Billionaire Gets Gold Fever

from Businessweek:
"I'm not a goldbug, but there are times when I feel like an evangelist for it," says Thomas Kaplan, an Oxford-educated historian and chairman of Manhattan-based Tigris Financial Group. "To my amazement, it's a hard sell. The conventional wisdom is that gold is for primitives. That derision shows me that contrary to the notion we're in a bubble, we haven't yet begun the real bull market."
The 47-year-old New York-born billionaire is a bundle of eccentricities, from his unplaceable but alien accent to his three-piece suits and his decidedly un-Wall Street way of talking ("as the thesis is confirmed, well-founded conviction gives way to the calm of metaphysical certitude"). Sitting in a windowless conference room decorated with lavish photographs of panthers, jaguars, and tigers—preserving big-cat habitats is his other major passion—he explains his training as an investor. "I'm much more qualitative than quantitative in my approach," Kaplan says. "It would have been an alien concept for me to think about an MBA."
His conviction about gold puts him in the company of such celebrated figures as George Soros and John Paulson, both of whom have been betting heavily on the yellow metal (and have invested alongside Kaplan in Vancouver-based mining company NovaGold Resources (NG)). At the moment, the wager looks inspired: The price of gold has risen for nine straight years, hitting an all-time high of $1,256.30 an ounce on June 21. While the price has fallen about 2 percent since then, Kaplan says the big rally is still to come. It's not riots in the streets he envisions, but a more fundamental case of demand outstripping supply as gold becomes a currency in its own right.
Variations on this view have become so popular in recent years that gold has gone from being an obsession of conspiracy theorists and kooks to a fully respectable investment idea that gets promoted at PTA meetings. Kaplan is not content to merely run with this crowd. To maximize his returns, he has engaged in the much trickier task of digging fresh gold out of the ground. But mining is a double risk—there's the cost, hassle, and uncertainty of extraction, and then there's the volatility of the market. The financial risks of mining show up in their stocks, especially compared with gold prices. While gold rose 13 percent this year, the Bloomberg World Mining Index dropped 9.7 percent. And gold is no more of a certainty than anything else. Before its recent ascent, it was stuck in a bear market for two decades. What if the threat of hyperinflation never materializes? A mere uptick in confidence about global growth could put gold right back in the doldrums.
Kaplan doesn't see that happening, and that's why he has fallen in love with the leafy green hills of Transylvania in central Romania. He owns an 18 percent stake in a Canadian company called Gabriel Resources that is attempting to reopen what is widely believed to be Europe's largest gold deposit, an estimated 10 million ounces, worth more than $12 billion at today's price, as well as 47.7 million ounces of silver. There's one problem: Some residents of the economically ravaged area, where unemployment is 80 percent, are fiercely contesting the project on environmental grounds.
Despite the opposition, the potential windfall has attracted investors, including Paulson, of whom Kaplan is an unabashed admirer. "If he sticks to his conviction on gold, he may yet become the richest man in America," Kaplan says, "and I'd love to see it happen." Kaplan would do well, too, though he brings his own particular dilemma—striking a balance between an urge to expand his mining empire and what he insists is an even greater desire to save the planet from environmental harm.
In 1988, Kaplan was completing his dissertation at Oxford—on the Malayan counterinsurgency and the way commodities influence strategic planning—and earning extra money analyzing Israeli companies listed on U.S. stock exchanges. The work involved traveling to Israel, and while there Kaplan connected with two people who would shape the rest of his life. First was Daphne Recanati, who had attended the same boarding school Kaplan had and was then just beginning her compulsory military service. She would eventually become his wife, mother of his three children—and his "reality check" for new investment ideas. "Her instincts are pretty much perfect," he says.
Through Recanati's mother, Kaplan was introduced to Avi Tiomkin, a well-known Israeli investor with whom he established a close bond. "There was immediate chemistry," says Tiomkin, now 62. "His views, his conviction were impressive." Kaplan sealed his standing with his mentor by predicting the invasion of Kuwait by Saddam Hussein several years before it happened, contradicting widely held wisdom that one Arab country would never attack another. "It was against all forecasts," Tiomkin remembers. "It was a huge surprise."
Kaplan commuted between Oxford and Tel Aviv until Recanati was accepted to New York University in 1991, and they moved back to the U.S. Tiomkin hired him as a junior partner, a position he held until 1993, when Tiomkin decided to focus on his Israeli investments and Kaplan left to execute his own big ideas, including major bets on silver, natural gas, and, eventually, gold.
He and Tiomkin kept in close touch. "We could've not seen each other for a few months and then continued the conversation where we left off," says Tiomkin. Like Kaplan, Tiomkin eschews his office most of the time, preferring to work from home or elsewhere. "It's in our genes, it's how we were born. It keeps us away from being too much under the influence of conventional wisdom." The two men have reunited and are now avoiding the same office. After working for various hedge funds including Caxton Associates, Tiomkin joined Tigris in 2008 as chief macro strategist, the same year he wrote an article for Forbes predicting the "demise of the euro."
Kaplan credits Marc Faber, the notoriously bearish Hong Kong-based publisher of the Gloom, Boom & Doom Report, with inspiring his move into natural resources investing in 1993. Faber has long argued that precious metals represent vital protection against the monetary foolishness of central governments. That year marked Kaplan's first defining deal, the launching of Apex Silver Mines to dig for silver in San Cristóbal, Bolivia. Among the early backers of Apex was Soros Fund Management.
With Apex, Kaplan pursued a strategy he is now trying to replicate in Romania: relocating villagers and buildings in the path of his mining plans to a new town nearby. Apex spent $12 million to move about 200 people as well as a cemetery and a colonial church, which was completely restored and rebuilt "brick by brick," Kaplan says. "San Cristóbal was transformed, and we established a foundation to create new, sustainable enterprises. To be from the new San Cristóbal became a badge of prosperity." Kaplan served as chief executive officer of Denver-based Apex and later its chairman. He resigned in 2004, and the company went bankrupt four years later, reemerging from bankruptcy protection in 2009.
Although he's fixated on gold these days, Kaplan hasn't abandoned silver. Through Silver Opportunity Partners, an affiliate of Kaplan's Electrum exploration group of companies, he bought key assets of Sterling Mining Co.—which include the Sunshine Mine, nestled in the heart of the "Silver Valley" of Idaho—out of bankruptcy earlier this year. Well known in mining circles, Kaplan and his team worked hard to keep a low profile leading up to the bankruptcy auction so as not to tip their hand and drive up the bidding. The Sunshine transition team was headed by Mark Wallace, president of Tigris.
Sunshine is among the most notorious mines in the world. First discovered in 1884, Sunshine produced an estimated 360 million ounces of silver. It closed in 2001, then reopened in 2007 before going broke less than a year later. Its checkered history includes a 1972 fire that killed 91 miners, one of the worst disasters of its kind in the U.S. A 12-foot-tall, painted-steel sculpture of a silver miner with a rock drill stands along I-90 between Kellogg and Wallace, Idaho, in memorial to the dead workers.
Now, Silver Opportunity is studying the economic and environmental issues surrounding restarting the mine. Wallace says the deal was a case study for Kaplan's investment approach. "It was no doubt a complicated and risky transaction," Wallace says. "Through our expertise, we were able to minimize the risk involved, resolve litigation, and reunite the patchwork and fractured ownership interests that inhibited the mine and limited its value over the last decade."
While Wallace sorts out the Sunshine mess, Kaplan pursues other interests: In 2006 he created a nonprofit called Panthera to focus on saving big cats. Among its projects is a collaboration with the Wildlife Conservation Society to boost the tiger population in certain countries, including India, Myanmar, and China, by 50 percent over the next decade. After a long and involved courtship, he persuaded Alan Rabinowitz, a zoologist with a specialty in big cats, to become president of Panthera. When he was first approached by Kaplan, Rabinowitz, who had spent his career at WCS, was close to retirement and was torn about taking a new job. Kaplan kept the position open for a full year while Rabinowitz debated whether to accept it. On Apr. 1, 2008, he and five other WCS employees joined Panthera, with ambitious goals. "We have realized that you have to fight for them as a species everywhere they exist on earth," Rabinowitz, now 56, says. To that end, Panthera is negotiating with governments across the globe to create "genetic corridors" so cats can move freely without being constrained by man-made borders. Kaplan and Rabinowitz have developed a deep friendship; they are "BB" and "LB" to each other; Rabinowitz is the big brother, Kaplan the little brother.
"When I met Alan, I realized he'd been doing what I'd wanted to do with my own life," says Kaplan. "Nonetheless, I'd always harbored this dream that I'd be able to return to my true love."
Kaplan acknowledges the paradox of promoting conservation while investing in an industry long associated with extreme environmental degradation, but he says any conflict between the two is easy for him to resolve. "If I'm given a choice between conservation and business, conservation wins, always," he says. "I've conserved a great multiple more than I've disturbed." His geologists apply what he calls the Tom Rule to their decisions about what land to acquire for mining. "If it looks like we shouldn't build a mine here, either take it and I'll hold the land to stop others from building on it, or skip it," he says. "I tell them: 'Use your common and aesthetic sense.' It sounds crazy to refer to aesthetics, but ultimately the morality of the endeavor should win out."
This was on his mind when he arrived in Transylvania in 2009 to get a gut check on Rosia Montana. He had alerted no one there about his visit, flying into the tiny Romanian city of Saibu with several colleagues from Tigris' London office and enduring a three-hour drive through the mountains. They explored the back roads around the mine, witnessing a degree of ecological damage that left Kaplan to theorize that the pollution dated to the time when the Roman Emperor Trajan conquered the region, marking the beginning of Rosia Montana's mining heritage.
Community and environmental activists have been fighting Gabriel Resources' plans for a decade, arguing that the use of cyanide in the mine threatens nearby villages and that a spill could contaminate the countryside extending into neighboring Hungary, where officials have joined the opposition. Kaplan counters that the area already has been devastated by centuries of mining—"the river literally runs red from sulfides"&mdashand that digging the mine would in fact help the county of Alba by repairing some of the damage of past mining projects.
Leading the resistance to the mine is a nongovernmental organization called Alburnus Maior, which was started in 2000 and is based at Rosia Montana. The group contends that Gabriel's plans will destroy historical sites and force resettlement of 740 farms and 140 apartments. The group also says that 40 Romanian NGOs and institutions support its "Save Rosia Montana" campaign, which proposes to boost the local economy through tourism, agribusiness, and small industries, including crafts. "We will continue to use all legal means at our disposal to stop this proposal from ever being realized," Alburnus Maior's Stephanie Roth said in an e-mail. Roth, a former environmental journalist, was instrumental in persuading the European Parliament to publicly oppose the mine. She said the fact that some residents will ultimately refuse to sell their properties to Gabriel means the mine won't ever get under way because the company needs all of the land to secure a construction permit. "I don't think that Gabriel's project will ever go ahead, and in contrast to Gabriel, the locals have all the time in the world," Roth said.
Rozalia Drumus, a 79-year-old retired schoolteacher, lives in Rosia Montana with her unemployed daughter and subsists on a 1,159 lei ($337) monthly pension. She has planted a sign on her gate: This property is NOT for sale. "We had a small happy village, but people's greed for money was too much," she says. "Gold is a bastard."
Kaplan ardently defends Gabriel's efforts, arguing that mining is the best way to help the economy of Romania. "Those who say a scarred landscape should be preserved at the expense of a truly exciting economic future for a poor community are being unjust," he says. "This is telling the local people to bootstrap their way to progress when they don't have the means to procure boots."
In June, Romania's environment minister said the government probably will resume a review of the project, which likely means months more of public debate. Even if Romanian government approval is obtained, it will take at least a year before gold can be pulled out of the ground. Meanwhile, as gold prices swing wildly and talk of a double-dip recession ripples across the markets, Kaplan retains his karmic calm. "People view gold as emotional, but when they demythologize it, when they look at it for what it is and the opportunity it represents, they're going to say, 'We really should own some of that.' The question will then change to 'Where do we get the gold?' "