Contributed Commentaries
Paulson & Co. Addresses the Elephant in the Room
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
At the recently concluded Denver Gold Forum, there was a presentation given by the high-profile hedge fund Paulson & Co. which has caused quite a stir in the mining space. The presentation entitled “Gold Equities: Myths, Dreams and Reality” was given on September 26th by Paulson & Co partner Marcelo Kim who was speaking with the full backing of the firm’s founder, John Paulson. In 2010, Paulson made $5 billion by betting on gold and has remained a staunch gold bull despite the painful miner bear which ensued after gold peaked in 2011.
The 23-slide presentation contained some ugly statistics which Kim announced to the packed room of industry professionals in attendance. Average total shareholder returns from gold mining investments are a negative 65 percent since 2010 over a period when the CEOs of 13 of the largest companies have pocketed a collective $550 million in pay. In that time, the gold price rose by 20 percent and the price of oil, a major input cost for miners, fell by 28 percent.
After concluding that most global gold miners have been poorly managed, Kim called out the world’s biggest investors in gold-mining stocks to form a coalition to tackle miners’ “dreadful” performance. The coalition will focus solely on the gold sector, issuing vote recommendations to shareholders on issues including CEO pay and company take-overs.
According to Bloomberg, “Paulson & Co. has been in talks with Tocqueville Asset Management LP about its plans for the Shareholder’s Gold Council […]. Vanguard Group Inc., BlackRock Inc., State Street Corp. and Van Eck Associates Corp. are among other large investors in several of the mining companies mentioned in the presentation.”
Kim also implied management of major mining firms have not been entirely to blame, saying shareholders “behave like sheep being led to slaughter”. Instead, shareholders must demand accountability from companies and insist that company pay, especially for CEOs, be aligned with shareholder returns. Investors which control large percentages of major miners’ stock should also encourage “booting out” poorly performing CEOs and boards.
Kim continued, “If we don’t do anything to change, then as investors we will continually be disappointed with shareholder returns and the industry will slowly dig itself into a hole of irrelevance and oblivion.”
Toward the end of the presentation, Kim recommended boards must also have more shareholder representation, adding that Paulson had recently secured board positions at Midas Gold Corp and International Tower Hill Mines Ltd, two recent Paulson investments.
While I applaud these facts coming to light at the industry’s top annual event, I find it ironic that during this presentation, Kim had chosen these particular mine development firms to mention the fund owning such a large position in. Both of these juniors control deposits which are an “optionality” on the price of gold, meaning both companies need a much higher gold price for the deposits they control to be economic.
In other words, these two developers are a prime example of the type of lower grade, bulk-tonnage deposit global miners mistakenly took over toward the end of the last gold bull market. Ill-advised, share dilutive take-overs of large, low-grade deposits were a major source of the criticism hurled at the industry by Paulson & Co in Denver last Tuesday when Kim said, “(Shareholders) need to stop CEOs, boards and management enriching themselves at the expense of shareholders and prevent companies from embarking on the kind of acquisitions and budget blow-outs that have destroyed $85 billion in value just since 2010”.
Judging by the gold price in relation to the GDX, the underperformance by the global gold miners has been glaring since the beginning of this year, despite stronger balance sheets and the write-downs of marginal deposits by most of the major mining firms. Through Q3, gold is up roughly 10% and the GDX is up about the same. The major gold stocks generally leverage gold’s gains by 2x to 3x, which is why traders want to own them during gold bulls.
I feel it is high time someone has finally brought these facts to the attention of the public on such a large platform as the Denver Gold Forum, and particularly to the investors in this sector. Hopefully, this will be a wake-up call for both management and major shareholders, bringing more accountability into the mining space.
