De­tour Gold’s bat­tle with in­vestor down to the wire

U.S. bil­lion­aire wants ‘whole­sale change’

National Post (National Edition) - - FINANCIAL POST - Gabriel Friedman Fi­nan­cial Post gfried­[email protected]­tion­al­post.com

TORONTO • 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 partly 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 tack 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 lifeof-mine plan three times, with the costs to mine suc­ces­sively in­creas­ing each time — some­thing that even caught the at­ten­tion of third­party 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.”

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