Klarman Takes a Hit on Gold Miners; The Leather Apron; Fed Action During 1987 Crisis

HARD LUCK

Some Investors Gettin’ Hammered in Gold Miners

In October, Marcel “Mac” DeGuire became president and chief operating officer of Guyana Goldfields, an exploration-stage company listed on the Toronto Stock Exchange that has been losing money trying to develop gold mines in South America for years. Within a few weeks DeGuire was helping to convince investors to buy into a Guyana Goldfields financing for C$3.40 a share, a significant fund raise for the company of some $100 million that closed in February. Eleven days later, however, DeGuire resigned from Guyana Goldfields, citing “personal reasons.” The stock has plunged by more than 60% in 2013 and is now changing hands for C$1.24.

It might be surprising for some market watchers to learn that Guyana Goldfields’ biggest shareholder is the Baupost Group, the massive Boston hedge fund firm run by Seth Klarman. Baupost owns 19.7% of Guyana Goldfields, a stake recently worth about $30 million. A billionaire hedge fund genius, Klarman is one of the most revered money managers of his generation, a value investor who likes to steer clear of controversy and public attention, keep his head down and concentrate on his investments. His track record and reputation are stellar, which makes it a little strange that Baupost has gotten behind Guyana Goldfields and some other long shot, some might even say iffy, gold mining ventures with penny stocks and high executive pay. These companies often make sure to point out that Baupost is a major investor in their shares in investment presentations.

Shares of gold mining companies have been hammered this year as the price of gold has tumbled. Most gold mining companies are facing a serious cash crunch as the economics of their industry get upended. The fall of gold and gold miners has publicly embarrassed investors who made big bets on the sector, like billionaire John Paulson, who has been so frustrated with the shadow his decimated and relatively small gold hedge fund has cast on the rest of his hedge fund operation that he has stopped sending out his gold fund’s financial returns to investors in his other funds. Klarman’s gold mining investments have also been clobbered, losing between $150 million and $200 million in value in 2013. That’s hardly an insurmountable loss for Klarman since Baupost manages $28 billion and, unlike Paulson, Klarman does not separate out his gold-related investments in a separate fund. Still, Klarman’s gold mining losses, which have not received any public attention this year, are among the biggest to have hit a major U.S. hedge fund this year.

Read more: http://www.forbes.com/sites/nathanvardi/2013/07/10/seth-klarmans-baupost-hedge-fund-loses-more-than-150-million-on-gold-miners/

Mr. Klarman must be quite bullish on the future price of gold in U.S. Dollars because his investments in the Junior resource sector require much higher gold prices to be profitable. Note the high capex costs.  Remember that it is not the size of a deposit but the cost to bring ozs. into production that matters. 

I prefer the royalty/streamer companies like RGLD, SLW, FNV, SAND that are already profitable with low fixed costs and little operational risk. Those firms  can make money even if gold goes lower.  When you read about “famous” investors losing money in a sector, a lot of bad news is long in the tooth, IMHO.

John Doody on July 10, 2013 discusses the gold mining sector (Audio): fsn2013-071013

A Good Read: The-Leather-Apron-Letter-07-12-2013

The Fed and the Crisis of 1987 (Financial History) 152107746-Fed-1987

 

2 responses to “Klarman Takes a Hit on Gold Miners; The Leather Apron; Fed Action During 1987 Crisis

  1. 1) I’m surprised by Klarman’s position. Why even bother with a $30M position, especially in something so tiny that probably can’t be scaled too much given the large amount of capital he puts to work in other areas? I’m guessing there is a reason.

    2) Those who follows miners – Have any miners prepared for something like this by reducing the M&A purchases, piling up cash, etc.? I’d like to find the ones who were not repurchasing shares earlier due to price but are now more interested.

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