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Electrum’s investment in NOVAGOLD, I happened to be one of the largest holders of mineral rights in the Islamic world, stretching from West Africa to Pakistan. In due course, by the time I met Greg Lang, resource nationalism had led me to conclude that the era characterized by the mantra “go where the gold is” was coming to a close, and that North America was once again the Promised Land for miners. Sure, it took longer to permit a mine in the United States, but at least one could keep one’s
property when the marathon ended. You needn’t fear
waking up to find out that what you thought you had
in your possession the night before was no longer
what you owned in the morning – never mind
additional factors such as political instability,
insurgencies, and terrorism. Finding myself repeating
the old Woody Allen line “I’m not afraid of death; I just
don’t want to be there when it happens,” I simply
realized that the credo that had guided me through
the years – namely, acquire category-killer assets that
give the greatest leverage to the underlying investment
thesis – needed the following corollary: in jurisdictions
that will allow one to keep the fruits of that leverage.
That is the so-called Kaplan Doctrine. With a
sentimental tear to acknowledge the more
swashbuckling successes of my youth, I shifted
Electrum’s portfolio from half North America/half
“other” to 90% North America. I’ve never looked back.
Apart from the fact that the list of previously investible countries has literally imploded – destroying billions of dollars of value in even well-managed companies and proving Electrum’s strategic withdrawal to North America to be both right and luckily timed – Greg and I were now becoming ever more convinced that Donlin could be not just the best asset in the gold development space, but literally peerless. Seen through that prism, Donlin is, in effect, the quintessential manifestation of the Kaplan Doctrine.
17 Why is jurisdiction the existential investment criterion? Can it actually get worse than it is now?
Over the last decade, jurisdictional risk has migrated from being regarded as an occasional nuisance to an existential threat. Were I to name the jurisdictions that have been struck off my investment-grade list, it would hurt one’s ears to hear the roll call. Projects that were slated to go online won’t – and some that did have since been subjected to mine closure due to social disruption or political fiat. Where allowed to continue, some companies have been extorted (at times with the threat of violence) out of most, if not all, of the financial rewards due to their shareholders for their risk-taking and value enhancement – what I call “stealth nationalization.” In an increasing number of places, the brazenness of the confiscatory policies is such that “stealth” would constitute a charming euphemism.
Because it is politically impossible for neighboring countries to hold an investor-friendly line, there will assuredly be more such offences in the future. This wave, after all, is occurring during relatively good times. As I have come to know most of our investors and consider them kindred spirits, I feel compelled to share yet another dire observation posed as a question: What are the odds that the governments of gold-producing countries – which are often dependent on the price of multiple raw materials – will let the precious-metals miners keep the
Leverage in a Place Where You Can Keep the Rewards
low risk
moderate to high risk
extreme risk
no data
Source: Fraser Institute Annual Survey of Mining Companies, 2018, Investment Attractiveness Index
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