1. Creating Predicability

Setting goals is an important public communication tool for companies as it shows investors what path they plan to take going forward. This path is very important to understand as it creates different risk/reward dynamics and therefore influences the company's suitability in our portfolio.
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For investors, we must look at whether companies are willing to set forward looking goals on how they intend to move, and how this is likely to positively impact company value:

These goals can inform us what we can expect going forward. An example of how setting goals can drive predictability is Australian Strategic Metals (ASX:ASM). The company listed on the ASX in July 2020 as a rare earths mine developer. The nature of the mine development business is quite intense, usually implying a long investment cycle, high capital cost and prolonged payback. Yet in September 2020, ASM aborbed their Korean JV partner which was developing a rare earths refining plant - which subsequently became their primary business focus.

Importantly, the added focus of Metallisation in the subsequent investment presentation tells us that their investment focus has shifted away from purely mining. ASM is now a rare earths processing company which is a staged investment business with lower capital intensity (US$35-45M). Furthermore, the nature of the business implies earlier cashflows and less execution risk. The three near term goals under Metallisation tells us what management intend to do with the business.

These goals was later reiterated in a May 2022 presentation which showed the delivery of stage 1 plant intallation/commissioning and followup stage 2 development (although slightly delayed). Although the rare earth mine development is still occurring in the background, the clear listing of goals around the Korean Metals Plant (Metallisation) has created predictability around the company's focus and how they plan to advance the metals plant to stage 2 production.

2. Trust

Setting goals is the best way for a company's management to build trust with investors. In most cases, investors never get the opportunity to personally meet and get to know a CEO or managing director. This means that we have less visibility on their ability to deliver on promises and execute on strategy - giving rise to the common Agency Problem. Yet setting goals and following through is a fantastic indicator whether a director is true to their word and motivated to deliver. Over time as reality matches with promises, investors are more likely to trust even blue sky ambitions, which is the stage a company needs to arrive at to generate meaningful on-market momentum.

A great way to examine whether a company's management is trust worthy is to look back at goals and promises laid out 2+ years ago and compare them to the business today. Factors to examine include:

Brookside Energy (ASX:BRK) has both set and overachieved all their key goals since transitioning the company towards a crude oil development company. In March 2022, the company set out 3 key goals

At this point in time, the company's first well, Jewell had already commenced production, so the subsequent focus was on the Rangers and Flames wells if the development timeline was to be fulfilled. If the then look at subsequent announcements, we can see that the Rangers well commenced early-stage production in May 2022 and the Flames well in August 2022. Although 1 month behind schedule, it is reasonable to consider this program a success and a on-time delivery of the first goal.

In September 2022, the company further outlined the Wolf Pack well, first of their phase 2 development wells which relates to their second goal. This was followed up in October with the Juanita well development at a newly acquired Bradbury area. At the time of writing (July 2022), the Wolf Pack well was confirmed to be Brooside's best well to date, and Juanita was about to begin drilling. All this development has been internally funded and without external equity/debt capital as outlined in goal 3.

Given the technical and financial success of these 4 wells to date, there is reasonable trust in management to both deliver on the Juanita program and also an additional well alluded to on the Bradbury project area. Furthermore, this track record has earned management well deserved trust that they can indeed execute on future developments, which lowers perceived agency risk.

3. Adaptability

Although setting goals is a great indicator of good management, we must also observe when it is suitable for a company to adjust strategy and adapt to the inevitable surprises in business. When these surprises arise, investors need to pay particular attention to management's communication and rationalisation of it. Are they upfront on the challenges? Do they reflect on their previous hypothesis? Are they clear how they plan to overcome the new landscape?

Coda Minerals (ASX:COD) demonstrated a great example of adaptability on their way to a copper mine development. The company had a ground-breaking discovery in South Australia at their Emmie IOCG project in June 2021. Initial drilling hit strong copper mineralisation yet soon realised that the model they built for the system was not correlating to their actual drill results - i.e. they had little idea where the copper actually was. Especially when you're operating almost 1km underground, this is a very expensive gamble.

Upon realising this, the company quickly switched their goal from drilling, to further geophysics. This pivot and goal shift is an upfront time investment in generating better future drilling targets, which makes Coda a significantly more predictable investment with less downside surprises.

Yes, this pivot may increase the time investors need to wait until their next batch of results which not be everyone's preference, yet, now that we have a clear set of goals outlined, all shareholders can predictably guess what they are on the journey for.

Closing considerations

Setting goals is a powerful mechanism for communicating management's intentions to investors. In many cases, the goals alone can tell us where a company is going. Reflecting on their past goals and how they've eventuated can tell us along about management's character, consistency and adaptability. Yet, we must also use judgement when seeing if the goals set are reasonable and adequently ambitious.

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