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Canadian businessman and philanthropist Peter Munk (Fernando Morales/The Globe and Mail)
Canadian businessman and philanthropist Peter Munk (Fernando Morales/The Globe and Mail)

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Exclusive interview: Peter Munk on ‘hubris,’ ‘stupidity’ and the future of Barrick Gold Add to ...

Mr. Munk had no mining experience, but he had dreams of building the biggest gold miner. He started small, buying a stake in a tiny gold mine near Wawa, Ont., in 1983. A year later, Mr. Munk bought Camflo Mines, a company led entirely by miners that was essentially bankrupt because it had been so badly run. Regardless, Mr. Munk identified Camflo as a gem. In it he saw an opportunity to marry his business expertise with a team of experienced miners, including Bob Smith, a Canadian mining hero who eventually became Barrick’s president.

Barrick then literally struck gold in 1986 when Mr. Smith gave Mr. Munk his blessing to buy Goldstrike, a mine in Nevada that was deemed problematic but turned into one of the best gold mines in the industry’s history and helped vault Barrick into the big leagues.

Barrick was methodical. It made one strategic move after another. In 1994, it bought Lac Minerals and expanded into South America. In 2001, it bought Homestake Mining Co., one of the oldest gold producers, and moved into Australia.

Barrick had a policy of selling a portion of its production at fixed prices to protect the company against a drop in gold prices. That hedging program underpinned the company’s success in the 1990s.

And then in 2006, Barrick launched one of largest mining deals at the time and bought Vancouver-based Placer Dome for $10.2-billion. That acquisition propelled Barrick to become the world’s largest gold producer with 27 mines on five continents.

Cracks below the surface

The early part of this millennium were heady days for gold companies. Bullion had started its ascent, and Barrick was set to profit from the boom.

But the ground was slowly shifting beneath Barrick. Acquisitions and policies that made Barrick successful in the 1990s started becoming problems, and its disciplined execution of mine developments gave way to a relentless pursuit of growth.

Barrick’s gold hedge program, which protected the company when bullion traded below $300 an ounce, made it difficult for the miner to capture gold’s higher spot prices. It took Barrick nearly a decade to unwind its hedge book during the 11-year bull market on gold.

As gold prices rose, Barrick embarked on plans to develop the Pascua Lama gold mine that it got with the Lac Minerals acquisition. At the time, the mountaintop mine on the border of Chile and Argentina, was projected to cost about $3-billion to develop with production slated for early 2013. With 18 million ounces of gold, it would be one of the largest gold mines in the world.

But work at Pascua Lama dragged on for years amid difficult negotiations with unions and regulatory delays, and the mine plan proved more complex than Barrick anticipated. Pascua Lama’s costs skyrocketed to more than $8-billion, while the project ran into environmentalist and political opposition.

Mr. Munk raced to fix his company. He flew to Argentina this year to talk to the country’s President, Cristina Kirchner, about suspending Pascua Lama. He tapped his high-powered network of financial advisers to figure out a course of action.

In the fall of this year, at a lunch at the Toronto Club, one of Mr. Munk’s regular restaurants located a few blocks away from Barrick’s headquarters in downtown Toronto, Mr. Munk, Barrick’s CEO Jamie Sokalsky, Royal Bank of Canada CEO Gordon Nixon and RBC’s deputy chairman of capital markets Jamie Anderson discussed options for strengthening Barrick’s financial position.

RBC advised Barrick to raise funds. “Strengthening their balance sheet was very important to the future of the organization. So obviously we would have advised them of such,” Mr. Nixon said in an interview. As of the third quarter, Barrick had nearly $15-billion in long-term debt.

On Halloween, Barrick suspended construction of Pascua Lama indefinitely and said it would raise $3-billion in an equity offering at $18.35 a share to pay down its debt load.

It was one of the largest equity offerings in Canadian history. The largest was also done by Barrick, when it raised funds to wind down its hedge book. On a table in Mr. Munk’s office, a bronze bar plated in 24-karat gold is stamped: “Largest Canadian equity offering, $4,026,164,375, September 15, 2009.”

At 86 years old, the elegantly dressed Mr. Munk is spry and sharp of mind in the interview. He talks openly and extensively about Barrick’s situation, listing four factors that have hurt the company: The Dominican Republic’s decision to force the company to renegotiate terms after Barrick and Goldcorp Inc. spent billions building the Pueblo Viejo gold mine; Barrick’s all-cash bid for Equinox; the slump in gold prices; and Pascua Lama.

“That is such a major fiasco. Many projects since then have doubled or tripled in cost but Pascua Lama to go from 3.6 [billion to $8.5-billion]… It hit me, first time I thought since Barrick, I should commit suicide. I couldn’t believe that this was happening in our company. It was the most unbelievable event,” he said.

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Barrick vs. Spot Gold

1. The beginning

May 1983: Barrick Resources goes public. Controlled by Peter Munk and his partner David Gilmour, the firm holds mainly oil and gas exploration assets, with a few gold interests.

July 1984: Barrick buys Camflo Mines, a Toronto company that has gold mining operations in Quebec; its first substantial gold asset.

Dec. 1986: Barrick buys the Goldstrike mine in Nevada, which proves to be an enormous gold resource. The company now owns six North American gold mines.

2. Early success

August 1994: Barrick buys Lac Minerals for $2.3-billion, after winning a bidding war with rival Royal Oak Mines. This makes it the world’s third-largest gold producer

3. Mergers and acquisitions

June 2001: Barrick merges with Homestake Mining in a $2.2-billion deal, creating the world’s second largest gold producer.

Oct. 2005: Barrick launches a hostile bid to buy Placer Dome. When the $12.1-billion deal closes in early 2006, Barrick is the largest gold company in the world.

May 2007: The company eliminates the last of its hedge contracts, allowing it to take full advantage of gold price increases (and exposing it to falling prices).

4. Trouble on the horizon

April 2011: Barrick launches $7.3-billion takeover of copper producer Equinox Minerals, only to write down half of that value two years later when copper prices slump.

June 2012: CEO Aaron Regent is fired after four years on the job, a period when the Barrick share price stagnated despite a big jump in the price of gold.

5. The decline

Oct. 2013: Barrick halts construction on its Pascua Lama gold and silver project that straddles the border between Argentina and Chile, and launches a $3-billion stock sale.

Dec. 2013: Barrick announces that Peter Munk will step down as chairman at the next annual meeting, in 2014.

Chart shows daily closes. Index: Feb 25, 1987 = 100
Graphic by Richard Blackwell and John Sopinski
Source: Bloomberg

 
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