Go North Young Man: Seth Klarman Invests in Canadian Quarry

Value investing superstar Seth Klarman of the Baupost Group (and author of the ultra-rare Margin of Safety) is betting on a large quarry development not far (relatively speaking!) from my hometown in Ontario, Canada. Fortune’s coverage provides a nice profile of Klarman and his new (mildly controversial) quarry investment:

Last spring a Canadian firm called the Highland Cos. submitted an application to turn 2,300 acres of area farmland into one of the top-producing rock quarries in Canada. One of the principal owners of Highland is the Baupost Group, a $24 billion hedge fund based in Boston and run by a secretive investor named Seth Klarman. …

Klarman’s name may be new to the farmers of Ontario, but in the world of hedge funds he’s long been a superstar. In fact, Fortune identified him back in 1989 as an investor with the potential to become the next Warren Buffett. And Klarman, 54, certainly has delivered. “He’s one of the most astute investors of our time,” says Jeff Scott, chief investment officer of Wurts & Associates, which advises institutional investors on hedge funds. The proof is in his returns: Klarman has earned 19% annual gains after fees since starting at Baupost in 1982, making $10,000 invested then worth $1.55 million today. (The same investment in an S&P 500 index fund earned $216,000.) Baupost’s assets have grown sixfold over the past decade; it’s now the world’s 11th-largest hedge fund, according to Bloomberg. Klarman’s record is all the more impressive because he avoids using leverage to boost his gains. Moreover, he typically holds a third of Baupost’s assets in cash — a sign of his strict value standards and patience. (Currently 17% of the fund is in cash.) …

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.

Read the full article here.

 

Author Disclosure: None

Talk to Frank about Seth Klarman

  • http://www.facebook.com/friends.of.ndact No Mega Quarry

    Mildly controversial? Try HUGELY controversial. The water from the proposed site is source water for one million Canadians. The water runs south to Lake Erie, west to Lake Huron and north/east to Georgian Bay. This area is also highly productive prime farmland. The cost of aggregate taken from this area will be paid in fresh food and clean water and it is a price Canadians will not pay. If Mr. Klarman is as wise an investor as you say, he’ll cut his losses sooner rather than later. It is time for North Americans to get their priorities straight — Food & Water First.

    • Frank Voisin

      Hi NMQ

      Thanks for writing! My understanding is that the government is doing a full environmental review for any potential impact on the water or surrounding land. If the project fails this review, then the project will be halted so you shouldn’t have anything to worry about, right? If it passes, then this becomes more of a NIMBY issue.

      I am sure the government will do a thorough assessment, especially given the media coverage.

      Good luck!
      Frank

  • lexo

    The environmental review is only happening because of thousands of people protesting the quarry. From all walks of life – it’s not just environmentalists, or farmers, or wingnuts, but everyday people from around the province. Rich people, poor people, famous ones, and nobodies. It’s not a NIMBY issue – it’s the fact that corporations are putting essential things like food and water at risk for millions of people over a large area, based on unproven technology and promises. There’s also the issue of the deceit involved in purchasing the land in the first place – that Highland group would be farming on it. How can you trust a company that lies from the beginning about their intentions?

    If something goes wrong with this – it can’t be fixed. This is about doing the right thing, for ourselves, and our children.

    • Frank Voisin

      Hi Lexo

      Well, it certainly sounds like the environmental review is a good thing. However, I would guess that the protesters won’t be happy if the review goes in the company’s favour.

      Something ignored by the Anti-Quarry websites is that this project will be good for Ontario’s economy. Employees will need to be hired and inputs will have to be sourced. Taxes will be paid. This is good for Ontario.

      With respect to the “deceit” involved in the purchase, I see no problem with this. The sellers would have (unfairly) demanded a higher price had they known it was a hedge fund purchasing. No one forced them to sell. Who the sellers were and who the buyer was is irrelevant to whether the purchase price was a good one. The deals were made by arm’s length parties negotiating about the value of the assets transferred. It is disingenuous for the sellers (let alone third parties!) to come in later and complain that the deals were somehow unfair. Also, even if the hedge fund had made its presence known, and paid a high premium for the land, this would certainly not dissuade any of the protesters.

      I suggest that you search online for the various interviews Seth Klarman has given (my site has a few, as does the Benjamin Graham Center for Value Investing at the University of Western Ontario). I think you’ll find he is an upstanding guy, involved in charity work and down to earth.

      Take care!
      Frank

  • Karly

    Whether this is ‘good for Ontario’s economy’ or not isn’t relevant. When thousands of acres of farmland and an enormous water table are affected, something tells me, ‘well, it was good for the economy!’ won’t cut it. Lexo is right, this is for future generations of Ontarians who want access to clean water and non spoiled farmland. This is about food security. This is about respecting the environment. I don’t think it’s really relevant what environmental charities Mr. Klarman gives do either– what good is giving money to one charity on one hand when you are affecting the water/land of up to 1 million people on the other hand? The hundreds of thousand of people who oppose this quarry will not stop. They will not be appeased by an environmental assessment either. Canada has notoriously lax mining and natural resource laws. We also have a anti science federal government who commits environmental atrocities daily. This isn’t about money–this is about making a stand for Canada’s future, and hopefully bringing about change in the laws that allow this stuff to keep happening. Not to mention the fact that Highland purchased the land under false pretenses, but that’s another story. They must have wanted a fight–because they’re sure going to get one.

    Best

    Karly

    • Frank Voisin

      I disagree. I think the economy should at least be a consideration. Your values may suggest that it should not be the only, or sole consideration (I agree with this), but to suggest that it is completely irrelevant is absurd.

      I have no problem with the purchase of the land under false pretenses. This ensured a fair price, and I know the price was fair because the sellers agreed to sell. To say that they should have paid more because the buyer was a hedge fund is silly.

  • Colene Allen

    How do you figure this quarry is good for the Ontario economy? The profits will go back to the US, and not remain in the Canadian economy. The land will not be able to be restored to be used as Class 1 farmlands again, which reduces the ability of Ontario to produce fresh food. The rivers will not be able to be restored to what they are currently (which at that isn’t great). The employment created although somewhat long term is still transient in the end, and the required infrastructure will damage the environment.

    You want good for the Ontario economy? Invest in developing alternatives that are environmentally friendly to the dwindling supply of aggregates. That is where the money will be in the future, not in digging up people’s farms.

    • Frank Voisin

      1. Canadians will be employed for the day to day work
      2. Demand for Canadian sourced products used as inputs will increase
      3. Taxes will be paid in Canada on Canadian-sourced profits

      #1 and #2 will lead to further employment as direct and indirect employees increase their own consumption of products from other industries.

      This is just off the top of my head. I am sure there are other economic benefits.

  • T.Spot

    I hear Detroit is in desperate need of a new economy and they have a huge supply of above the ground aggregates, abandoned buildings and other concrete structures. …. and its only one boatload away to any major city along the great lakes.

  • Karly

    “I have no problem with the purchase of the land under false pretenses. This ensured a fair price, and I know the price was fair because the sellers agreed to sell. ”

    That, in my humble opinion, is everything that is wrong with this situation. You clearly only see dollars and cents, and don’t see the people who were swindled out of their farmland. Just because I agree to sell something doesn’t mean I want to. Lying ensures a fair price? I couldn’t disagree more with everything you’ve written about this quarry.

  • T.Spot

    Whats the matter Frank ? Can’t handle the truth? You realize you are a destroyer now don’t you !!
    Great work on paper but in reality your formula is missing some very important figures that will greatly affect your bottom line in the future.
    Firstly you have neglected the first rule of success and that being the principle of always “Function over form”
    Allow me to explain…. The land that you have “purchased” is only available in that area and is not replaceable by any man made means…. Correct?
    This land is extremely important to the entire province of Ontario and beyond …… Correct?
    This area is a large food production area which is expanding tremendously as population and “LOCAL” food awareness grows .
    This area is an incredibly large aquifer that filters and holds trillions of litres of water that flow south into the great lakes , which as we know are the largest fresh water supplies in the world and northward towards Georgian Bay , which is attached to Lake Superior the largest of all the Great Lakes.
    The reason it flows in two opposite directions is that it is also the highest altitude in Ontario. As we all know water finds is lowest point, so when you put something, ie. “contaminants” into water and pour it from a great height it will spread over a greater area and find low lying areas to settle in.
    Pumping out , { to where???? } ^ billion litres of water per day for all eternity to sustain this project is highly questionable at any cost factoring.
    The food production loss and environmental damage is 100% compared to whatever short term cash a few people will make no matter how you stack your beans.
    The future of this project is filled with lawsuits, political mayhem, destruction and loss.
    My point being “function over form not form over function”
    The function of your Quarry is to make money at all costs but due to its location and issues is in bad form
    The function of this land in question is to filter the water for Millions of people in two countries, Canada and the U.S. and provide food for millions of people who live in the region
    The form of the land is to provide these life essentials in a balanced and natural ,ie done without any human interference, way as well as being an incredible beautiful landscape full of natural wildlife.
    Life is the function but cash is your form and unfortunately you cannot eat cash.

    You have to honestly admit you do not have the power to provide the same benefits that this land provides for free to so many no matter how rich and powerful you think you are.
    Remember you are NOT a god!

    Please come and visit the area of your desire before you lay down your path of destruction.

  • K Covey

    I wouldn’t necessarily call it “fair” price but rather just what’s commonly called a “fair market value”. i.e. two arms length entities engaged in a trade.  Efficient markets are predicated on the belief that willing sellers and willing buyers have fairly complete knowledge of what they are buying and selling, where primarily their expectations of the future or what they can do with the asset (so called value adding activities) differ.  Extreme ‘Taking candy from a baby’ style transactions aren’t all that ‘fair’ in any moral sense. Nor would be charging a desperate person their life savings for fuel or some other necessity in a disaster situation considered a ‘fair’ and moral trade – but it could be a fair market value transaction if the deal is done.

    • voisin

      Hi Keith

      I don’t think your analogy is representative of what happened here. There is nothing to suggest that the farmers who sold to the anonymous buyer were in a situation similar to someone in a disaster situation being price gouged for necessities.

      i.e. There is nothing to suggest duress here. I think people are outraged because of how much the sellers could have gouged the hedge fund had they known the buyer had deep pockets, and that doesn’t seem to be “fair in any moral sense.”

      Frank