Less than two years ago, Barrick Gold Corp. stunned the mining world by acquiring Equinox Minerals Ltd. for a staggering $7.3-billion in cash.
The deal was a head-scratcher then – a gold company buying a copper miner – and an even bigger one now. The mining giant just wrote off $3.8-billion related to the acquisition, over half of the total purchase price.
Barrick isn't alone in its boondoggle. Late Wednesday, Kinross Gold Corp. erased another $3.1-billion from the value of its Tasiast gold mine, bringing the total writeoff on the asset to $5.5-billion. The Tasiast mine was acquired as part of purchase of Red Back Mining Ltd. for a total price of $7.1-billion. You do the math.
Then there's Cliffs Natural Resources' recent $1.1-billion (U.S.) writeoff stemming from its acquisition of Consolidated Thompson Iron Mines Ltd.; Newmont's $1.6-million writedown last year on its Hope Bay project in Canada; and Agnico-Eagle Mines Ltd.'s $645-million (Canadian) writedown on its Meadowbank project in Nunavut.
Add them all up, and you'll see over $12-billion has been erased from mining assets either in Canada or owned by Canadian companies. (There are other tangential examples as well, such as Walter Energy's recent $1.1-billion writeoff that came after acquiring Western Coal Corp.) The pain is widespread, too. The disappearing billions stretch from gold to copper to coal to iron ore assets.
The numbers are proof that CEOs didn't learn their lesson during the financial crisis. Two major gold miners have written off more than half of their big post-crisis acquisitions, and Cliffs erased a quarter of $4-billion purchase price it paid for Consolidated Thompson.
The pain is felt globally, too. ArcelorMittal recently wrote off $4.3-billion (U.S.) of its European operations – though that stems from its mega 2006 merger – and BHP Billiton Ltd. just wiped out $2.8-billion of the $4.75-million purchase price it paid for Fayetteville shale gas assets that the behemoth acquired only 18 months prior.
Look, CEOs are going to make mistakes. But these aren't one-off writedowns, which are bound to happen from time-to-time; because there are so many, this is clearly a case of groupthink. CEOs somehow got it in their heads that they needed to buy something as the markets heated after the crisis, and there was no listening to anyone who sounded the alarm – not even someone in their own industry. Remember that in March 2011, David Garofalo, the head of HudBay Minerals warned that there wasn't a brewing commodity supercycle. "We think that scale for the sake of scale generally tends to be very value destructive," he said at the time.
Not only did so many CEOs ignore calls like his, they justified their purchases with narrow-minded reasoning. Remember Aaron Regent's reasoning for buying Equinox: "It is very rare that assets like this come on the market." Yes, it is rare. But that doesn't mean you need to overpay for them.
Of course, he had an explation for the purchase price too. "Most of the long-term copper price assumptions that are being used right now we think are understating what is going to happen," he said on a conference call justifying the acquisition. How quickly those assumptions can change.
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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