The former directors of uranium explorer Summit Resources reaped multi million dollar windfalls from share options earlier this year, highlighting just how lucrative options can be.
The former directors of uranium explorer Summit Resources reaped multi million dollar windfalls from share options earlier this year, highlighting just how lucrative options can be.
The Summit directors were in the unusual situation of being able to exercise their share options just a few months after the issue date, courtesy of Paladin Resources’ acquisition of a controlling 81 per cent stake.
Murchison Metals, Golden West Resources, Sundance Resources, Mineral Resources and Conquest Mining are among many other companies to have used share options to help remunerate their senior directors last year.
In these cases, it remains to be seen whether the options deliver real value to the recipients.
The value of options can swing wildly, depending on share price movements.
In some cases they prove to be worth more than initially expected, if the share price rises strongly, while in other cases share options plunge in value or become worthless.
In Summit’s case, its directors and senior executives were granted a total of 8.1 million share options in November 2006 “as equity compensation benefits under the long-term incentive plan”.
Former managing director Alan Eggers was the principal beneficiary, being awarded three million options with an exercise price of $2 per share.
His options were valued at $2.09 each (or $6.2 million in total) when they were granted, using a complex mathematical formula that factored in six criteria, including the prevailing share price of about $2.70 per share.
Paladin’s takeover, which was announced in February 2007, put a rocket under Summit’s share price, which immediately made the options more valuable.
Mr Eggers and his fellow directors exercised their share options in May this year, by which time the company’s share price had risen to $5.56 per share.
With an exercise price of $2 per share, the directors made an instant profit of $3.56 per option (or about $28 million in total).
Summit’s former chairman, John Seton, former director Lindsay Colless, former chief financial officer Doug Warden, and former company secretary Karen Brown also reaped multi-million dollar windfalls.
The traditional rationale for using share options is that they align the interests of senior executives and shareholders, since a higher share price will deliver gains to both groups.
Mineral exploration companies also favour share options because they usually do not have the cash flow to pay competitive salaries to their executives.
Mr Eggers, for instance, drew a salary of just $36,250 last year.
However, Summit paid his private company, Wesmin Geological Consultants, $1.27 million for management, geological, office and computing services and a termination fee.
Many other companies granted potentially lucrative options packages as well as paying competitive salary packages.
Murchison Metals executive chairman Paul Kopejtka was paid $381,500 in fees as well as being granted four million share options valued at $2.2 million.
GVM Metals paid its managing director Simon Farrell $360,000 in salary and fees and granted him share options worth $2.2 million.
Takeover target Golden West Resources increased managing director Gary Hutchinson’s salary to $280,000 (up from $240,000) and granted him share options valued at $3.7 million.
