Ron Thiessen: Taseko Chairman on Fending Off A Self-Dealing New York Activist Hedge Fund
An activist group recently bought 5% of Taseko Mines to force an extraordinary meeting of the board with a goal of replacing board members and reshaping the direction of the company. According to Chairman Ron Thiessen, this comes despite the activist group having limited knowledge of how to run a mining company. Gibraltar, Taseko’s flagship mine, is one of the lowest grade copper mines in the world and requires a very competent management to turn a profit.
Feelings are running high and the activist group is seen as antagonistic, a corporate raid attempting to asset strip the company. The group has labelled certain assets valueless that are actually valuable and want to defer stripping which would sterilize the ore body and dramatically reduce the life of the mine.
The activist group have not stated why they have chosen Taseko but divestiture could result in bonds being paid at face value rather than the current 50% discount. This group has twice as much invested in bonds as they do in the stock. How these groups normally operate is by gaining an interest in the company’s debt then taking over the board. They then elevate the debt to a secured position and consequently strip the assets.
The Taseko take over has become a major deal in Canada and Rob Thiessen provides us with an exclusive interview to go over his side of the conflict.
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is Ron Thiessen. He is the Chairman of Taseko Mines. Ron, welcome to the program.
President, Chief Executive Officer and Director, Quartz Mountain Resources Ltd., Ron Thiessen: Nice to be here, Collin. Thank you for the opportunity.
CK: Yeah. We have a very interesting story that has been developing surrounding Taseko Mines and what one could call an activist investment group. This is a pretty big phenomenon that has been going on in the United States. Our friend, Marin Katusa over at Katusa Research put together a piece that focuses on this particular story and a couple other ones in the Canadian resource space. It is called The Do’s and Don’ts of Fund Activism in the Resource Sector. I want to try and provide a little bit of a back story here as to what is going on and then, Ron, I will turn it over to you to kind of fill things in.
Essentially, Taseko controls the Gibraltar mine, which is the second largest copper producer in Canada. A group named Raging River Capital, which is this activist investor group has taken up a large enough position in Taseko – over 5% — which allows them to go ahead and try to call a special meeting whereby they have requested to remove a few directors, including yourself, and shakeup management of Taseko. I am going to, at this point, Ron, turn things over to you to try to provide a little more clarity on how things developed here and fill in the gaps on my story.
RT: Okay, sure. So, as you noted RRC, Raging River, picked up enough stock, just over 5%, like 5.1%, to engage us in an activist campaign and call an extraordinary meeting to replace a part of the board. Now there is a protocol to all of this and these are not that unusual especially at the point of United States. When an activist investor gets involved they usually have some pretty specific complaints or issues that they want dealt with. There usually is a standstill period during which the activist group and the management or the board engage with each other to discuss the issues.
I would have to say from the get go Raging River really was not interested at all in an engagement. We did say that this was the protocol and that we welcome the opportunity to address their concerns. We did manage to convince them to have a call with us. They were not that prepared. Again, the protocol is that you produce a white paper that outlines the issues that you have got and your suggested changes to that. We did not really get that; we got a list of questions and that was about it. We had a pretty short call where they were not really interested on what the answers were. They wanted to get to the actual process of calling the meeting.
It has been, I would say, pretty antagonistic from the get go with respect to this, and you certainly see that in the proxy material that Raging River published. That was how this all started up and as I said the Raging River guys proposed to replace three people on the board and nominate their own group to that. They want to leave the independent directors in place. They have told us more or less what their general concepts will be in moving the company forward. I find those very superficial. They are not really well-thought out or any kind of detailed plan. I am very concerned that they actually have not told us really want they want. I mean if all they are planning to do is what they lay out in the management information circular I think that is pretty specious, It is not going to amount to anything and I would probably dismiss these guys as cranks or cracks. But that is not the case.
I have looked into the background and I do not think that they are like that. I also think they are very different than what they present themselves as and I said before I believe that they are really corporate raiders. They have an agenda and that agenda is very different than the one that we read about. To tell you the truth they had have to have a different agenda to make something happen at Taseko that would be very, very different. From that standpoint I do not think they have been transparent or truthful in what they have laid out. Basically, it has been almost a personal attack instead of a truly corporate, positive initiative. That was one of the things that Marin was talking about – negative activism versus positive activism.
Positive activism, you get involved with management, try and take advantage of what they have to offer and you bring new things to the table and you move forward on that basis. Negative activism is you trying to get rid of the history and take things on for yourself. If you, as the activist, have no history on those assets, then there is a real problem there because how are you going to manage those things without any history? Especially in the case like Taseko Mines where Gibraltar, the second largest copper producer in Canada, is the lowest grade copper mine, certainly in North America, one of the lowest grades in the world. It requires a great deal of efficiency and thought and paying attention to everything to make money at that mine, and that is what those guys do, assembling an incredible operating team.
Other mining companies come to Gibraltar to study the efficiency and the economics of that operation and how they can produce positive cash flow in an operation like that. They built that mine at a lower cost per throughput than probably any mine that I know of in the world. It is a highly respected team, and to dismiss that team is they do not know what they are doing. You cannot step into their shoes and dramatically increase free cash flow in Gibraltar. It is not even wishful thinking. It is just specious attack on the management team.
Basically, they have issued their information circular. Their business plan is to dispose of what they call redundant assets which they say have zero value and we begged to differ a great deal on that. These are extremely valuable pipeline of assets. They do have an investor in their group who has previous history on one of these assets and was desirous of having a large interest in it. When that large interest was not forthcoming I understand they did walk away, but now they have come back with the activist group. They talked about doing things at Gibraltar that would free up more free cash flow. You cannot do that. You cannot defer stripping which is I think what they are really talking about. Pushing that out you end up sterilizing the ore body and turning a 28-year mine life into a single digit perhaps as short as four or five years. That would be a disaster for that operation. There are almost 600 people working there.
There is a relationship with Hunter Dickinson that they also sever, which, again, Taseko can do that any time. There is no cost to making that severance in terms of a penalty or a fee, but a lot of what Taseko gets from HDI are things that would have to be replaced. I mean they rent office space from us at the direct cost that the landlord charges HDI so you are going have to go to get rental space. You are going to have to go out and probably hire a bunch of people so you are not going to save any money. In fact I would suggest that because of that association with HDI there are things that come to Taseko at a lower price than they would otherwise achieve. I mean otherwise they would not use it because that is the whole idea is to take the advantage of HDI’s expertise and in some cases HDI’s buying power for drilling contracts and the like and get lower cost. I do not believe there is any money to be saved there.
CK: Ron, just to clarify for our listeners, HDI Hunter Dickinson is a company that you are associated to that runs the back office operations for Taseko. Marin Katusa even argued as you have just pointed out that Taseko, by using HDI as a back office and for certain negotiating powers, probably actually saving a good bit of money. Obviously, people initially looking at the situation that do not know might seem to think that you, being the chairman of Taseko and also having a role at HDI, which is getting paid by Taseko, is a bit of an incestuous relationship. But I just wanted to point out that that is present and they are using that, but you are claiming and Marin backs you up that is not the case.
RT: Yeah. Well, let me just explain a little bit more. Collin, you raised a very good point because it could be a perception issue and perception sometimes takes precedence over reality. HDI is simply a captive service company. We do work for HDI-related companies and the idea is because mainly HDI is in the exploration and development phase of business, not necessarily mine operating. We have got projects where geologists were out running exploration programs and when that exploration program is over the engineers step in and take over the projects, so instead of the geologist being dismissed and terminated to go elsewhere, they will move to the next exploration. We share services and find that we can keep the core staff of people available.
When any company that is in the HDI group wants to run an exploration program, they ask us to put together the team of people to do that. That is basically three times Taseko has asked for us to run explorations programs. In that way they do not have to go out and hire exploration geologists. They do not have to take on the payroll. They do not have to take on the severance and all the rest, plus our guys they are extremely experienced at doing that. We run several exploration programs in BC so typically our drilling costs are— well, I know one instance when Taseko put out to build and put out an RFT for an exploration drilling program at Gib. The HDI cost is 25% lower than the best bid price that the mine got.
We do not really run the back office. I would not use that term. Taseko has its own accounting people, but what we will do for them they will need tax advice. We have a tax practitioner within the group. They need some work on some legal documents. They can either go to Mc Millan, their corporate counsel outside or we have in-house legal counsel. For some legal transactions, minutes and document certifications, and sometimes NDAs and CAs they come and use the internal lawyer here, and they pay about I think about $225 an hour for that lawyer as opposed to paying $550 for an external lawyer. If they need some financial analyst, some specialty work done on a project they can also ask us because we have a couple of people that that is what they do and it is at their request. In addition, the independent audit committee has to sign off quarterly and at the end of the year on all of those related-party charges and the auditors typically take a look at them as well and look at them for reasonableness and the quantity of them.
The amount that HDI has received for those charges is such a small infinitesimal portion of the total expenditures of Taseko, really, is the minimum. But they are related partly and, again, there is nothing to stop them telling management we do not like the perception of this. We think that the perception is worse than the saving and let us terminate that relationship. They can do that quite easily and there is no cost to it.
CK: Ron, we have about 7 or 8 minutes left in the interview here and now that we provided a pretty solid back story for listeners I want to address a couple questions I have, the first one being that one might assume an activist group in a market that we are in right now where things are so beaten up and it is so easy to convince investors to kick management out and give another team a try. Why they would go after what somebody like Marin Katusa would say as a very well-run company like Taseko with a mine that cannot be optimized very easily; we have already touched on this, a very low grade deposit that is being operated very efficiently. First question for you: why are they going after you?
RT: Well, I think they have hit the nail on the head. I think that they have not told us what that is. My views are speculative, but I have talked to a lot of people. We at Taseko have pushed very hard and actually had gone to court to force Raging River to make more disclosures. They went from a very nominal disclosure in the first instance to then disclosing a pretty complex structure of ownership and investment in bonds and in stock and third party investors. I mean they do not even tell us how much the principals of Raging River have put in or how much stock the principals own. But there is obviously a compensation relationship from the bond side of the investors so they get special compensation at Raging River people for improving values on the bond side.
I think the ultimate game plan because they know some of the parties behind it here is potentially the sale. They tell us in their management information circular that the value of the non-core assets is zero. An asset like Florence which has an asset value between three quarters of a billion or a billion dollars they are saying it has zero value because it is unproven technology. I can tell you when I was on the phone with their expert he has talked about us doing column soil testing and we said where did you get the idea that any column soil testing was done? The basis for your statement is totally incorrect, so how can you make an assessment that it is valueless unless you know what kind of work we did? And that was their expert. What if they divest of Florence for next to nothing to a party that has shown a historical interest in owning a large position in it? Divestitures could result in bonds being paid at face value. Our bonds currently trade at a value of 50% discount. There is a huge upside in the bonds.
I have also had somebody else point out to me that there is a couple of SPACs out there – Special Purpose Acquisition Corporations listed in New York. They are sitting on sizeable sum of money that was raised for an acquisition. If that acquisition is not completed within the balance of this year that money ends up being returned to those investors. There is an opportunity to take Taseko and roll it into a company like that. That is taking control of the company without offering the shareholders a premium. These guys have only bought 5%. They have got twice as much money invested in the bonds as they do in the stock. I could say that the way corporate raiders work is they try and get significant interest in your debt and then they try and take control of the board, and then they elevate the debt to a secured position and strip the asset. And I think that is the endgame here.
I think it would be completely in Taseko shareholder’s interest to allow creditors to sit on the board of directors. I have talked to some bondholders and I have asked them directly. I have nothing against my bondholders. We are going to pay these guys out at full value. We are going to pay them all their interest and they are going to get their return. But would you come and sit on my board of directors knowing that you are a bondholder and you have then two masters to look at and to personally said no. We would not put ourselves in that conflicted role.
CK: What is next, Ron, in terms of the process? How far are we along? How much progress has Raging River Capital made? Do you guys feel threatened to the point where there could be a decision soon and you guys route? How does it work?
RT: Well, the meeting is May 20th so we still got a ways to run here, a month and a half. Our management information circular just hit the street late last week and I think it is very comprehensive. It addresses all of the things that Raging River raises and then some in a lot of detail. We are doing our outreach now to shareholders. I have talked to most of the big shareholders or other board members have and I do not find any of the people that I have talked to who are remotely interested in supporting Raging River. From our advisers who have been on the phones with retail investors, we are getting a very high response rate and support from management.
I mean there is some core large groups of shareholders. Not all are institutional, but we do have a fairly decent size retail, so there is a fair amount to put out there. But, again, I would say insiders, some of the big institutions— there is really only one institution so far that has come out against us and they have, I believe, more money invested in the bonds than the shares. I would not be surprised at the end of the day that sometimes these activist things can also elevate the value in the short term of bonds or share prices. Just somebody wanting you can make others say, “Well, this is a good game on its own.” But at the end of the day we actually have to vote for the people that know how to run this company and assure that it delivers for its shareholders at the end of the day.
I do not think there is going to be too much happen other than there will be some more things in the press. But shareholders should read the information circulars. They should vote the yellow proxy, and on May 20th we will see when the dust settles. I am confident. To tell you honestly, most of these activist campaigns are unsuccessful for the activist. That is why typically they do other things to try and cover their potential losses which, again, could be part of the bond play.
CK: This whole thing came about by Raging River acquiring just a 5% stake. I do not think it was very long ago that they purchase that block off of two other groups and that has allowed them to put forth this requisition for the shareholder meeting and initiate this whole process which I can imagine has been a costly and time-consuming process for management. Obviously, in a public company there needs to be a balance that allows unhappy shareholders to come in and try to make a change. But now that you have gone through this do you think that the rules in Canada that have allowed this to happen on the exchange without putting yourself in a murky situation, do you feel that this is the best way and this is how things should be allowed to happen?
RT: Actually to tell you the truth I do not. I do not know if 5% or 10% should be the threshold, but I think that length of ownership should come into play here. I do not think you should be able to do something like this unless you have owned the position for at least six months and, really, twelve months, and that you have made a conscientious effort to engage with management and the board. I mean these guys— I think Raging River was setup in November or December. They acquired their share position in January and they launched. They never had any intention of real engagement. Their intention is grab control of the board and force the company to do things that they want to do. I just cannot believe that the shareholders would not see through that. I mean the cartoons in their information circular, okay, they are entertaining. They got some guy wearing a mask dragging on the HDI bag. But it is a cartoon.
CK: Very true. Well, Ron, for listeners that want to find out more maybe from a slightly biased opinion but a very good read, go to www.katusaresearch.com and that has Marin’s very detailed piece to give more information. Also, if any investors in Taseko are interested in finding out more, Ron, should they reach out directly to you or who can they talk to to get more information?
RT: They can call me, contact me or they can go through investor relations at Taseko which is on the web. You know I am happy to talk to investors.
CK: Excellent! Alright, well, Ron, thanks so much for coming on the show. I know times are busy right now and stress is probably running a little higher than normal. I appreciate getting your side of the story and educating our listeners on activist investing in Canada.
RT: Thank you, Collin. Thanks for the opportunity.
Mr. Ronald W. Thiessen, CPA, is President, Chief Executive Officer & Director at Quartz Mountain Resources Ltd., President, Chief Executive Officer & Director at Northern Dynasty Minerals Ltd., Chief Executive Officer & Director at Hunter Dickinson, Inc., Chairman at Taseko Mines Ltd., and Chief Executive Officer & Director at Hunter Dickinson Services, Inc. He is on the Board of Directors at Quartz Mountain Resources Ltd., Northern Dynasty Minerals Ltd., Amarc Resources Ltd., Hunter Dickinson, Inc., Pebble Partnership, and Hunter Dickinson Services, Inc.
Mr. Thiessen was previously employed as Independent Director by Detour Gold Corp., Chairman by Rockwell Diamonds, Inc., Executive Director by Anooraq Resources Corp., Co-Chairman by Continental Minerals Corp., Chairman by Farallon Mining Ltd., Chairman by Great Basin Gold Ltd., and President by Casamiro Resource Corp. He also served on the board at Tri-Gold Resources Corp.
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