In recent weeks, the bright lights in mining and finance circles have been asking what on earth Eric Sprott is up to.
Mr. Sprott's stock picking prowess has made him an occasional billionaire – the 72-year-old money manager has a chunk of his fortune tied up in gold companies, which means he is well-to-do all the time and vaults into the ranks of the unimaginably wealthy when bullion prices soar.
What turned heads, is Mr. Sprott's decision to turn down a quick score on Kirkland Lake Gold Inc., and instead watch the company lose a third of its value since September, when it announced plans to merge with Australia's Newmarket Gold Inc. Circumstances forced Mr. Sprott to remain silent – he's chairman of Kirkland Lake and with the company in the midst of a marriage, he declined an interview request.
Those in Mr. Sprott's circle say his actions speak to an investor with conviction, one who is not afraid to defy market sentiment. He may not be correct, but Mr. Sprott is being true to long-held views on where markets are heading.
Here's the puzzle: After announcing the merger, regulatory filings show Kirkland received a juicy takeover offer that was nixed by the company's board. Mr. Sprott owns significant stakes in both Newmarket and Kirkland, worth more than $100-million combined, and recused himself from merger talks, but committed to vote in favour of the deal.
The cash-and-share bid for Kirkland came from a partnership between Gold Fields Ltd. and Silver Standard Resources Inc. The Newmarket merger values Kirkland at approximately $1-billion, while media reported the spurned suitors offered $1.4-billion. Why turn down a premium price?
Here's where conviction comes into play. Gold currently trades below $1,200 (U.S.) an ounce. If you believe in gold as a hedge against what ails the world, as Mr. Sprott does, your expect bullion is heading north of $2,000. The short-term lift that comes from saying yes to a takeover can't match the long-term opportunity cost of giving up ownership of high-quality gold properties.
An investor getting cash from selling into a takeover must redeploy that money into a new gold play, likely less attractive than the stock they just sold.
Taking back stock in a takeover brings a more subtle issue. There is a premium valuation accorded to pure-play mining companies operating in stable regions. Kirkland owns five mines in Ontario. Newmarket runs three properties in Australia, jurisdictions where rule of law is well established.
Gold Fields biggest properties are in Africa; its reserves are formidable, governments are unpredictable. Silver Standard is, no surprise, primarily a silver producer. That is a turnoff for gold bugs.
Several institutional investors lobbied loud and long against the merger, and in favour of re-opening takeover talks. But late Friday, the two companies announced their transaction was approved, with 82 per cent of Kirkland shareholders voting in favour. The vote marked an endorsement of Mr. Sprott, an occasional billionaire with an unwavering affection for gold.