Capital Allocators

Intuitively I’ve known that the gold mining industry doesn’t allocate capital well. I’ve touched on some of the return performance of royalty companies in the past. Their low return royalty model looks angelic compared to other actors. As I browse through company balance sheets I note the scars of the past (dramatically negative retained earnings). I’ve never really looked at this information in much detail. I know Kinross made some bad bets, I know Barrick lost its track with Pascua Lama. The full magnitude of the capital destruction, however, was way worse than I thought it would be.

Take a look at this snapshot. In 2013, this group -which is by no means comprehensive- wrote off over $24B in 2013.

Over this same time period, the group destroyed $70B worth of capital. Barrick alone tallied $30B.

If we look how much was written off, compared to these company’s current enterprise value the data shows the Kinross leads the pack. Between 2005 and 2018 the company wrote off $12B, which is 50% more than the current valuation…

Interesting stuff. Terrifying really. There are, however, a handful of companies that did pretty well during this time period. All of the streamers kept write-down % under 10%. Kirkland Lake was one of the only companies that survived the period without an issue.

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