You have to feel a twinge of sympathy for Aaron Regent after he was sacked as chief executive of Barrick Gold Corp. on Wednesday morning. His error? Failing to ignite Barrick’s share price during his three years on the job.
That puts him in good company.
Since Mr. Regent was appointed chief executive in 2009 the shares have bounced around, but they ended the era unchanged. By comparison, gold has surged more than 90 per cent over the same period, leaving investors asking a basic question: Why bother with the world’s biggest gold producer when you can do considerably better by owning gold itself?
Presumably, Barrick founder and chairman Peter Munk – who pointed to the disappointing share price performance in announcing the management change – was getting tired of trying to answer that question. And when shares disappoint, somebody has to take the fall.
“The objective of any corporation should be to maximize shareholder value,” said Steve Foerster, a finance professor at the Richard Ivey School of Business at the University of Western Ontario. “And since CEOs are in a position to set a strategic direction, they bear the ultimate responsibility.”
But while shareholders have every reason to feel frustrated by Barrick, its share price hasn’t been lagging its gold-producing peers.
Over the past 12 months, the shares have fallen 6 per cent. That’s actually considerably better than the 11 per cent decline for the 16-member NYSE Arca Gold Bugs Index. Indeed, only four companies within the index have seen their shares rise over the past year.
And over the past five years, Barrick’s share price has beaten the performance of its index peers by more than 10 percentage points.
The fact is, most gold producers have been lagging the price of gold in a big way in recent years – a phenomenon that extends to other miners as well.
Indeed, the divergence between commodities and commodity share prices is so strong that PricewaterhouseCoopers entitled a 60-page report on global mining “The Growing Disconnect” – curiously released on the same day Mr. Regent was fired.
In it, they note that the world’s 40 biggest mining companies saw profits rise 21 per cent last year to a record $133-billion (U.S.) – yet market capitalizations (the value of outstanding shares) fell 25 per cent.
John Gravelle, PwC’s mining industry leader for Canada and the Americas, argues that this remarkable disconnect is caused by chief executives and shareholders having very different perspectives right now.
Top managers have a long-term bullish view on commodities and are investing money to increase the supply. On the other hand, shareholders are worried about the impact of a slowing global economy, and want commodity producers to hand over more cash in the form of dividends or share buybacks.
“There are a lot of things spooking investors now that are out of the CEOs’ control, like Europe,” Mr. Gravelle said. “People don’t know what the global economy is going to look like if we start seeing financial institutions collapse in Europe.”
If he’s right, expect Barrick’s new chief executive to step away from deal-making and appeal to shareholder demands by turning on the dividend taps.
That might not be such a bad thing. But it makes you wonder: If Barrick still has a long-term bullish on the price of gold, why cave in to a pessimistic shorter-term view from shareholders?