Detour faces reckoning with campaign by billionaire investor for board overhaul
Results of vote looms Tuesday as miner feels pressure to make ‘wholesale change’
U.S. hedge fund billionaire John Paulson’s battle to oust the entire board of directors at Toronto-based Detour Gold Corp. and replace them with his own hand-picked group officially ends when final ballots are counted on Tuesday, but he may already claim some victory. And perhaps Detour will, too. Regardless of whether other shareholders grant Paulson’s wish for “wholesale change” on the board, Detour’s management has already partially conceded some of his concerns by replacing two of its directors this summer. It also added at least one director whom Paulson could support. More recently, it recommended the ouster of an additional two directors, meaning four out of the eight directors on the board when Paulson launched his campaign this summer are likely to be replaced. While that isn’t the majority Paulson has campaigned for, it is an outcome that would give both sides cover to claim victory. “Paulson’s campaign for change has already had a positive impact,” Marcelo Kim, the partner at Paulson & Co. leading the campaign wrote in a letter to shareholders last month. It noted that since Paulson first went public with his calls for change at Detour this June, the company has outperformed the S&P/TSX Global Gold Index by 17 per cent after trailing it for several years. Paulson, who gained eminence for correctly betting on the U.S. housing market before the financial crisis, has said he controls a 5.7-per-cent stake in Detour and has invested $280 million in direct equity and $250 million in debt financing during the past decade. This June, after Detour released a new life-of-mine plan, his hedge fund initially suggested the company needed to consider selling itself. But Kim, who is leading the campaign for Paulson, switched tacks and in July called for a special shareholder meeting and a vote to replace the entire board of directors. He argued Detour’s executive team badly mismanaged the company’s flagship open pit mine in northeastern Ontario — one of the largest in Canada, slated to produce around 600,000 ounces of gold this year. In the roughly two-year period from July 2016 to this past June, Detour’s market capitalization fell 70 per cent from $6.1 billion to $1.8 billion. During approximately the same period, executives modified the life-of-mine plan three times, with the costs to mine successively increasing each time — something that even caught the attention of third-party proxy adviser Glass Lewis in a report released this week. “Given the significant revisions ... two years in a row, we agree with Paulson’s assertion that the board either does not have the requisite skills to question the assumptions contained in the plans and to manage potential risks, or it lacks the ability to attract the right people to ensure the plan is fulfilled,” Glass Lewis wrote. Still, neither Glass Lewis nor Institutional Shareholder Services, the other third-party proxy adviser to weigh in, would support plans for a completely new board. ISS said Paulson “has failed to make a compelling case for board control and has failed to articulate a detailed go forward plan.” It recommended support for Detour’s ballot, which called for the removal of two of its directors to be replaced by two of Paulson’s candidates. In a presentation, Kim calls for an immediate search for a new CEO with experience operating a similar mine, and he wants to revamp the compensation structure for the board. Another measure of his campaign’s success will be whether interim chief executive Michael Kenyon and board chair Alex Morrison are removed, and also whether Paulson’s nominees obtain a majority on the board. Kenyon has said he will resign when a new CEO is picked or by the next shareholder meeting, either way within a year. Neither Kim nor anyone from Detour would comment. While ballots were all collected on Friday, some shareholders may still vote at an in-person meeting in Toronto scheduled for Tuesday. David Neuhauser, managing director of Livermore Partners, who invested this summer and is supporting Paulson, declined to make predictions about the outcome but said “the dynamics are in place for change.” “I think anything is better than nothing — you could do it as a stepping stone,” said Neuhauser. “You could have two (new directors) this year and more next year.”