business

Paulson Is Right: Gold Producers Must Fix Their Bad M&A Habits

  • Evolution CEO says hedge fund made valid points on industry
  • Generalist investors scarred by gold miners’ mistakes: Klein
Jake Klein, Evolution Mining chairman and co-founder, says that gold giants must change to woo scarred investors.

Billionaire hedge-fund manager John Paulson is right to press top gold producers to avoid repeating their bad deal-making habits as prices press higher after notching up their biggest annual gain since 2010, according to Australia’s second-largest supplier.

“I have a lot of empathy for what Paulson has been saying,” Evolution Mining Ltd. Executive Chairman Jake Klein said in an interview. “They’ve highlighted a number of very important and valid points about the industry’s behavior.”

John Paulson

Photographer: Rick Maiman/Bloomberg

Paulson & Co., which calculates mistimed deals led to $85 billion of gold writedowns so far this decade, is organizing a Shareholders’ Gold Council -- a collection of institutional investors who remain wary on the sector’s record on deals, executive pay and board appointments. 

Producers need to prove they can be “profitable, dividend-paying, sustainable companies,” Klein said at the annual BMO mining conference in Florida. “That’s still a bridge I think we need to cross as an industry.”

Read more: ‘Disastrous’ Deals Sideline Gold-Mining M&A as Metal Rises

Evolution, which has cut deals for acquisitions since 2015 with larger competitors including Barrick Gold Corp. and Glencore Plc, has focused more recently on reducing the size of its portfolio by selling mines. The Sydney-based company this month boosted its interim dividend payment by 75 percent on higher underlying profit.

“The most important thing for producers is not to get into the bad habits that saw us write off so much asset value the last time gold prices peaked,” Klein said Monday. Even as Evolution attempts to address investors’ concerns it’s “hard to get the attention of that generalist who is still bearing the scars of the last time the gold price was higher,” he said.

Even so the Franklin Gold and Precious Metals Fund’s lead manager Stephen Land has said that there could be a renewed focus on mergers and acquisitions in the gold sector as producers seek out new projects to replace depleting mines. Newcrest Mining Ltd., Australia’s top producer, this week invested in development assets in Ecuador and Mexico.

Evolution will remain open to deals that could raise mine life, lower costs of production and add value for investors, according to Klein. With an absence of distressed sellers, potential buyers need to make a judgment that they will be able to increase the resources and reserves of any mine they buy. “It’s an area that requires a geological perspective, and there’s some risk to that,” he said.

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