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Money Manager Blisters Gold Companies for Disregarding Stockholders

Money Manager Blisters Gold Companies for Disregarding Stockholders
By Tim Wood
21 Apr 2005 at 01:33 PM EDT

ZURICH (ResourceInvestor.com) -- London based resources investment manager Graham French delivered a brutal but deserved rebuke to the majority of gold company bosses for putting bankers ahead of shareholders.

French was a keynote speaker, along with US Global’s [GROW] Frank Holmes, at a luncheon convened for the European Gold Forum.

French is one of the most influential equity owners in the industry. His group has around $12 billion invested in precious metals and the particular fund he manages, the Vanguard Precious Metals Fund [VGPMX], is worth $1.3 billion, and has been a top performer over the long-term.

He dressed down gold producers for failing their owners in several areas including hedging, returns below the cost of capital, a fetish with retaining earnings rather than distributing them as dividends, elevating growth above returns, and avoiding rights issues for fund raisings.

French blasted the deference to banks. “When we asked gold producers why they hedged at $300 an ounce. . . they said because the bankers told them to. Now I ask them, playing Devil’s advocate, why they aren’t hedging at $430 an ounce, and they say it’s the bankers again!”

He urged companies to address their investors once more, not their bankers or advisors.

“It’s about returns, not growth or geology, or maps, or anything else,” he said.

French said that over the past 16 years, the gold sector’s cost of capital was 6%. However, the industry had only managed to achieve returns over that period of 2-3%. In other words, the gold equity industry is responsible for destroying wealth on a tremendous scale.

Only twice has the industry returned a result higher than its cost of capital – in 1992 and 2003. French noted, with pained irony, that those two years also marked the sector being the best asset class. That translated into significant multiple expansion, but it was quickly squandered by a return to the old ways.

Speaking to Resource Investor afterward, French agreed that part of the problem is entrenched pessimism. Company management is more concerned with stockpiling money in advance of a downturn in the cycle than it is with maximizing returns. Similarly, producers are not mining at higher grades to take advantage of higher metal prices, but are rationing deposits with ascetic zeal.

Pay dividends

French cited a University of Chicago study which showed that over nearly 60 years companies that paid the highest dividends outperformed the market on earnings and return on capital.

The difference is staggering. Dividend payers achieved annual rates of return of 4.2% versus 0.4% for companies that did not pay dividends.

A dividend is a reflection of management confidence, said French. Those who pay them are secure about future earnings. Those who retain them are less so, but even more dangerous, they are prone to use retained earnings for empire building.

“I’m fed up with size arguments. . . claims that big is beautiful. It is about returns. I don’t give a damn how big your company is, just how much it returns” French said.

His view highlights the professional battle between bankers and hedge funds, who are driven by short term fees and arbitrage tricks, and fund managers who rely on much longer time frames.

Reward your shareholders

French flayed management disregard for stockholders, which he illustrated with the fact that 64 recent financings raised $11 billion in new capital. Of those, only 5 were rights issues and 48 were placements, book builds, or pernicious bought deals.

“This industry does 90% of its fundraising without consulting its shareholders. I come to my desk one day and find that I have been diluted without anyone telling or asking,” French said to spontaneous applause.

Later, he mused to Resource Investor that it would be appropriate to return to Zurich next year and ask what had happened to the $11 billion raised. Would there be another $660 million on the table for investors, or would the money be missing?

He scoffed at the excuse that placements etc were necessary because of timing. “Mining is a long term, big business. All the companies talk about taking 7-8 years to build a project, but they forget that when they ask for money,” he added

“Look, I don’t mean to sound arrogant, but we are the shareholders! The bank’s owners are Wall Street. Look after us and we’ll sit on your register for years.”

He cited an example of a comp any that had recently undertaken a financing for ‘general corporate purposes’ as the sort of investment that deserves abandonment.

Indeed, French has sent a clear signal to gold companies that he has abandoned some of them already. His fund changed its mandate last year and the portfolio is now filled with chunky investments in platinum, base metals, coal, and diamonds. According to the latest available data, French’s top ten holdings are:

1.
Impala (platinum)
2.
Lonmin (platinum & fish food for Xstrata or SUAL?)
3.
BHP (diversified)
4.
Rio Tinto (diversified)
5.
Anglo American (diversified)
6.
WMC (diversified)
7.
Meridian Gold (gold)
8.
Aber Diamond (diamonds)
9.
Cameco (uranium)
10.
Peabody Energy (coal)

Intriguingly, Meridian is the sole gold company that gets a ranking. It does not pay dividends and has a legacy ROI problem with its Esquel project in Argentina. Does French’s high opinion of it portend further positive changes?

Sailing into the sunrise

French concluded with an impassioned plea to gold executives using the analogy of a boat sailing into a sunrise.

“The sun is up and it’s going to shine for a long time,” he said in reference to the gold price. “You’ve got a 1,000 year-old boat, but it has a few holes in it caused by poor returns and disregard for shareholders. Will you dress up the boat and lie in the sun, or go below decks to plug the holes?

“I’m pleading with you – repair your holds. The mums and dads who own your stocks want returns. . . not maps and geology . . . Do that and then you can put the bright sails up and lie in the sun,” he concluded.


LINK: http://www.resourceinvestor.com/pebble.asp?relid=9360