Gold Miners Beware - Activism From Unhappy Investors Picking Up
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(Kitco News) -Investor activism has picked up in the gold sector during the last two years, with shareholders demanding management run companies in a manner that benefits share prices and stockholders rather than boards and executives, said a report from Kingsdale Advisors.
A number of high-profile mergers have occurred in the mining sector, including Barrick Gold Corp.’s acquisition of Randgold Resources Ltd. and Newmont Mining Co.’s takeover of Goldcorp Inc. But another notable feature has been unhappy shareholders launching campaigns against boards and chief executives.
Activists have launched 13 campaigns in the past 26 months, scoring wins or partial wins in all but three, the report said. The three management wins came at small companies, meaning activists have had an impact at relatively large firms.
Kingsdale Advisors, which has offices in New York and Toronto, is a shareholder services and advisory firm that has acted in some of the largest and most high-profile proxy fights and transactions. Since 2003, public companies across North America have turned to Kingsdale to help them reach out to shareholders at times of transactions or resolutions driven by shareholder votes.
Recent merger efforts have been focused on capital efficiency and operational excellence, rather than simply increased output or diversification, as in the past.
“With the giants of the industry growing, pressure will increase on others to improve as well, recognizing the need for rationalization and scale,” Kingsdale said. “Gold investors who have suffered through years of value destruction, failed acquisitions, mismanaged permitting, misaligned compensation schemes, overoptimistic or ill-conceived life of mine plans, and strings of missed guidance, are skeptical and have put management teams on short leashes when it comes to value creation.”
Kingsdale suggested that there have been times when deals that made sense did not materialize, such as lost merger opportunities for companies that had mines in close proximity to one another, perhaps because executives want to preserve their jobs. Meanwhile, shareholders have become frustrated by management that may be slow to embrace a new ideology or question some of the assumptions about their own long-term strategy.
Activists have been frustrated in part by mergers that did not deliver the promised returns. Many who wanted exposure to the price of gold have turned from the miners themselves to royalty companies, Kingsdale said.
“During this time, Canadian gold companies have not only underperformed the markets, they’ve even disappointed when compared to the price of physical gold—which itself has been lackluster. You can’t blame shareholders for being weary.”
Kingsdale later added: “For years we have heard shareholders voice a growing list of concerns that too many times fall on deaf ears. The continued persistence of these problems and what shareholders see as repeated and avoidable errors, either in operations or judgment, are leading more and more investors to a breaking point.”
“Over and over, we have heard shareholders complain — first privately and now increasingly publicly — about sustained poor performance vs. peers or the index; poor market guidance; project delays; capital overruns; inability to secure ‘routine’ permits and negotiate licenses; and excessive compensation.”
The investor activists are not easily classifiable, ranging from average investors “willing to organize” to well-known hedge-fund managers. Their interests are long term, not just for a quick pop higher in share prices, Kingsdale said.
One of the more high-profile examples is when well-known hedge fund Paulson & Co. took on Detour Gold, with Paulson’s slate of nominees taking over the board. Fund partner Marcelo Kim blasted executives at the Denver Gold Forum in 2017, arguing that boards have destroyed shareholder value by putting their own needs ahead of shareholders.
Other companies have faced backlashes from unhappy investors as well.
“As history has shown, it doesn’t even matter if they have a good case for change, just that they can tap into the frustration of other shareholders,” Kingsdale said. “Additionally, gold fund managers that may not be activists themselves are increasingly showing support for fellow shareholders wanting to implement positive change. The lesson for directors is they cannot afford to look at a shareholder list, see no ‘known activists’ and assume they are safe.”
Kingsdale listed several steps gold companies can undertake to avoid similar problems, such as understanding their shareholders and developing “compelling” long-term plans. Companies should undertake a deep self analysis and “don’t underperform” in the areas they can control. They should also strive to avoid biases, such as geologists feeling pressured to confirm management suspicions about the quality of proposed mining sites.
“For directors on gold-company boards, whether they agree with the views of activists and the shareholders who back them is irrelevant,” Kingsdale said. “What is relevant is that a growing series of circumstances that they may or may not be able to control are conspiring against them to create an irrefutable case for change.
“The question then is will you let that change sweep over you or will you drive that change?”