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Peter Munk (Chris Young/Globe and Mail)

Peter Munk

(Chris Young/Globe and Mail)

Peter Munk: A mining magnate nears the end of his golden reign Add to ...

On a chilly evening in early March, Peter Munk picks me up from my hotel in his tiny Fiat Punto, manual transmission, that he drives himself. His wife Melanie is stuffed in the back and our destination is the local schnitzel restaurant, where the Munks are treated like anyone else in Klosters, the Swiss ski village near Davos.

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What a change. The last time I spent more than a few minutes with Mr. Munk was in 2008, in Montenegro’s glorious Bay of Kotor, the Mediterranean’s only fjord. We were on his chartered superyacht, the 50-metre Te Manu, a nautical pleasure palace with a crew of 11 that would have made any oligarch proud.

Has Mr. Munk, the founder, co-chairman and former chief executive officer of Barrick Gold Corp., fallen on hard times since then? Yes and no.

At $27-billion, Barrick is worth less than half of its peak in 2011, just before the gold price collapsed and the financial horror of the company’s now-suspended Pascua-Lama mining project in the Andes was exposed. Mr. Munk’s wealth has declined along with the share price (although he owns only 2.1 million common shares), but certainly not to the point where he is flying economy and forgoing oysters and champagne.

Instead, the Fiat represents the new, simpler life of the Hungarian emigrant to Canada who turned a motley collection of gold assets into the world’s mightiest gold producer. Mr. Munk will leave the Barrick board at the company’s annual shareholders’ meeting in Toronto on April 30, after which John Thornton will go from co-chairman to chairman. The Barrick board meetings, endless encounters with institutional investors and phone calls at three in the morning will disappear, along with many of the perks that went with his status as one of the world’s most powerful mining bosses. The little Fiat will get driven more often. The vacations in Klosters, which the Munk family considers home, and Montenegro will get longer.

The transition could save his life or kill him. Mr. Munk is 87 and has been equipped with a pacemaker for more than a decade. His famous energy is draining away and he knows he can’t do the job any more. At the same time, the man who spent more than half a century building businesses on five continents could find that retirement bores him rigid, or worse. “Leaving Barrick is like a Chinese restaurant, sweet and sour,” he says “Sometimes you feel sweet in your mouth, sometimes sour. I live it – Barrick is me. But I have heart issues. I can’t travel like I used to.”

I ask if he’s worried about his health. “I don’t mind dying,” he says. “I just don’t want Barrick to die.”

Indeed, Mr. Munk is worried about Barrick’s future. A couple of years ago, before Mr. Thornton, a former Goldman Sachs president, joined the Barrick board, he and Ivan Glasenberg, CEO of Glencore International (now Glencore Xstrata), talked about merging their companies. Mr. Munk’s idea was to create a fully diversified multinational that could withstand the jarring ups and downs of the commodities cycle.

If that had happened, the world’s biggest gold mining company and the world’s biggest commodities trader would have formed a global resources giant to rival BHP Billiton and Rio Tinto, with a market value (based on today’s values) of about $67-billion (U.S.). “It would have been a perfect combination,” Mr. Munk says.

Mr. Munk talks to me from the living room of his Klosters chalet, which is called Viti Levu, after the Fijian island where he and partner David Gilmour started the Southern Pacific Hotel chain in the 1960s. The woody chalet is large and comfortable, with a heated pool in the basement, but is far from ostentatious. Its best feature is the magnificent view of Gotschnagrat Mountain, which the Munk family has skied since the 1970s.

Mr. Munk stopped skiing two years ago, because of his heart, and it was a big blow to his recreational life; he had skied every year for 71 years. Melanie, his second wife, and their five children – two with his first wife, Linda, two with Melanie, and one adopted – keep the family tradition going. The walls are decorated with enlarged photos of the skiing Munks. Melanie keeps a large family scrapbook in the living room and shows me the newspaper articles about the ski disaster in March, 1988, when a Gotschnagrat avalanche severely injured the wife of her cousin Charles Palmer-Tomkinson, who was skiing with Prince Charles, and killed Major Hugh Lindsay, one of Charles’s best friends. On separate occasions, Mr. Munk and his wife have broken bones on the runs, which are considered among the most challenging in Europe.

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.

But Mr. Munk’s desire to transform Barrick into a BHP was also emotional, which does not necessarily mean it was driven by shameless ego. Mr. Munk decried the loss of Inco, Falconbridge and Alcan to foreign takeovers during the great Canadian selloff in the middle part of the last decade (which also saw Stelco, Dofasco, Algoma Steel and a raft of energy companies vanish). At one point, during the “hollowing out” of Corporate Canada, he charged into the Toronto offices of The Globe and Mail to tell the editorial board that the sales would damage Canada’s ability to compete globally and that they should be reviewed carefully by the federal government.

When Mr. Munk talks about vanishing companies, he leaps out of his chair in the chalet and paces back and forth, raging like a Fortune 500 King Lear. He rattles off the names of global companies in small countries – Nestlé in Switzerland, Volvo in Sweden, Philips in the Netherlands. “Why don’t we have one?” he says. “Why the hell should the Brazilians take our best nickel company?”

Mr. Munk claims a merged Barrick-Glencore would have kept its Canadian identity even if Mr. Glasenberg became the boss. The trading division would have been headquartered in Switzerland, the mining in Toronto (the hometown of Mr. Glasenberg’s wife). However, the merger idea never made it beyond the offices of Mr. Munk and Mr. Glasenberg. Mr. Munk says gold “didn’t fit into the trading pattern” of Glencore, which uses ships and warehouses to trade coal and other bulk commodities. “It’s also not easy to get two cultures together and there would have been a great amount of resistance from my shareholders, to switch them when there was a runup on the gold price. It would be very difficult [for them to contemplate] that the future cannot be in gold alone,” he says.

But Mr. Munk got a sort of consolation prize in the form of John Thornton, who shares his ideas that Barrick should become bigger and more diversified. “Operating under the Canadian flag is a huge competitive advantage,” Mr. Thornton says in phone interview. “The priority is to be the world’s leading gold company and to be the leading, or a leading, copper company.”

A disastrous mining project

Mr. Thornton was Goldman Sachs’s president and co-chief operating officer until 2003, after which he delved headfirst into China. He served as a director of HSBC Holdings, the bank whose roots are in China, until 2013, sits on the international advisory council of China Investment Corp. and is a professor at Beijing’s Tsinghua University. He was appointed co-chairman in early 2012 and awarded a $11.9-million (U.S.) signing bonus whose disclosure a year later, when gold prices were sinking and Barrick got whacked by a $4.4-billion after-tax impairment charge, enraged shareholders. They voted against it, but since the vote was not binding, the payment went ahead.

Mr. Munk defends his man to the hilt, noting that the signing bonus was small compared to Barrick’s market value and arguing that Mr. Thornton is the right man to turn Barrick into a global mining leader. “It took me years to find John Thornton,” Mr. Munk says. “He wants to build a global entity.”

If falling gold prices were the only problem facing Barrick, Mr. Munk would be leaving it relatively unscathed. But he is not – Pascua Lama took the shine off his golden rule and delivered the message that the company needs to learn a thing or two about mine development in difficult terrain. The ultimate insult came when the market values of Vancouver’s Goldcorp and Barrick converged. At last count, Barrick’s Toronto stock exchange value was $27-billion (Canadian), Goldcorp’s $25.8-billion. The minor difference becomes shocking when you realize that Goldcorp’s annual production, at 2.67 million ounces in 2013, was well less than half of Barrick’s 7.66 million ounces.

Investors, in other words, are valuing Goldcorp’s per ounce production much more highly than Barrick’s. That will have to change if Barrick is to regain the confidence of investors. To do so, Mr. Thornton and Jamie Sokalsky, the CEO who replaced Aaron Regent, who took the fall for the Pascua-Lama disaster, will have to ensure that Pascua-Lama’s development costs are tightly controlled once mine construction resumes and that a cost blow-out like Pascua-Lama never happens again. “Priorities one through five are operational excellence,” Mr. Thornton said.

When Mr. Munk talks about Pascua-Lama, his otherwise strong voice falls to a whisper and he slumps in his chair. Indeed, the scale of the disaster is hard to fathom. In 2013, Barrick reported a loss of $10.4-billion (U.S.), due largely to the writedowns related to Pascua-Lama and the overpriced 2011 purchase of copper producer Equinox Minerals.

What went wrong? To this day, Mr. Munk insists he doesn’t know how the costs soared to outrageous levels and why corrective measures were not taken earlier. It’s a classic mystery: Who knew what when? “I could not believe the day [in 2012] when I was told we could be multibillion dollars over budget,” he says. “For 30 years, we never missed a budget.”

Pascua-Lama is located at a height of 5,000 metres in the Andes, on the southern reaches of the Atacama Desert. Because of the dizzying elevation, location in two countries and proximity to glaciers, it presented a unique geopolitical, engineering and construction challenge. The air is thin and the high winds and low temperatures can be vicious. Feeding the thousands of workers and removing the garbage and human waste they produced proved to be a hideously expensive logistical nightmare. “Every hour of productive work required probably five hours of work to keep [the employees] up there working,” Mr. Munk says.

As Barrick was building, the environmental regulations multiplied. “Each new rule brought the need to build another wall,” he says. “Resolving each and every one of them resulting in more building. The cost of building escalated to the point it was unreal.”

The development costs went to $8-billion from the initial $3-billion estimate (about $5-billion has been spent so far). By last autumn, Barrick had had enough and put the project into cold storage. It plans to revive it once gold prices recover and it figures out a ways to control the costs. Bringing in a development partner to spread the risk and the workload is one idea that is gaining currency within Barrick’s executive offices.

Enter Mr. Thornton, who is impeccably connected in China. “One thing would be to consider the Chinese as operational partners either for Pascua Lama or the other mines,” he says, referring to the other five big deposits nearby. “The Chinese are very good at bringing in projects on time and on budget.”

Mr. Munk refers to a “specific event” that he and Mr. Thornton had hoped to announce by now. He won’t say what it was, though it may have been news about a Chinese partner or possibly the sale of African Barrick. Barrick tried to sell African Barrick, Tanzania’s biggest gold producer, to China National Gold Group, but those talks collapsed last year. Since then, Barrick has been paring back its controlling stake in African Barrick, although an outright sale of the remaining 64-per-cent investment is not out of the question.

The “event” could also been the purchase of a large gold producer. But given the sharply reduced value of Barrick shares, their use as a takeover currency has vastly diminished.

Mr. Munk has a month left on the job. He will no doubt step down from the board with a standing ovation at the annual general meeting. In spite of the Pascua-Lama fiasco, he did build the world’s biggest gold company and, for prolonged periods, created a lot of wealth for shareholders. He also spared Toronto from mining company oblivion during the hollowing-out era. While he lived well, he did give away much of his wealth – $200-million (Canadian) and counting – to good causes, such as the Peter Munk Cardiac Centre at Toronto’s University Health Network.

Barrick will never be far from his heart. He hopes Mr. Thornton and the senior executives will ask his advice on how Barrick can evolve into a global mining champion. He would love to see Barrick achieve that status before he goes to the great golden ore body in the sky. “Barrick is my legacy,” he says. “The thing is to leave something behind that is meaningful, especially for me. I’m an immigrant. I owe Canada. Canada gave me everything I have.”

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