A fight for control of Toronto-based Detour Gold Corp. is heating up, as one of the company’s largest shareholders on Wednesday threatened to replace the board of directors on the same day management released a new plan for its flagship mine.
The battle pits one of the world’s best-known hedge funds, Paulson & Co. — led by billionaire John Paulson, who was portrayed in The Big Short as making a prescient bet against the U.S. housing market a decade ago — against the board of Detour, which operates one of the world’s largest gold mines in northeastern Ontario.
The Paulson & Co. statement called Detour’s board “entrenched” for ignoring purchase offers amid a slumping stock price. Detour’s stock on Thursday afternoon was trading at $11.88, about 33 per cent off its 52-week high.
“We are extremely disappointed with this entrenchment, which leaves us with no choice but to explore replacing the board,” the statement said.
Last week, the hedge fund sent a letter to the board of directors (obtained by the Financial Post and first reported on by Bloomberg News) that stated, “Numerous gold companies have told us they would be interested in (buying) Detour.”
Detour on Wednesday fired back with details of a new operational plan for its flagship Detour Lake mine, calling it the best way to maximize shareholder value. It pegged average annual production at 659,000 ounces of gold over the next 20 years or so.
Billionaire John Paulson, president of hedge fund Paulson & Co., in 2009. Rick Maiman/Bloomberg files The miner also said it would entertain any “bona fide” purchase offers, and on Thursday, in a conference call with investors, its former chairman and current interim chief executive Michael Kenyon suggested previous offers were not credible.
“We’re not going to engage in conversations with somebody that actually is incapable of doing any transactions,” he said in response to a question about what “bona fide” meant.
Kenyon has been acting as CEO since Paul Martin stepped down in May, not long after Detour suffered a string of bad news: It cut gold production, raised expected costs and failed to obtain permits to expand its mining operations.
The new mine plan drew mixed reactions from analysts.
“In our opinion Detour’s latest LOM (life of mine) plan is a non-event for two reasons; first little changed from the guidance range provided on April 26 and second many, including potential acquirers of the company, could not care less,” Bank of Nova Scotia’s Trevor Turnbull said in a note.
But CIBC analysts noted the plan allows Detour to make gradual, but attainable improvements over the next five years and confirmed the company’s guidance issued in April.
“This should come as a relief to some investors,” CIBC’s Cosmos Chiu and Kevin Chiew said.
Regardless, Paulson & Co. controls 5.4 per cent of Detour’s shares and can make trouble for the board.
Under Canadian law, any shareholder, or group of shareholders, that controls five per cent of a company can “requisition” a meeting for a stated purpose, such as replacing the board, said Jim Blake, a partner specializing in corporate law at McLean & Kerr in Toronto.
In such cases, he said, the board must schedule a meeting within 21 days.
In its statement on Wednesday, Paulson & Co. reiterated its objections.
“The Board’s failure to announce a strategic review, including a sale of the company, is a clear indication of an entrenched board looking out for its own interests and not those of its shareholders,” it said. “Further evidence of this is the fact that the former Chairman is now the CEO and a former director is now the new Chairman, perpetuating control of a board that has presided over dismal performance of Detour’s stock.”
In 2017, Kenyon, then chairman, earned $347,500 in cash and stock awards, while Alex Morrison, the new chairman, earned $252,000 as a director, according to the company disclosures.
Paulson & Co., which earned fame for correctly betting on the U.S. housing market before the financial crash of 2008, later bet on gold, which has not risen above US$1,600 since 2013, and has been trading around US$1,300 per ounce all year, according to Infomine.
Bloomberg in May reported that Paulson’s funds have faced massive investor redemptions, declining to a little more than US$9 billion under management — 80 per cent of which belongs to Paulson — from a peak of US$38 billion in 2011.
The hedge fund’s letter to Detour’s management last week, signed by Paulson and partner Marcelo Kim, said the company has underperformed its peers and its own stated valuations.
“At this point, it is incumbent on you to see if another company is ready to pay a full and fair price for the company,” it said.
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