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Holly LaFon
Holly LaFon
Articles (7844) 

Seth Klarman Finds Margin of Safety in Drab Miners

November 08, 2013 | About:

As an anti-momentum investor, Seth Klarman, founder of the Boston-based Baupost Group and author of the coveted out-of-print investing treatise “Margin of Safety,” can be expected to do the polar opposite of the broader market. His primary objective of avoiding risk drives him to out-of-favor sectors, where he picks stocks with a substantial margin of safety and waits as long as necessary for them to appreciate. Klarman has said, “Money is made when the crop is planted and not when it’s harvested.”

It is no wonder then that he was buying mining companies in the second quarter. The S&P Metals and Mining ETF (SPSIMM) has declined more than 11% year to date. The broader Materials sector was also the second-poorest performing group of the S&P 500 year to date, returning 15.6%, compared to 23.9% for the overall market.

Though the mining sector has revived somewhat from its January highs, it reached a low point in the second quarter, tumbling about 31% from the beginning of the year through June to lows not seen since 2009. The price of gold coincided with the decline, coming off of its multi-year rally in June to its lowest point since 2011. Meanwhile, global demand for gold was down 12% compared to a year prior, though consumer demand climbed 87% in China and 71% in India, according to the World Gold Council. Productions at miners also grew 4% from the previous year.

This is when Klarman began to take more interest. That quarter, three of his five new buys were from the sector, bringing his total metals and mining holdings to five out of his portfolio’s 24 stocks. The sector as of quarter end still represented a relatively small portion of his overall portfolio, at 2.4%.

Seth Klarman’s top mining picks from largest to smallest are Novagold Resources Inc. (NG), Yamana Gold Inc. (NYSE:AUY) and Kinross Gold Corp. (NYSE:KGC).

Novagold Resources Inc. (NG)

At 1.1% of his portfolio Novagold is Klarman’s largest miner position. After buying shares each quarter from the third of 2011 to the fourth of 2012 as the price fell, Klarman owns a total of 21,688,300 Novagold shares with an average purchase price of $6.70 per share. At the Friday share price of $2.10 he has an average loss of 69% on the stake.


Klarman’s Baupost Group is Novagold’s third-largest shareholder, behind John Paulson’s Paul & Co.

Novagold’s primary asset is a 50% interest in Donlin Gold, the world’s largest gold project in development. The Alaskan deposit is expected to produce 1.5 million ounces of gold per year for the first five years and average 1.1 million per year for the remainder of its estimated 27-year lifespan, making it the world’s largest gold producer.

Permitting for the mine recently began in the third quarter of 2012 and will cost the company an estimated $15 million for full-year 2013.

Its second asset is a 50% interest in Galore Creek, a copper, gold and silver project located in northwestern British Columbia, Canada and began in 2007. Expenditures at that project totaled are expected to be total $8.0 million for 2013.

With a cash balance of $216 million, the company confirmed in its third quarter report that it has sufficient resources to fund both the Donlin Gold project’s permitting process and operations at Galore Creek, and repay its convertible notes.

In the third quarter Novagold recorded a net loss of $20.7 million, or $0.07 per basic and diluted share, compared to a net loss of $21.5 million, or $0.08 per basic and diluted share a year prior.

Yamana Gold Inc. (NYSE:AUY)

Klarman holds 3,255,500 shares of Yamana which he bought in the second quarter when the price averaged $12, but hit a multi-year low of $8.55 in June.


Canada-based Yamana Gold owns a diverse set of assets in production and development located in Chile, Argentina, Brazil and Mexico. The company mines for gold, silver, copper, zinc and molybdenum. It is currently trying to advance its production from 1.0 million GEO in 2010 to 1.7 million GEO over the long term, with increased production each quarter. In 2013, it expects to produce 1.3 million GEO.

In the third quarter Yamana’s total production declined 1% year over year to 306,935 GEO. It recorded net earnings of $43.5 million, or $0.06 per basic and diluted share, compared to net earnings of $60.0 million, or $0.08 per basic and diluted share a year prior. Lower earnings were due primarily to lower commodity prices and lower equity earnings from interest in one of its mines.

Revenues also declined to $456.7 million, compared to $611.8 million a year prior, mainly due to lower metal prices and lower volumes of gold and copper sold. The average price of gold in the third quarter of 2013 was $1,332 per ounce, compared to $1,680 per ounce in the third quarter of 2012.

Cash on Yamana’s balance sheet totaled $232.1 million, down from $349.6 million at 2012 year-end. The company pays a dividend of $0.65 per share, placing its dividend year close to a 10-year high.

Yamana’s 10-year revenue and earnings history:


The company trades at a P/E ratio of 23.4, P/B ratio of 0.9 and P/S ratio of 3.60.

Kinross Gold Corp. (NYSE:KGC)

Klarman initiated a position in Kinross at 2,102,700 shares in the second quarter when the price averaged $6, making it his third-largest miner. Kinross shares are down almost 48% for the past year to 10-year lows. The price Friday is around $4.91 per share.


Canada-based Kinross operates a portfolio of nine gold and silver mines located across four regions: South America, North America, West Afric and Russia. It also engages in exploration and acquisition activities, extraction and processing of gold-containing ore and reclamation of gold mining properties.

Kinross in the second quarter increased production by 4% from the same period in 2012, and metal sales decreased to $968 million from $1.01 billion, due primarily to lower gold prices. The company’s average realized gold price during the quarter was $1,394 per ounce, down from $1,568 per ounce in the second quarter 2012.

It reported a second-quarter net loss of $2.48 billion, or $2.17 per share, compared to earnings of $113.9 million, or $0.10 per share a year prior. The reversal in earnings was due to the continued decline in metal prices and an impairment charge of $219 million related to an investment in a mine.

The company notes in its third-quarter report that its business operation results are closely linked to the price of gold. It expressed its views on the declining trend as follows:

“The major influences on the gold price during the second quarter of 2013 included the United States Federal Reserve’s statements regarding a potential reduction of stimulus measures, continued liquidation of gold exchange traded funds, as well as strong equity markets that have pulled investments from other asset classes, including gold.”

On July 31, 2013, Kinross’ board moved to suspend its $0.08 per share semi-annual dividend in order shore up liquidity. The company’s cash holdings total $1.16 billion, down from $1.34 billion a year prior, with long-term liabilities and debt of $2.8 billion.

Kinross’ long-term revenue and earnings history:


See more of Seth Klarman’s stocks in his Baupost Group portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Seth Klarman.

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