it may write down the value of its assets by as much as A$6 billion.

"I wouldn't be surprised to see this continue to impact more and more companies," said Mr. Benson, a former senior manager at BHP, referring to executive pay reviews. "Now that we've seen a significant change in the gold price, and we're seeing real worries about what's happening in China, people are starting to act as though there is a longer-term change taking place."

Australian gold company Saracen Mineral Holdings Ltd. (SAR.AU) is among those taking stern action. Its nonexecutive directors have agreed to a pay cut of around A$20,000, while managing director Raleigh Finlayson's salary is under review. Resolute Mining Ltd. (RSG.AU), which operates three gold mines across Africa and Australia, has also frozen senior management pay, while uranium explorer Deep Yellow Ltd. (DYL.AU) plans to cut executive salaries and board fees for the second time in a year.

Panoramic Resources's Mr. Harold thinks these moves are just the tip of the iceberg. "At the end of the day, as an industry, we were all getting paid too much," he said.

-Write to Rhiannon Hoyle at [e-mail]

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