Seth Klarman’s Hedge Fund Loses More Than $150 Million On Gold

July 11, 2013 at 09:05

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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.

Baupost’s gold mining portfolio is a relatively modest part of its main hedge fund’s overall portfolio. It’s designed to protect client capital, including purchasing power in an inflationary environment, and perform well over the long-term when other investments in the portfolio may not be performing well, according to someone familiar with Baupost’s thinking. The firm has taken large and concentrated positions in five small gold mining outfits and had a sizeable investment in a sixth, Allied Nevada Gold ANV -1.63%, which the hedge fund unloaded in the first quarter of 2013. The specific gold mining investments were selected after the firm’s investment management professionals carefully analyzed them and found their investment as well as hedging characteristics compelling, says someone familiar with Baupost’s portfolio.

Baupost has bought into two gold mining stories in Romania that have performed poorly. One of them, Gabriel Resources, has for years been trying to develop the Rosia Montana gold project, spending more than $400 million. But the project has been stymied by environmental concerns over the plan to use cyanide to develop an open cast gold mine and Romania’s demand for extra financial guarantees. Baupost owns 13% of Gabriel’s stock, which is down 35% this year.

Another Romanian effort Baupost has backed is Carpathian Gold. Baupost is the second-biggest shareholder, owning 19% of this company that has seen its stock fall in 2013 by nearly 50%. The shares currently trade for 17 cents Canadian. But Dino Titaro, the CEO of Carpathian, is doing pretty well. He has received $2.5 million in total compensation over the last two years, according to Carpathian’s most recent proxy filing.

One thing that some of Klarman’s gold mining investments have in common is a connection to Thomas Kaplan, a billionaire New York investor who made his fortune in natural gas but has been a big proponent of so-called junior gold miners. Baupost has big stakes in Sunward Resources, which has seen its stock drop by 70% this year to 24 cents Canadian, and NovaGold, where Kaplan is chairman of the board. For many years NovaGold has tried to develop a huge gold mine in an isolated corner of Alaska with Barrick Gold ABX +0.65%, which would require barging equipment up the Kuskokwim River, navigable only six months of the year. The weather in the area is harsh and so are the environmentalists. In 2006 the company estimated that it would be pulling 700,000 ounces of gold a year out of the ground by 2012, but so far there has been no production. The stock is down 58% this year.

Baupost appears to be sticking with its gold mining investments even though gold miners have performed very poorly for some eight years. Deutsche Bank recently noted in a report that gold miners failed to give investors upside when the price of gold rose to its $1,900 an ounce peak and their stocks produced serious losses that were greater than those posted by gold itself when the price of the yellow metal fell this year.