News & Thoughts

Kim and co architects of tarnished gold

Oct 26, 2017

Much has been written in the past week or so about the presentation made at the recent Denver Gold Forum by Paulson and Co partner, Marcelo Kim. In short, Kim took aim at outrageous amounts of CEO pay at the big end of the gold mining industry despite the parlous shareholder returns and various investment blunders delivered by most of that same group.

One cannot but agree with Kim that there seems to be a substantial disconnect. Of course this is not isolated to gold mining. CEO pay is a problem in many industries, particularly in the US. The research on this issue is very clear: incompetent people do not perform better if their pay is increased. Who knew? What Kim presented seems to confirm my own experience that the big problem is some people think what they are paid is actually a reflection of how smart they are, so bigger pay checks almost naturally lead to bigger stuff-ups in many cases.

Kim’s solution is to attack this problem head on with more investor activism. He is looking for investors to join him in the Shareholders Gold Council, an entity with a clear mission that he set out in the final line of his final slide: “[The council] Finally gives gold investors a real voice”.

Somewhat ironically the biggest problem that exists in the gold mining industry – and has existed for the three-and-a-half decades I have been involved in it – is there for all to see in those seven words that end Kim’s presentation. It’s missing one very important word and reflects a muddled mindset.

CEO pay is not the problem. In many companies it might be obscene but if the CEOs gave it all back to shareholders the returns would still be diabolical. I believe the problem is that Kim and many like him who would describe themselves as “gold investors” already have too strong a voice in how gold mining companies are run. The gold mining industry needs more “gold mining investors” – investors who understand mining gold is different from investing in gold.

I can’t deny that those who want to invest in gold and have done that by encouraging gold mining companies to run themselves as “gold investments” rather than as companies in the very cyclical and capital intensive business of gold mining have been a significant source of capital for the industry. However, I do think it’s fair to also observe that in doing so they have essentially been co-architects in the very poor performance that Kim and others are now so angry about.

Gold mining is a hard business even when it’s done well. There are easier ways to make money on a gold price view – assuming your view and your timing are correct – than investing in drilling and digging in the far flung corners of the earth.

As if to reinforce my point, in among the various slides in the Paulson presentation about everything wrong with the world’s largest miners, there was one miner that stood out. In the top 13 there was one solitary miner of gold that outperformed all its peers and outperformed the gold price to boot (and not just over the past seven years where Paulson was concentrating its analysis, but the past 20 years). That miner was Randgold.

Randgold was actually a good investment despite the gold price. Imagine that, a gold investment that made money despite the gold price and it pays a dividend to boot, something you won’t wring out of a gold coin, a gold bar or similar gold investments.

Randgold’s secret? It was right there on the front slide of their CEO Mark Bristow’s presentation at the very same conference. “… It’s about delivering value to all stakeholders”.

To watch Bristow present is a delight. His ongoing passion for the mission at Randgold is clearly evident, as is his pride in what he and his team have done, and continue to do.

When asked a question about exploration budgets at the end of his presentation at the Denver Gold Forum not only did he say that the number, $30-40 million, had never changed, despite volatile gold prices, but also that Randgold had never laid off a worker because of softer gold prices. How many other gold producer CEOs can say either of those things?

I was particularly impressed by the latter statement because it never ceases to amaze me how often outrageously paid CEOs announce with “great regret” that they are tightening the corporate belt and laying off exploration geologists and other “non-essential” staff to cope with an unexpected drop in gold prices. How are exploration geologists non-essential to an industry that depletes its reserves daily? How is a drop in gold price unexpected? In the past 40 years USD gold prices have closed lower in 17 of those years!

More exploration geologists and fewer CEOs that think they understand the gold market is surely a better approach!

To watch Bristow present is also a little excruciating. Every year, every conference, he presents in great detail the secret sauce that has delivered stellar returns for Randgold investors. He is generous to a fault. On occasion as he lays out the business model it’s almost as if he is begging others to do the same. Come on guys, just run your business like a business and you too can deliver returns that outperform the gold price. Join us!

He didn’t set out to be a leader but he’s way out on front and instead of trying to hog the limelight one senses his palpable frustration at being so lonely. He wants the gold mining industry to do so much better than it is because he knows it can and he has seen the multiple benefits it brings to his corner of the world.

While other CEOs drone on about ordinary assets, which have the potential to be outstanding when gold prices surely rise, but reassure us that they are in highly stable jurisdictions, Bristow tells us about assets that are in challenging jurisdictions but are making fantastic returns for his investors right now and will continue to do so even if USD gold falls to $1,000/oz.

Randgold’s message of creating value for all stakeholders is a far cry from the shrill battle cry of the Gold Shareholders Council.
Randgold has shown by example over two challenging decades that a well-run mining company with a vision beyond the next quarter, and the next gold price spike, can be like a utility stock with the most incredible latent potential for earnings growth if and when gold prices rally. That’s better than any gold investment that I am aware of. Think of it like a perpetual call option on gold that pays you to hold it!

We don’t need louder voices telling gold miners how to be better gold investments. What we need as an industry is more CEOs and boards that have the courage to run profitable mining companies in the here and now and in almost any circumstance we can imagine; profitable businesses, in the business of mining gold. Businesses like Randgold.

Do that and the investors who have stayed away in droves because of the industry’s perennially poor track record will beat a path to your door. Remember the dollars in the hands of investors looking for well-run companies dwarfs the funds in the hands of “gold investors”.

*Sean Russo is managing director of Noah’s Rule, a specialist debt and risk advisor