Activist investors shook up Canada’s clubby gold mining industry over the past two years by targeting boards at a dozen companies and winning an impressive number of battles. More campaigns are in the works, and even the largest mining companies may be vulnerable.
But can the activists deliver on the heightened expectations that come with their successful board fights?
It’s easy to understand why outsiders such as hedge fund Paulson & Co. Inc. get broad support when they target a laggard such as Detour Gold Corp. Detour’s stock, which hit $35 in the summer of 2016, plunged below the $10 mark last year amid a litany of problems at its flagship mine, northeast of Timmins, Ont.
That kind of story is too familiar in gold mining. Over the past 10 years, returns from Canadian gold company shares have trailed gold prices by a large margin. Shareholder services firm Kingsdale Advisors, a central player in a number of boardroom battles, published a report on the mood of the gold sector last week that said: “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.”
Paulson’s year-long campaign against Detour saw it turn over the majority of the board of the Toronto-based gold miner. The New York-based fund, best known for founder John Paulson’s profitable bet against subprime mortgages prior to the global financial crisis, is also working at uniting fellow grumpy investors by backing an activist group called the Shareholders’ Gold Council.
The Detour campaign was one of 13 proxy battles to play out in the gold sector over the past 26 months. Activists achieved all or part of their goals in all but three contests. "Investors have lost faith in the boards of gold mining companies’ ability to manage risk and are seeking out ways to push for change,” Kingsdale said. “Any company, no matter its profile, size or asset base, can be an activist target.”
But like the dog that chases a car, then catches it, there’s the nagging question of what comes after an activist victory in a proxy battle. Detour shows that boardroom victories don’t quickly translate into stock market gains.
Throughout its long proxy battle, Paulson & Co.'s game plan for Detour consisted of installing new management, then selling the company. Step one is done. Step two – finding a buyer for a miner with a single property, in Northern Ontario – is proving far more difficult so far, in a sector that is skittish about paying high prices for acquisitions. Paulson & Co. has won boardroom battles at Detour, but to date, the fund has lost money on this investment.
Most activist funds use the same playbook as Paulson. They target poor performers with the goal of putting the company in play. These funds capitalize on justifiable investor frustration with management teams that took home massive pay packages for posting subpar results. In mining, that means activists often end up with board seats at companies with significant operational problems; even the most successful mine is a daily engineering challenge.
Only a handful of fund managers have the experience and stamina required to fix busted mining plays. Brookfield Asset Management Inc. recently did it with North American Palladium Ltd. Former Barrick Gold chief executive officer Aaron Regent, who runs Magris Resources Inc., also uses operating skills as the starting point for investing in mines. As activists began roiling the sector, Magris spent US$500-million to acquire properties in Quebec from Iamgold Corp.
Kingsdale’s report highlighted the fact that many of the activists now targeting gold miners are patient money. “For the most part, these are not your short-term corporate raiders or ankle-biters,” the advisory firm said. “Their interests are long term; they’re not only in it for a quick lift in share price.”
That long-term view is useful for anyone diving into mining stocks. The sector’s fortunes are going to be driven in large part by commodity prices and the ability of management teams to deliver complex projects, on time and on budget. For gold stocks, the whims of bullion markets – which have been strong lately – are always going to have a big impact on the share price. The arrival of activist investors promises to reshape boardrooms at gold mining companies, but it doesn’t change the underlying dynamics of the sector for investors.
Andrew Willis