Peter Munk confronts Barrick’s ‘perfect storm’

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Barrick Gold Corp.'s quest for growth turned it into the world's largest gold company. Founder and chairman Peter Munk says that's also what helped send it off the rails.

It would be difficult to imagine what more could have gone wrong for Toronto-based Barrick over the past year. It started with the replacement of its chief executive officer in June of last year, followed by a multibillion-dollar cost overrun at Pascua-Lama, the ambitious gold project it is building in the Andes. The company also took a $3.8-billion charge on a highly-criticized copper acquisition. The company's stock price has plunged to around 20-year lows.

"If you add to that the softening of the gold price, if you add to that that we had a major writeoff in our copper business … by the early part of this year, it really felt, it really smelt, and it really looked like, the perfect storm," Mr. Munk told shareholders at the company's annual meeting Wednesday.

And the bad news continued, as Barrick said Wednesday that it would consider suspending the Pascua-Lama project altogether after a court ordered construction halted in Chile amid allegations the project is polluting local groundwater. Experts say a resolution to the problem could be as much as six months away and add up to $500-million to costs. Shareholders also voted against the company's executive compensation plan, amid criticism that a new co-chairman had been paid an exorbitant signing bonus of $11.9-million (U.S.).

Barrick and other global miners are paying the price today for rapid expansions launched in the middle of the last decade.

At that time, mining was among the most highly valued of any sector in public markets, and valuations were several times where they are today. Investors started to abandon the sector around the time that merger mania was taking hold, however, with many of them going to exchange-traded funds for risk-free exposure to rising gold prices.

Barrick was among the leaders of that charge, acquiring rival Placer Dome Inc. for an eye-popping $10-billion in 2006 and adding twelve new mines and a number of advanced exploration and development projects to its global portfolio. In 2011, as copper prices were running near all-time highs, Barrick paid $7.3-billion for Equinox Minerals Ltd.

For Mr. Munk, more growth was simply the Barrick way, and the company could not have predicted the attached risks would materialize as much as they have.

"Barrick grew faster, became larger, attracted the best people and it was natural for us that we were not going to rest on our laurels ... it was our responsibility to do that," Mr. Munk said.

"We shot ourselves in the foot because we could have stayed put in a great financial position, not started Pascua-Lama, not started Pueblo Viejo," he said, referring to the company's flagship projects in Chile and the Dominican Republic, respectively. "Today I think your treasury would be ten, fifteen billion dollars better, with an easier management job. Our political problems would have been minimized to a much more manageable dimension."

"Did we know then that we were going to run into every year, more and more difficulty?" he said. "Did we know then that the same governments who practically begged us to invest in their remote areas to provide jobs, to provide opportunities for education, to provide foreign exchange, to provide for taxes, were going to be changed and newcomers would say, 'who are these foreigners? Why would they take our gold away from us?"

But Mr. Munk said Barrick is far from done.

"I can only tell you very directly that Barrick will not give up," Mr. Munk said, justifying the signing bonus to co-chairman John Thornton as the cost of acquiring a person who can guide the multinational company through global resource nationalism.

The $8.5-billion gold and silver mine is lauded as an impossible feat of mine engineering on the one hand, and a possible environmental travesty on the other because it is built alongside ancient glaciers.

Barrick is also facing troubles in the Dominican Republic, where the government of the impoverished Caribbean nation is demanding a greater share of profits from the $3.7 billion Pueblo Viejo mine, which went into production this year. Dominican President Danilo Medina has called the current deal with Barrick was "unacceptable" and threatened to impose a windfall tax on profits if no deal is reached.

At Pascua-Lama, work was halted in Chile in early April amid allegations from local communities that the project is polluting precious groundwater and rivers in the Atacama desert region. Experts say it could take six months for courts to rule on the case.

"We will not continue to spend capital if we do not have a strong indication of the required time frame to resolve these issues in short order," said Barrick CEO Jamie Sokalsky, as he apologized for a share price trading near 20-year lows. "We are serious about disciplined capital allocation. That means we have to consider all options including the possibility of suspending the project."

To be sure, Barrick is still working on the Argentine side of Pascua-Lama, where it is doing the majority of the construction work associated with the project.

Most of the gold from the future mine is to come from the Chilean side, but Barrick said it was also evaluating an alternative development plan that involves accelerating the development of another smaller pit in Argentina in order to provide a source of ore for initial production. It said it was not in a position to know what impact any changes would have on the capital cost and production schedule of the project.

"If it were my money I'd stop it right now, because the world does not need an extra gold mine right now, and I would just focus on getting the best out of my existing operations and paying down debt," said George Topping, an analyst with Stifel Nicolaus in Toronto.