In an exclusive interview with The Globe and Mail, outgoing Barrick Gold Corp. chairman Peter Munk:
- Blames himself for getting caught up in the metals mania.
- Outlines four factors that damaged Barrick in recent years.
- Vows Barrick will emerge as one of the world’s diversified mining titans.
It was spring 2011, and a frenzy had gripped the mining industry.
As China consumed ever-growing amounts of copper, gold, nickel and other metals, prices were breaking records and mining companies were launching multibillion-dollar deals. The mantra in the resource sector was “growth, growth, growth.”
Barrick Gold Corp. was readying its arsenal. With gold prices flying high, the company earned a record $3.3-billion (U.S.) in 2010. The gold producer had the strongest credit rating among its peers, and everywhere Barrick chairman Peter Munk turned, brokers were offering to lend the company billions of dollars at low financing rates.
At the time, the large Lumwana copper property in Zambia owned by Toronto-listed Equinox Minerals Ltd. was a coveted prize for industry’s big base metals players. As a gold company, Barrick was not seen as a likely bidder.
But when China’s Minmetals Resources Ltd. offered $6.3-billion (Canadian) to acquire Equinox, the situation proved too tempting for Mr. Munk.
Barrick launched a blowout bid of $7.3-billion in cash for Equinox in April, 2011, a staggering amount that clinched the deal.
It didn’t go well.
Early this year Barrick announced a $3.8-billion (U.S.) writedown largely tied to Equinox, an acknowledgment that it far overpaid for the company.
Now Barrick is a wounded company, its former strength sapped by poor acquisitions and mine developments gone horribly wrong. China’s growth has cooled and the metal mania has long faded. Barrick has suffered big losses, its credit rating has been slashed and its once-pristine balance sheet is heavy with debt. Its stock price, at $16.72 (Canadian) Wednesday, has retreated to levels seen 20 years ago.
Mr. Munk looks back at the Equinox era, when companies were madly acquiring rivals with the belief that metal prices would endlessly soar, and puts the blame squarely on himself.
“We bought Equinox to increase our copper. And that was my first major mistake – entirely attributed to hubris,” Mr. Munk said in an exclusive interview with The Globe and Mail.
“The very fact that I accepted that stupidity … that I kept on believing, because everyone kept on saying gold goes up. I should have known,” he said.
Barrick announced Wednesday that Mr. Munk will hand over the chairmanship of the company he founded in 1983 to former Goldman Sachs president John Thornton at the next annual meeting of shareholders.
The company also shook up its board, which has been criticized for not exercising enough independence from Mr. Munk. Long-standing board members Brian Mulroney, a former prime minister of Canada, and Howard Beck, a lawyer who has served as a director since Barrick’s inception, will also stand down at the annual meeting. The board nominated four new members, including Bay Street veteran Ned Goodman.
The timing of his exit is tough for Mr. Munk, who built Barrick up from nothing into the world’s largest gold producer, a stunning achievement in a country that features few global industry leaders.
“We’ve had a rough year, rough 18 months I say. But equally, as I keep on telling my children, and any business school I am asked to speak to, you don’t go through being a hero year after year without encountering the odd rough days,” Mr. Munk said from his office on the 37th floor of a Bay Street skyscraper.
But whatever problems Barrick is sorting through now, Mr. Munk remains steadfast that Barrick will eventually grow to be on par with the very biggest of the world’s diversified mining giants such as Rio Tinto (often called RTZ) and BHP Billiton.
“I really believe that Barrick’s destiny is the North American RTZ and BHP, and that’s what it will be without a shadow of a doubt.”
A gold giant is born
Peter Munk had been a contrarian investor all his life. His first business was an idea he hatched with friend David Gilmour to create newfangled stereo systems from Canada, which became a must-have for the likes of Hugh Hefner and Frank Sinatra.
When that fizzled out, they decided to start a hotel chain in Australia and Asia because Hilton and all the other major hotel chains were already established in North America.
Then when the price of gold took a nosedive in the early 1980s from a high of $850 (U.S.) an ounce to just above $400 an ounce, Mr. Munk and Mr. Gilmour decided that this was the time to start a gold company.
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.
“Please remember this has been our 28th year in mining. … We started off with one goddamn mine at Wawa, Ont., and we are now the biggest in the world with 23 mines. [Major cost overruns] never happened. It happens now? When you have the most sophisticated people and you’ve got unlimited financial resources and top management? How could that happen? It was incomprehensible to me.”
The Equinox deal
The Equinox deal was part of Barrick’s evolving philosophy to diversify beyond gold.
Barrick CEO Aaron Regent at the time told media that there was merit to diversification, and Mr. Munk as well thought the company needed another metal to help mitigate a downturn in gold prices.
“Nothing is more volatile than commodities, and so I begged my board, that guys, you just got to move into other areas, and you got to take advantage of this fabulous share price and then broaden the base, so when one commodity goes down for some reason, the other one maintains you and vice versa,” Mr. Munk said.
Two of Barrick’s directors initially panned the proposal. Others agreed it was a good idea, including Nathaniel Rothschild, a member of the Rothschild family, who was excited because he thought Equinox would generate $1-billion in cash flow. In the end, the board unanimously agreed to acquire the copper company.
Equinox’s management would have accepted Barrick shares instead of cash, but some Barrick board members did not want to dilute Barrick’s shareholder base and thought it would be wise to take advantage of the cheap capital. The company borrowed $6.5-billion (Canadian) and used some of its existing cash to buy Equinox.
Equinox’s Lumwana copper project in Africa was well known in the industry. Newmont had expressed an interest but never made a bid. China’s Minmetals quickly retreated, saying it did not see the value at Barrick’s price.
“But this is where Munk should be hung, that I fell for that, because it was conventional wisdom” that metals prices would continue to soar, Mr. Munk said.
“Things are good, that’s when you’ve got to pay attention, that’s when hubris takes over, the self-confidence, that oh of course you follow exactly what everybody says.”
It was downhill from the moment Barrick bought Equinox. Shareholders and analysts were confused. Why did Barrick buy a pure copper company? Was there a change in strategy?
In June, 2012, Barrick fired Mr. Regent, citing disappointment in the company’s stock price, and appointed its chief financial officer Jamie Sokalsky as CEO.
At the same time, Barrick appointed Mr. Thornton as co-chairman – a move that took shareholders and some of Barrick’s managers by surprise.
The bad news continued. In 2013, the Dominican Republican government threatened to halt shipments from Barrick and Goldcorp’s Pueblo Viejo mine. The companies renegotiated a deal that gave the Caribbean country a larger share of the royalties.
In late April this year, Moody’s downgraded Barrick’s credit rating to the second-lowest investment-grade rating and Standard & Poor’s downgraded the gold producer to the lowest investment-grade rating, one above junk status.
Barrick was warned. The company had too much debt and had to fix its balance sheet or its borrowing costs would become prohibitive.
All the while, investors were becoming more vocal about Barrick.
Canadian pension funds, traditionally a quiet bunch, issued a public statement denouncing Barrick’s decision to award Mr. Thornton with a $11.9-million (U.S.) signing bonus.
Mr. Munk reached out to his institutional investors. Some of the big investors visited Mr. Munk in his office.
Mr. Munk said he tried to explain to his shareholders that he had to pay the signing bonus because he was competing with major private equity firms in New York. But his sales job fell flat. Investors still voted overwhelmingly against the pay package at Barrick’s annual meeting of shareholders this year.
Barrick insiders describe Mr. Munk as domineering on the board and say members often acquiesced to the chairman.
“He is a very charismatic individual, I can see the board having difficulty saying no, because he is charismatic,” said Pierre Lassonde, Newmont’s former president, who has known Mr. Munk since Barrick acquired Goldstrike.
Mr. Munk agrees that he has a strong personality but denies the accusation that he controlled the board, where his son Anthony Munk is also a director.
“Am I strong, articulate and pushy? Guilty on all three accounts. Does that mean that because I am pushy I am going to convince somebody who has known me as long as Howard Beck if he doesn’t think I am right?” he said.
“As much as you have heard opposite things that I am an oppressive control freak, you must give enough human credibility and dignity to my board that if I say something that is wrong that every one of them will stand up and say: ‘It is wrong, Peter Munk.’ ”
“Does that mean that we don’t fight?” he continued. “That’s what I want. I want debate. I want to foster a diversity of opinions.”
“What makes me admit of being very articulate and very passionate, how else can you build a company? You want me to be a wilting flower? I mean, wilting flowers don’t build companies.”
When all the problems hit, investors wondered “What’s wrong with Munk, he must be a demonic dictator to his board that he has people there for 20 years 30 years, they must be nothing but figureheads who just nod. They have forgotten that the same figureheads for 25 years helped build Canada’s most successful company. Nothing has changed,” Mr. Munk said.
Trophies to Barrick adorn the shelves of Mr. Munk’s dimly lit office, with views to Toronto’s east end, where he once knocked on doors selling vacuum cleaners. There are pictures of Bob Smith, Mr. Munk’s wife and children, and others of Mr. Munk with various members of his board and world leaders.
Part of his grand plan is to align Barrick closely with China. He believes it is in China’s interest to diversify its access to resources, and he foresees the Asian country working in tandem with Barrick on projects such as Pascua Lama. For that reason he courted Mr. Thornton, who first started dealing with China’s vice-premier at the time Zhu Ronghi in 1994 when he was at Goldman Sachs.
Mr. Munk’s interest in China stems back to the 1990s when there was little talk about the potential of China’s economy. Mr. Munk and Paul Desmarais, the late chairman of Power Corp. of Canada, travelled to Beijing to pitch the Chinese on developing gold mines. The idea fell flat at the time, but has since become the number one focus for Mr. Munk. A framed photo of Mr. Munk, Mr. Desmarais and Mr. Mulroney meeting with the former Chinese premier Li Peng in Beijing is prominently displayed in Mr. Munk’s office.
Mr. Munk has wanted to transform Barrick into a North American mining powerhouse of the likes of Australia’s BHP Billiton, Anglo-Australian Rio Tinto, and Brazil’s Vale SA, three of the largest resources companies in the world.
“Look England has got RTZ [Rio]. Australia has got BHP, South Africa has got Anglo, Latin America has got Vale and there, in the middle of a mining country, in the middle of the largest capital pool, North America, of the world, the second-largest consumer of all the raw materials and we have don’t have a single …,” Mr. Munk says, his voice rising as he shows the passion and oratory that has made Barrick annual meetings an attraction for shareholders for years. “Everyone has left, Inco has left, everyone is going bust, because there is nobody here who had the ability, the determination and the vision – the vision to create a North American entity.”
Nearly every big Canadian mining company has been taken over by foreigners. Inco was taken over by Brazil’s Vale. Falconbridge went to the former Swiss-based Xstrata, and Alcan to Rio Tinto.
“What happened to Inco, Falconbridge and all the others, it ain’t going to happen as long as I am alive,” Mr. Munk vowed.
Mr. Munk said Barrick will always be headquartered in Toronto, the city that became his home after he fled the Nazis in Budapest in 1944. His voice lowers as he talks about his gratitude for Canada, a country that accepted him and eventually his grandfather, his mother and her husband. Mr. Munk says his number one debt is to this country. His friends point to his Order of Canada as one of his proudest achievements. Mr. Munk has donated upwards of $160-million (Canadian) to various Canadian institutions through his charitable foundation.
Equinox and the past 18 months have tarnished Mr. Munk’s tenure at Barrick. But RBC’s Mr. Nixon said people should look at the entire picture. “He took a company and basically set out to build the biggest gold company in the world and did it. That is something that is not only difficult but special in terms of business leadership,” Mr. Nixon said.
Seymour Schulich, a former mining executive and Newmont director, calls Mr. Munk a great Canadian. Mr. Schulich, also a well-known philanthropist, recently bought Barrick shares and says he is a long-term investor in the company. “The underlying assets are very, very good,” Mr. Schulich said.
Mr Munk is pensive as he reflects on his legacy at Barrick.
“If nobody would try, of course nobody would make it,” Mr. Munk said.
“I must have given 25 lectures at business schools and my theme number one is: dream big, dream big. Put all your efforts into realizing your dreams. Be aware that many of you will fail and do not be afraid of failure. Failure can be ennobling. Failure can be the biggest teacher you have ever had.”
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