An analysis of 13 of the largest publicly listed gold companies shows that total shareholder returns have been “dreadful” since 2010 and management must be made accountable, Marcelo Kim, a partner at Paulson & Co., declared in a presentation at The Denver Gold Forum.
Kim and his team at the New York hedge fund are building a coalition called the Shareholders’ Gold Council in an effort to influence and improve the performance of gold companies when it comes to matters ranging from poor mergers and acquisition (M&A) decisions and exorbitant CEO compensation to board appointments.
Kim noted that while the gold price has gone up 20% since 2010, average total shareholder returns from investments in the top-13 gold producers underperformed the gold price by 65%. The sobering reality of gold equities, he said, is that economic returns have been value destructive. In addition, industry returns on capital have been lower than the cost of capital, cumulative impairments since 2010 have totalled US$85 billion, and an analysis of M&A suggests “serial value destruction.”
Returns on investment from major gold producers since 2010, as of Sept. 20, 2017. Gold Fields return includes spin-off of Sibanye. GDX is the VanEck Vectors Gold Miners ETF. Source: Paulson & Co., Bloomberg.
“There’s nothing in my presentation that a lot of people don’t know already, but sometimes someone has to make a push, and we hope to be that driving force,” Kim says in a telephone interview from Denver.
“We’re trying to build an ISS-like structure backed by investors that gives its recommendations in one voice. If companies know the views are coming from a group backed by major shareholders, they’ll have to listen — and listen very carefully — to what is being said.”
The council also wants boardroom conversations to be more open to owners. “We need to make sure the owners of the business know exactly what’s going on, and want to make sure that major deals are brought to shareholders. In this way, great management teams can run the best companies.”
Kim pointed out in his presentation that US$36 billion was spent in eight of the largest M&A deals between 2010 and 2016. All of them are still cash-flow negative to the tune of $1.7 billion, and 80% of the transaction value has been impaired.
The eight M&A deals Kim is referring to were: Lihir Gold and Newcrest Mining (ASX: NCM); Equinox and Barrick Gold (TSX: ABX; NYSE: ABX); Red Back and Kinross Gold (TSX: K; NYSE: KGC); Osisko Mining and Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Yamana Gold (TSX: YRI; NYSE: AUY); Andean Resources and Goldcorp (TSX: G; NYSE: GG); European Goldfields and Eldorado Gold (TSX: ELD; NYSE: EGO); Fronteer Gold and Newmont Mining (NYSE: NEM); and Sino Gold and Eldorado Gold.
Kim also pointed to poor investments during the same period that resulted in collective writedowns of US$85 billion. Despite the poor returns, cumulative CEO pay from 2010 to 2016 reached US$550 million.
Only two companies reported positive shareholder returns from 2010 to 2016: Randgold Resources (LON: RRS; NASDAQ: GOLD) and Polymetal (LON: POLY). The rest posted negative shareholder returns: Iamgold (TSX: IMG; NYSE: IAG), AngloGold Ashanti (NYSE: AU), Gold Fields (NYSE: GFI), Newcrest, Barrick, Kinross, Agnico Eagle, Goldcorp, Yamana, Eldorado Gold and Newmont.
Gold equities since 2010 have severely underperformed the gold price. While gold has gone up 20%, the GDX is down 45% and the GDXJ is down by 58%. GDX is one of the most popular funds in the global gold-mining segment, while GDXJ covers precious metals companies below the market capitalization cut-off for GDX, primarily the juniors.
“You get some companies that do generate very good returns and others that don’t, so we want as shareholders to be a part of a group where we can work with our management teams and boards to improve businesses. At the end of the day, that’s what this is. It’s not to get upset about how bad the results have been, it’s, ‘What do we do about it?’”
John Hathaway of Tocqueville Asset Management is already onboard with the idea of creating the coalition, Kim says, and Kim will pitch the idea to other fund managers in meetings in Toronto and London.
“A lot of other investors came up to me after my presentation and said: ‘This is what we need — we needed someone to spearhead the effort … let’s do something about it because if we don’t, we’re setting ourselves up for disaster, because we’ll just keep getting the same results over and over again.’”
But Kim also cast blame on investors themselves, who have failed to kick up much of a fuss over the value destruction in the industry.
“Guys, we’re to blame, too,” Kim says. “Every year companies have their AGMs, and every year no one shows up and says anything. We don’t do anything about it, so it’s time to do something about it.
“The conclusions I have presented are not a blanket indictment of the industry,” he adds. “There are a lot of genuine wealth creators — and we want to encourage them to work with us and align with us. So for anyone, investor or corporate, who wants to create long-term value, I say, join us.”
Marcelo Kim’s slide presentation “Gold Equities: Myths, Dreams and Reality,” can be accessed at Gold Equities: Myths, Dreams and Reality.
About Time