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Just over the past 10 years, the top 20 companies in the sector have destroyed $157 billion
worth of capital.
Over the same frame, they've made almost $130 billion worth of cash.
Now we're looking at pretty stratospheric numbers.
And the way that that capital has been destroyed is by investing in new and Greenfield projects
that have yielded very little and, in fact, have yielded zero return on capital.
OK?
And then, here's another big problem with the sector, which I think is maybe the root
problem, is that the management teams in the sector have very low ownerships of the companies
that they lead.
Right?
Average insider ownership rate-- management, and top managers, founders, what have you--
is about 0.4%.
That's a fifth of the next lowest insider owned industry that we're aware of, which
happens to be in the natural resources space as well.
So these management teams really aren't incentivized based on share price performance.
But their yearly cash bonuses-- which tend to be very generous-- are calculated based
on how large the reserves of the companies are, and how large the production is, and
how large the production profile is.
So what happens is when the price of gold goes up, the share price of the company might
go up, the cash flow certainly go up, the bankers throw a lot of capital at these companies.
They use their share price and their cash flow and that capital that's newly available
to them to buy the biggest gold mine that they've been looking at buying and that they'd
be interested in buying and adding to their collection of assets.
And for maybe a year, they make a much higher compensation.
But when the price of gold then goes down, their cash flows dry out, their share prices
decline.
And now they have leverage to contend with.
And they could potentially face liquidity problems, right?
And so they sell the very asset that they had bought often for pennies on the dollar.
And you rinse and repeat this process over a cycle, you end up with an industry that--
even though fundamentally, very profitable at the operational level-- will, through an
extraordinarily nonjudicious allocation of capital and business development, destroy
the kinds of capital that this industry has destroyed over time.