In your investment analysis do you consider whether management meets or exceeds their forecasts (often referred to as ‘guidance’)?

Historic management guidance measured against actual results needs to be carefully reviewed, and the reasons for material differences assessed. It is one thing in the case of:

• an exploration company if management forecasts a drilling program at the beginning of a current year of, say, 30,000 feet for that year and 27,000 feet is drilled. It is quite another if only 20,000 feet are drilled and there is nothing beyond management’s control (weather, labour strikes, etc.) that contributed to that; and,

• a producer if management gives guidance with respect to production quantities and costs (metal prices being beyond management’s control), that are materially greater than is actually achieved, and there are no contributing factors beyond management’s control.

It may be perfectly reasonable to excuse a management that fails to meet its guidance numbers by significant amounts in any one year. However, if management misses its guidance for two or more consecutive years by a significant amount that ought to be seen as a serious ‘red flag’ by investors.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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