I’ve been taking some email stick and getting flogged on the odd
website for last Friday’s criticisms of the Oxiana “options rort”. This
is from a Crikey subscriber:

I need to
take issue with you regarding the “options rort” in CEO Owen Hegarty’s
remuneration at Oxiana Ltd. I think you are wrong – both technically and morally,
and it would be helpful if you issued an apology.
Hegarty is a folk hero amongst the loyal shareholders – all of whom are mighty p*ssed off
with you.

And then there was this on the ShareScenewebsite:

Oxiana have always
been very approachable, both now in the ASX 100 and years back when they were
tiny. I don’t know why those complaining just didn’t pick up the phone and ask
for an explanation as I did. As for that tosser Mayne, he too could have
simply rung the company to ask for an explanation. But no, he prefers his
grandstanding to grab his ten seconds of fame.

Sadly, it seems those who have profited from investing in Oxiana have
been blinded by their newfound riches. Let’s now look at the facts.
Hegarty was issued 4 million options to buy shares at $1.20 a piece at
the 2004 AGM, but the notice of meeting only stated that “the options
will vest on 1 June 2006, subject to the satisfaction of performance
hurdles”.

The
subsequent 2004 annual report, released in March 2005, clarified that the hurdles were as follows:

  • 50% will vest on 1 June 2006 if the total shareholder return of
    Oxiana for the year ended June 30, 2005 exceeds the median of the total
    shareholder return of competitor companies.
  • a further 50% will vest on 1 June 2006 if the total shareholder
    return of Oxiana for the year ended 30 June 2005 is in the top quartile
    of the total shareholder return of competitor companies.

Fast forward to the 2005 annual report and suddenly we’re told the hurdles are as follows for these same 4 million options:

  • 50% will vest on 1 June 2006 if the total shareholder
    return of Oxiana for the two years ended 31 December 2005 exceeds the median
    of the total shareholder return of comparator companies;
  • a further
    50% will vest on 1 June 2006 if the total shareholder return of Oxiana
    for the two years ended 31 December 2005 is in the top quartile of the
    total shareholder return of comparator companies.

Oxiana has gone into orbit over the past ten months but, sadly for
Hegarty, it under-performed the broader market and its comparator
companies over the 2004-05 financial year. Therefore, the 4 million
options should have lapsed. Lo and behold, the 2005 annual report
changed the hurdle time frame to two years, so in six weeks time
Hegarty will be able to write out a cheque for $4.8 million to buy
stock worth $13.68, based on Monday’s record close of $3.42. That’s
a paper profit of $8.88 million for Hegarty at the expense of all other
shareholders who will be diluted.

The board has every right to feel sorry for Hegarty and could easily
have given him a bigger cash bonus as compensation. However, he does
own 27 million ordinary shares and a further 2 million $1.20-a-share
options that were issued in 2005 and are well in the money with all
hurdles set to be easily surpassed.

This is an issue all about the specific 4 million options and the
performance hurdles that were changed from the 2004 annual report to
the 2005 annual report. The facts are not in dispute and Oxiana is yet
to publicly clarify the situation.

Institutional Shareholders Services, the world’s most powerful proxy
advisor, approached Oxiana for an explanation almost three weeks before
the AGM. Private mutterings about a “mistake” never materialised into a
public statement, so ISS recommended a vote against the remuneration
report and the big institutions did just that, delivering a stunning
46% against vote – the biggest of any top 100 company.

Rather than attacking me, ISS and the institutions, Oxiana should have
a good look at itself and its cheer squad of small shareholders should
apprise themselves of all the facts outlined in this item and then
dismount their high horses. Besides, why should shareholders be so keen
to give away $8.8 million of value that they don’t have to. If the
company is feeling so generous, perhaps they could donate an extra $8.8
million to help Laos, the third world country which has delivered more
than half of the $4.5 billion in shareholder value to Oxiana.

Peter Fray

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