Investing in Precious Metals Miners
Part 4 – Gold Mining Governance
Part of an ongoing discussion with Equinox Partners about investing in precious metals mining.
Equinox Partners is a team of ten professionals based in Connecticut with a 25-year track record, a pedigree that extends to the very inception of value investing, and a specialization in precious metals mining. Today, the firm manages $500m in gold and silver mining equities on behalf of institutional and high-net-worth families.
Mark Twain, the erstwhile gold miner of some note, famously quipped, “A mine is a hole in the ground with a liar standing next to it.” Somethings don’t change. Understanding the motivations of the board and management team in the precious metals mining sector is as important today as it was a hundred years ago.
In the long run, the success of any given stock corresponds with the underlying fundamentals of the business: its growth in earnings, returns on capital, and the price one pays for those attributes. What is less often noted however, is the cause of such value creation: management teams and boards that run the company in order to accrete value for its owners, not themselves. In capital intensive businesses, such as gold miners, this dynamic is particularly pronounced. When management teams and boards are misaligned with minority shareholders, they can allocate capital to any number of ill-timed acquisitions, speculative exploration plays, and capital intensive projects with suspect returns on capital. Such outcomes are a natural outcome of companies that have little insider ownership.
“We spend a significant amount of time getting to know our companies’ management teams and boards. In mining, perhaps more than any other sector, the so-called agency problem can destroy an incredible amount of capital. We have to ask, are our companies being run for its owners or its insiders? In gold mining you tend to have a clubby set of management teams, professional board members aligned with management, and a collective will to develop assets at any cost rather than prudently deploying capital for the highest rate of return,” says the firm’s CIO, Sean Fieler.
Therefore, Equinox’s approach to the sector includes not only mine-site visits and discussions with management teams and boards, but it also entails also taking board seats, writing public letters, and the like. In an era of passive ownership of public companies via mega ETFs, such active engagement may seem passé. In fact, the opposite is the case. The growing indexation of public financial markets presents an incredible opportunity for those investment managers willing to do the tedious leg work involved in picking stocks. Once again, motivations matter.
“Passive investors are motivated to increase the amount of money they manage, rather than the returns of the companies in which they invest. Conversely, active stock pickers can only increase their assets under management if their portfolios outperform.” notes Mr. Fieler.
With such large passive pools of capital allocated to mining companies based on size and not attractive fundamentals, active stock pickers can take advantage of the gap. “Gold mining simply isn’t amenable to indexation. It is far too complex from a technical perspective, and far too nuanced from a governance perspective,” says Mr. Fieler. This creates inefficiencies in how these companies are valued, and rewards for those investors willing to unearth it.
For information, Daniel Schreck, Partner at Equinox Partners, at dschreck@equinoxpartners.com or 646 833 2783.
