A hedge fund bets big on a Canadian mega quarry – by By Scott Cendrowski (Fortune Magazine – February 15, 2012)


Superstar investor Seth Klarman’s controversial plan to develop a quarry in Ontario could pay off bigtime.

FORTUNE — Drive an hour northwest from Toronto along Highway 10 and you come across some of the best farmland in Canada. Folks here call it the Garden of Eden. Atop a 15,000-acre plateau sits a layer of dark dirt so perfectly balanced with clay and nutrients that it breaks apart in your hand like potting soil. “The stuff is like butter,” says a local potato farmer, David Vander Zaag, who sells his spuds to Frito-Lay. Even better: Below the rich topsoil lies a limestone deposit some 200 feet thick, creating an ideal natural drainage system. It once rained nine inches in a day, says Vander Zaag, and he didn’t lose a single potato from his crop.

It’s that limestone, though, that has brought the farming town of Melancthon, Ontario, pop. 2,900, the fight of its life. 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.

Highland’s quarry proposal has ignited a firestorm of controversy in Melancthon. Residents have myriad concerns — from increased truck traffic to the impact on the water supply to the unsightliness of an enormous pit mine in the distance. The farmers feel betrayed by Highland chief John Lowndes, an entrepreneur who grew up in the area. Beginning in 2006, Lowndes spent two years and some $50 million amassing 6,500 acres from some of the area’s biggest farming families. Several farmers claim that he approached them by saying that he wanted to build the region’s largest potato-farming operation — which he did — but never mentioned a quarry. Only after he owned the land, the farmers claim, did Lowndes reveal that Baupost and Highland had other plans. Lowndes declined to speak to Fortune.

The farmers say Lowndes breached their trust. But they have identified a second, bigger target for their frustration: Klarman. Why, they wonder, does an American hedge fund manager they’d never heard of until recently want to spoil their lush land? “Yeah, there’s something I’d like to tell him: Come up here,” Vander Zaag says, overlooking his 1,000 snow-covered acres in late December. “I want him to see the land. To see what he’s doing to it.”

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.)

So what, exactly, is this investing heavyweight doing in a fight with small-town Canadian farmers? The publicity-shy Klarman declined Fortune’s requests for an on-the-record interview to discuss his investing approach or his stake in Highland. Instead, a spokesperson provided a statement. “Baupost’s investment in the Highland Cos. is consistent with our long-term, value-oriented strategy,” the statement reads. “We take our role as a responsible investor seriously.” It goes on to say that Baupost is confident that Highland will proceed in a way that respects the community and environment.

Well, sure, but here’s the bottom line: 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.”

For the rest of this article, please go to the Fortune Magazine website: http://finance.fortune.cnn.com/2012/02/15/seth-klarman-baupost-quarry/