KLL Performance Rights - Major Red Flag

My post is a bit long but i feel its important to discuss. It's also just an opinion and i'm no expert in these matters.

In KLL's latest presentation I noticed the managers will receive 20m performance rights when milestones are met. That’s it! Simply reach the milestone and get your rights. Performance rights, bonuses, commissions etc. are tools used to change the behaviour of employees and/or managers. For example, commissions are used to incentivise employees to make sales. Therefore, the incentive is money and the target is sales. In KLL's presentation it states:

"The Performance Rights are divided into three tranches, vesting on reaching the following milestones: completion of a DFS, securing project finance, and achieving commercial production of SOP"

So the incentive is money (20m shares x $2? is an extreme incentive) and the target is speed (managers will race to reach milestones to earn their $40m). This is a MAJOR RED FLAG for this company. Incentives are very powerful tools to modify behaviour but can also have disastrous effects when designed wrong. There is evidence the incentive is working which includes lining the ponds instead of testing unlined designs (speed), several off-take agreements in place (speed), and posters on this site talking about being first to market (speed). It also important to question the 2.8m advisor options. 2.8m options seems a bit excessive. Let's assume the share price hits $2 and the advisors exercise then sell. That's $4.2m! Thats a lot of "advising" for a very small exploration company. These options may reflect the corporate culture of KLL caused by the incentive. The advisors would know management will do whatever it takes (possibly illegally) to get their $40m payout, so taking options is reasonably safe (and quite lucrative). Overall, it would be safe to assume the incentive is working.

Is there a problem with the incentive?

When you look at the purpose of a feasibility study then there is a major problem. The purpose of the study is to determine the mining method which will maximise profit. Unfortunately, the incentive is targeting speed and not the optimal mining method.

Does it matter?

It would depend on who you ask. The feasibility study will most likely show the company will earn a profit but it CANNOT show the full potential that could be earned. This is because managers are rushing (speed) to reach their milestones ($40m). That doesn't mean the share price will slump but eventually the feasibility study will need to be performed properly. It would seem KLL will do this after production has commenced (i.e. after all milestones are met). But does it matter? Not for the current managers. Their goal is to hit the milestones and get their rights. After that they’ll most likely resign and walk away with $40m. Shareholders that sell before people realise what has happened should do well. Long-term holders will probably not benefit as they will have a project that now needs to spend time and money determining how to maximise profit.

In summary, the incentive put in place (rights) is having the desired effect (speed) but may be leading to disastrous consequences as the study is not being optimised.

I'd go so far as to say AMN is also suffering the same consequences as it explains why announcements from KLL and AMN don't make sense. If I was a major shareholder of either company I would be asking to view evidence that significant trials/tests/research on every variable of the study has been completed. This is only because the incentive is not targeting the due-diligence of the study.

I'm glad RWD doesn't have this issue!