A mining mega-merger
When I met Mr. Munk in Montenegro six years earlier, he was a mere 80 years old and was full of bluster and optimism as he talked about his plans for the future, as if he were an MBA fresh out of school. Gold prices were on the rise and the financial crisis triggered by the Lehman Bros. collapse was still a couple of months away. He and Barrick seemed on top of the world.
At the time, Barrick, the product of 17 takeovers, including Lac Minerals, Homestake Mining and Placer Dome, was the unchallenged gold mining leader. It was on the verge of starting construction of the enormous Pascua-Lama gold and silver mine, with more than 15 million ounces of proven and probable gold reserves and an astounding 675 million ounces of silver.
Mr. Munk was using his fame and fortune – he denies ever reaching true billionaire status – to have fun and make a few extra bucks on the side. The big non-Barrick project was Porto Montenegro, the former Yugoslav naval base that Mr. Munk and several rich partners, among them Russian oligarch Oleg Deripaska and Lord Jacob Rothschild, are turning into a superyacht marina and resort.
In typical Munk fashion, the investment happened through luck and circumstance.
A few years earlier, he was swimming off his chartered yacht in Monaco, felt something strange brush his skin and realized he had had a distasteful encounter with a condom. At that point, he decided to ditch the overcrowded and dirty waters of Monaco, learned about a discarded naval base in clapped-out Montenegro, assembled a team of yacht-loving investors and worked out a killer deal with the government, which allows the owners of foreign-registered yachts to escape fuel taxes when they fill up their floating gin palaces. The project has 200 yacht berths, with another 200 to go. “I’m very proud of it,” Mr. Munk says.
Meanwhile, gold prices rose relentlessly – $1,200 (U.S.) in mid-2010, peaking out at almost $1,900 a year later. Each $100 rise in gold was larding another $750-million onto Barrick’s bottom line. In 2011, profit was $4.5-billion, the level of a big Canadian bank. In spite of the obscene profits, Mr. Munk had no intention of leaving well enough alone. He knew that one-product commodity companies were vulnerable to boom-bust cycles (at the time, he was not aware that the Pascua Lama disaster would accelerate Barrick’s fall from grace).
So he called Ivan Glasenberg, the head of Glencore (whose offices, in the Swiss canton of Zug are not far from Klosters). Mr. Glasenberg is the secretive South African-born accountant who learned the art of commodities trading from Marc Rich of Marc Rich + Co. Mr. Rich made fortunes from trading oil and other commodities but pushed his luck too far and was indicted in the 1980s for racketeering, tax evasion and trading with the enemy – Iran. He was pardoned by Bill Clinton on his last day in the White House in January, 2001, by which time Mr. Glasenberg and his team had taken Mr. Rich’s old shop and were transforming into a commodities-trading powerhouse.
Through its own mines and a controlling interest in Xstrata, the Anglo-Swiss miner that bought Canada’s Falconbridge in 2006, Glencore was emerging as a mining force too. In 2011, Mr. Munk, evidently well aware of the soaring value of Barrick’s shares, which could be used as a takeover or merger currency, started secret merger talks with Glencore.
Mr. Munk’s idea was to create a diversified, Canadian-based mining giant that could compete with BHP, the world’s largest mining group, Rio Tinto, Brazil’s Vale (which bought Inco) and Anglo American. Part of the rationale was financial. A diversified miner would be able to insulate itself from the worst of the cyclical downturns. Gold, for instance, and copper, are countercyclical; the former is bought by investors when economies are falling apart, the latter when economies are posting strong growth. Glencore’s commodities trading and logistics business, a robust money maker regardless of prices, would also protect the enlarged group. The biggest companies also have the best access to the international capital markets, a necessity to sate the voracious capital appetites of mining companies.