If the post-recession markets had to be defined by one theme, it would be the emergence of activist investors. 

Shareholder activism, defined by buying control of a company with the goal of making a major change in order to enhance its value, has been around since the first traders in the Dutch East India Company. But we’ve rarely seen so much activity and oversight lately. Activist campaigns have surged from 104 in 2000 to 758 in 2016 according to Activist Insight’s annual review.

Nearly half (40%) of S&P 500 companies saw activist investor campaigns in the seven years through 2015. Assets under activist management have grown nearly 20% annually for more than a decade, topping $123 billion last year.

Activists have been attracted by the mountain of balance sheet cash companies hold, and the historically cheap cost of debt. That availability of money lends itself to poor checkbook control by management and an attractive source of cash return to the billionaire activists that can buy seats on a board to control it.

#-ad_banner-#Oversight by large investors has helped protect shareholder rights and led to some impressive gains. A portfolio of activist targets monitored by Novus has returned 10.7% annually since 2004, handily outperforming the 7.6% annualized return on the S&P500.

One noted activist investor has just tipped his hand to the next potential group of targets. The companies in this industry have underperformed and activists are pointing the finger at management.  The activists are already pooling their money to start forcing change and these companies could soon be worth their weight in gold.

Gold Miners Haven’t Been Mining For Profits
Gold miners have underperformed metal prices for nearly a decade, and activist investors may soon get involved. Billionaire John Paulson is putting together a group of activist investors and institutional funds to target miners.

Shares of gold miners tracked by Bloomberg have lost 59% since the beginning of 2011 versus a loss of just 8.5% in the price of the commodity. Some of that poor performance is due to overzealous M&A activity as the price of gold climbed after the 2008 recession. The price of gold peaked in 2011 and has done little for four years on weak inflationary pressures.

Speaking at the Denver Gold Forum, Paulson argued that some of the poor performance was also due to high executive compensation and inactive boards. The Shareholder’s Gold Council, which could include representatives from Vanguard, BlackRock, State Street and Tocqueville Asset Management, will aim to unify institutional and activist investors to appoint board members and force change at select miners.

Government policies in China and India have weighed on consumer demand since 2016, but purchases could soon increase in the traditionally strong markets for gold. Geopolitical tensions and a run to $1,300 per ounce have recently brought investors back, with gold ETF holdings rising to levels not seen since 2013.

That could mean surprisingly positive outlooks when miners start reporting third-quarter earnings this month. Activist attention plus a recovery in the price of gold could bring investors stampeding back into the sector in a way we haven’t seen since the 2008 recession.

Gold Miners With A Target On Their Backs
Paulson has specifically called out the high level of executive compensation as a burden on miners’ shares. The best targets for potential activism could be those miners with relatively high compensation but solid fundamentals.

AngloGold Ashanti (NYSE: AU) operates in nine countries on three continents and could benefit from expansion projects in its lower-cost Australia and South America assets. The company is one of the largest producers in the world but sources roughly two-thirds of production in Africa where deep mines have higher extraction costs. Increasing production or acquiring assets in other regions could help drive investor sentiment and margins.

Paulson owns 12.8 million shares in AngloGold, worth about $120 million, his largest holding in gold miners. Executive compensation was $15.4 million in 2016, or about 1.2% of operational cash flow. The company has lagged peers in sales and margins, setting the stage for an activist to make major changes. 

Agnico Eagle Mines (NYSE: AEM) operates in countries with considerably lower geopolitical risk, like Canada, Mexico and Finland. Despite lackluster gold prices, the company has managed to book sales growth over the last three years, bucking the industry trend, and has one of the highest operating margins among its peers.

Paulson holds 757,600 shares of Agnico Eagle for a $35 million stake in the company. The company is very well managed but executive compensation is higher than any others I’ve seen at $31.7 million in 2016, just over 4% of operational cash flow. This could be exactly what Paulson and the Shareholder’s Gold Council will be targeting.

Iamgold (NYSE: IAG) operates in Canada, Suriname and Burkina Faso, as well as in Mali through a joint venture with AngloGold Ashanti. Attractive expansion projects in Canada and Mali could help the company increase production at lower costs. The sale of its Niobec mine in 2015 put the company in an enviable financial position with balance sheet cash of $776 million, nearly 27% of its market capitalization, and only $392 million in long-term debt.

Paulson holds 3.86 million shares of IAG worth about $25 million. Executive and board compensation totaled $7.0 million in 2016 for about 2.2% of operational cash flow. Shares are attractively valued at just 1.1 times book value and the company’s significant cash power gives it the ability to acquire cheap assets or buy back shares.

Risks To Consider: Investing solely on the potential for shareholder activism is ultimately a binary gamble. Investors should invest in companies with strong fundamentals that may also benefit from activism.

Action To Take: Position in gold miners that could see increased interest from activist investors and a push for greater shareholder returns even if gold prices fail to move higher.

Editor’s Note: With reports of deteriorating production, performance, and revenue… this high-profile CEO is ditching his auto empire. Now he’s set his sights on an even more lucrative business. And if you jump in at the ground level of this opportunity you can ride it upward to sky-high profits. Grab a piece of this $1.3 trillion industry in the making today.