July 21, 2018

Baupost Group Founder Between a Rock and Hard Place

A proposed limestone quarry in Ontario, like this one in Virginia, puts the Baupost Group founder between a rock and a hard place with local residents.

Seth Klarman runs the 11th-largest hedge fund with $24 billion under management. He’s not being conservative with that tidy sum under his care. Klarman wants to transform 2,300 acres of Canadian farmland into a limestone mine writes Scott Cendrowski in Fortune. The people of Melancthon, Ontario, however, raise environmental, health, and aesthetic concerns. They say the quarry, or an open-pit rock mine, would impact traffic congestion and the water supply. In fact, the Ontario Ministry of the Environment authorized an environmental evaluation that could take up to two years to complete. You could say that puts the Baupost Group founder between a rock and hard place.

The quarry investment could provide an exponential return over time. Based on recent market prices, the volume of limestone in the proposed quarry is worth more than $6 billion. And its value could be on the rise. The Ontario government expects demand for limestone and other rock used in construction to increase by 13% annually over the next two decades, driven by an ongoing population and construction boom in the province.

In a broader sense, Klarman’s willingness to put money into a Canadian quarry is reflective of his view that stocks today offer little value. The really big potential gains, he believes, are in more complex investments. Klarman is not bullish on the recovery. “With most of the world’s developed economies grappling with structural budget deficits and a grim outlook,” he wrote to clients last July, “and because all foreseeable solutions to excessive borrowing and spending will dampen global economic activity, we find it hard to be optimistic about the economy.” At Baupost’s client meeting this past October, Klarman told investors that stocks were neither cheap nor expensive. It is the Federal Reserve’s policy of near 0% interest rates combined with government bailouts, he believes, that have driven asset gains since the financial crisis. “Massive government intervention in the wake of the 2008 financial crisis is now widely considered to have been a good thing,” he wrote in July. “We remain unconvinced.” He worries that the next crisis could be worse than the one in 2008.

Klarman is one of the industry’s most successful investors. He has returned 19% annually since he launched the Boston-based Baupost Group in 1982. “$10,000 invested then would be worth $1.55 million today. (The same investment in an S&P 500 index fund earned $216,000.)” Klarman named the fund after the initials of his first backers: his professors at Harvard Business School, impressed with his investing acumen.

Klarman’s Canadian investment shares the marks of his other investments: undervalued assets where others are unlikely to tread. His equity, or stock, holdings include the scandal-plagued BP and News Corp. He bought one third of the debt of Lehman Brothers after it went bankrupt in 2008 and his fund recently sued Bank of America over subprime loan-backed bonds. So even though the hurdles facing the quarry’s progress puts the Baupost Group founder between a rock and hard place, Klarman is adept at being in this position.

Comments

  1. The people of ONTARIO not just Melancthon raise environmental, health, and aesthetic concerns as well as economic, food security, source water protection and water ownership concerns. NAFTA gives foreign owned companies rights to Canadian water and in this case we are talking a lot of water — water relied on by one million people (today). The proposed quarry would be the largest in Canada and ranks up with keystone and BC oil pipelines as potential environmental disasters. Canadian taxpayers will pay for this proposal one way or another.

  2. Mulmurman says:

    It’s interesting to see many of the financial publications picking up on the story of Baupost/Seth Klarman getting themselves involved with what many of us who live in the area where the proposed megay quarry will would be located believe is a company dubious repute. This proposed project together with its backers The Highland Companies and Baupost are attracting widespread bad publicity for its size, its technical complexity and the risks associated with its operation. It also would remove 2,300 acres of prime agricultural land from productive use. prime among the risks is that it has to ‘manage’, their terminology, up to 600 million liters of water daily into perpetuity. The water they intend to return somehow to the existing water courses. It should be pointed out the quarry would be located in the headwaters area of 5 river systems and penetrate underground aquifers. The ‘hole’ will be over 200 feet below the water table, deeper than Niagara Falls. So your readers might eventually understand why the locals and many, many others are somewhat exercised when they learn that some offshore hedgefund is behind the rape of their land and the plundering of their resources, and one of the fundamental necessities of life, water, is threatened, plus we’ll have to put up with reduced air quality from dust, noise from blasting, collateral damage from blasting, significantly increased truck traffic on rural roads which results, among other things, in rapid deterioration of the roadway itself.
    Still we’re now waiting for The Highland Companies, as part of the Environmental Assessment, to make public their Terms of Reference which will meticulously scrutinised.
    It’s been said before, and it might as well be said again, this could be the project that Mr. Klarman reviews as to whether it’s worth his while to continue backing. If he hasn’t he should, because the opposition will not wither and disperse..

  3. donna deneault says:

    We would not dispute that Seth is a “good investor”, but the land in Melancthon Township is not a good investment for these reasons: 1) threat to drinking water for over a million Ontario citizens, 2) destruction of rich agricultural soil (honey wood silt loam), fish habitat, wildlife habitat, water pollution from explosive residue(this location is Headwaters for 5 or more rivers), air pollution from thousands of trucks, air pollution from toxic dust (explosives), crop and soil destruction (farmland that is not part of quarry but adjacent will have toxic dust blowing on it, over it and crops will be destroyed).

    From what I am learning on the subject, not enough is being done to recycle the needed material.

    Why does the environment always become an afterthought when there is potential for big money to be made ?

  4. Elizabeth Gray says:

    Mr. Klarmen neglects to mention that the land he wants to transform is some of the finest farmland in Ontario, significant in its contribution to local food supply, habitat to some endangered and ‘at risk’ species, and the headwaters for five Ontario rivers. His plan to blast a 2000 acre hole in the earth, to a depth equal to the height of Niagara Falls, has drawn criticism from many groups in Canada, including the David Suzuki Foundation, the Council of Canadians, and has garnered considerable attention in the Canadian press.

    The Society for News Design (SND), an international organization, gave an award to the Toronto Star newspaper for its coverage of the story Anatomy of a quarry fight which described reports of deceitful tactics employed to convince farmers to sell their land.

    It is not the humble farmers of Melancthon alone who are actively protesting the quarry. Nearly 30,000 supporters, from across the province and beyond, braved the rain and cold last October to show support for this quiet farming community. The FOODSTOCK event, led by Chef Michael Stadtländer and the Canadian Chefs’ Congress, drew 100 Chefs and internationally renowned musicians like Jim Cuddy (Blue Rodeo) to help raise funds to fight Mr. Klarman’s proposed mega quarry.

    Churches, scientists, Natives, artists and social justice groups are publicly opposing the quarry in defense of the land and water.

    One has to wonder whether Klarmen’s investors are really interested in financing such a fight or whether it is a stone best left unturned.

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