Peter Munk’s final play - Macleans.ca
 

Peter Munk’s final play

Barrick Gold founder fends off revolt and fights for a legacy


 

Chris Young / CP

Back in 1996, Peter Munk sat down with one of his biographers and laid out his 34 “golden rules” for success in business. Some of them offer practical advice: “Always leave something on the table in a public issue. If you push for the last penny, it may hurt you the next time around.” While others border on fortune-cookie wisdom: “Time is short. If you want to achieve much, you’ve got to run.” Taken all together, the list seems less like a coherent corporate philosophy than an odd mélange of exhortations to take risks and calls for fiscal prudence. But there was also an element of prophecy—at least when it comes to the current fortunes of the celebrated 85-year-old entrepreneur. “If you want to dream big, expect big problems,” states rule 30. “Big dreams challenge the fates.”

From its humble beginnings as an oil and gas play in 1983, Munk’s Toronto-headquartered Barrick Gold Corporation has grown into the world’s largest gold producer, with 24 mines operating on four continents, five more in development and ore reserves estimated at more than 140 million ounces. Characterized by the relentless pace and sheer scale of its acquisitions, including a 2011 foray into copper with the $7.66-billion takeover of Equinox Minerals Ltd., the company had been a darling of investors for more than two decades. At its peak in 2011, Barrick was trading at $53 a share and had a market capitalization of $54 billion.

Now, after months of declining gold prices, a second-quarter loss of $8.6 billion and writedowns on its projects that total more than $13 billion so far in 2013, the stock is trading around the $19 mark, and the company is worth closer to $20 billion. Stumbling under $11.6 billion in debt, Barrick has slashed its dividend by 75 per cent and is vowing to cut costs and its workforce. It recently struck deals to sell its investment in Alberta oil and gas—at a $500-million loss—and three underperforming Australian gold mines for $300 million. But the moves are proving to be far too little and way too late to placate angry shareholders. They first showed their displeasure at the annual general meeting last April, voting 85 per cent against a $17-million pay package, including an $11.9-million signing bonus for John Thornton, who now co-chairs the board with Munk. (Aaron Regent, Barrick’s CEO, was given a $12-million kiss-off in June 2012 after five years of service and replaced by Jamie Sokalsky, formerly the company CFO.) And last week, word leaked out of efforts by activist funds in the U.S. and Europe to bring together the company’s largest investors to force a purge of the board, and finally usher Munk—who has been promising to disengage for years, and now owns just 0.2 per cent of the shares—out the door.

“I think the fundamental problem is that Barrick is really run like it’s Munk’s personal company,” says Mike Morris, a fund manager at Two Fish Management LLC, the Indianapolis firm that is leading the charge. “He wants a legacy. But when you don’t own any shares, you don’t really care.” Morris has been circulating a 72-page study he prepared on Barrick’s performance versus its major rivals. He points to the $292 million in compensation paid to the company’s executives and board members between 2007 and 2012—$93 million in 2012 alone, a year when returns dipped 21 per cent—as far surpassing industry standards. (Munk, who saw his base salary as co-chairman rise 67 per cent to $2.5 million, took home a total of $4.3 million in 2012. Former prime minister Brian Mulroney, the board’s senior adviser, global affairs, appointed by Munk just after he left office in 1993, received $2.5 million.)

And even over the unprecedented 12-year market run on gold, which came to a screeching halt this past April, Morris argues that Barrick underperformed, offering a 10-year annualized return of two per cent versus an average of 8.7 per cent among its 10 biggest peers. All the while, new stock issues to help finance acquisitions have outstripped dividends, with shareholders pumping in $2.3 billion more than they have received back over the past five years. “This has nothing to do with low gold prices,” says Morris. “It’s a company that has delivered no cash to shareholders for a decade.”

The activists are pushing for the addition of several independent directors to the board—currently seven of the 13 members fall into that category—and are demanding that the new blood have mining expertise. (At present, no one sitting on the board has any.) They also want a corporate retrenching that would see Barrick’s underperforming assets sold or spun off, and transform the company into a much smaller player, focused on a few key mines in North and South America.

It’s enough of a backlash that even some of Munk’s staunchest backers are re-evaluating his worth to the enterprise. “Over the years it’s become a very Peter-centric firm,” says John Ing, president of Toronto’s Maison Placements Canada Inc., a friend and investor since the 1980s. “He built a company for growth. But now everyone wants one built for profitability and transparency.” At one time, Barrick traded at a premium to its peers, notes Ing. Today, its shares change hands at a discount. Overspending on acquisitions, and poor project management, like the massive Pascua-Lama gold and silver mine in Chile that is now $5.5 billion over budget and three years behind schedule, have eroded market confidence. “It’s not a roll-up-your-sleeves board. They haven’t got the best minds,” says Ing.

Barrick has confirmed that it plans to add more independent directors to its board, and will review its compensation practices, promising to update investors before the end of the year. But neither Munk nor Thornton have addressed the revolt. A Maclean’s request for interviews with the co-chairmen or other members of the management team did not receive a response.

Should Munk be quietly forced out, it would be a muted ending to one of Canada’s most colourful corporate sagas. Born and raised in Hungary, he fled to Switzerland in 1944, along with his father and grandfather, after they traded much of the family fortune to the Nazis for spaces on the “Kastner train.” (Munk’s mother was sent to Auschwitz, but survived and was eventually reunited with her family.) In 1948, he joined an uncle in Canada and undertook his studies in electrical engineering at the University of Toronto, picking tobacco in the summers to pay his tuition. Munk’s first run at business was Claritone, a high-end stereo maker he and a friend, David Gilmour, established in 1958. It was a success until an ill-advised decision to build a plant in Nova Scotia and branch out into TVs. Munk and his partner were forced out amid mounting losses in 1967, and later faced insider-trading allegations that were eventually settled out of court.

From there, he and Gilmour went into exile in Fiji, where they spun a small investment in a single hotel into a chain of 54 resorts scattered around the South Pacific. (The Saudi arms dealer Adnan Khashoggi was an early partner.) Munk returned to Canada in 1979 to a frosty reception from bankers and the establishment. “They treated me like a fugitive and a loser,” he complained to Peter C. Newman in his 1998 book, Titans. When he bought his first gold mine, a small northern Ontario operation, in 1984, the Royal Bank gave him exactly one year’s grace to pay off the company’s outstanding $100-million loan.

Munk freely admits that Barrick’s spectacular growth over its first two decades was as much about chance as his acumen. In 1986, he paid $62 million for Goldstrike, a mine in Nevada that was thought to have about 600,000 ounces in the ground. The next year, his geologists discovered a far richer vein there, containing more than 20 million ounces. The steady profits—the mine is still a mainstay, churning out 417,000 ounces last year—allowed to company to grow rapidly, gobbling up first its small rivals, and then its large ones. The deal that made Barrick the biggest gold miner in the world—a $10-billion takeover of Placer Dome in 2006—was the 23rd acquisition of Munk’s tenure. And sometimes his misses were just as important as his hits. In 1996, Barrick tried mightily to win a piece of Bre-X’s astounding Busang find in Indonesia, with then–board members like former U.S. president George H. W. Bush directly lobbying Suharto, the archipelago’s long-time dictator. The efforts failed, and the company avoided the fallout of the ensuing scandal. “I praise my Lord that I didn’t succeed. Sometimes luck is more important than talent,” Munk told Maclean’s in 1998.

However, Barrick’s guiding force could also be canny when it counted. Munk, who has often described himself as a gold skeptic, and doesn’t even wear any as jewellery, made a practice of forward-selling the company’s production at fixed prices to hedge against market fluctuations, which was hailed as a wise decision when gold lagged through the 1990s. And he diversified into real estate, buying Trizec, the owner of such iconic properties as Montreal’s Place Ville Marie and Toronto’s CN Tower for a bargain-basement price of $661 million in 1994. After 12 years of aggressive expansion, he sold the renamed TrizecHahn for US$8.9 billion in 2006, to the great benefit of both Barrick and his own personal fortune.

Munk has always been a slightly distant corporate leader. A lifelong avid skier, he has a winter home in the Swiss resort town of Klosters, where he used to regularly carve the slopes with his good friend Prince Charles. In the summer, he retreats to an island in Georgian Bay. He gave up his title as Barrick’s CEO in 1999, and it’s been longer than that since he’s actually maintained an office there. Since 2004, he’s been overseeing the building of a massive harbour for super-yachts at the site of an old Warsaw pact naval base in Montenegro, along with high-end hotels, condos and retail space. And much of his energy in recent years has been devoted to philanthropy—he established an eponymous foundation with the stated aim of giving away his entire fortune—and his name now graces a cardiac centre at Toronto General Hospital, a school of global affairs at U of T and an engineering research centre in Israel.

But that above-the-fray approach, once seen as a virtue, is now among the chief complaints of disgruntled Barrick shareholders. The company was slow to embrace the long upward march in gold prices that started after 9/11 and really picked up speed after the 2008 financial crisis. A decision to finally extract itself from its gold hedges in 2009—at the insistence of investors—cost $5.6 billion. And Munk’s recent dream of turning Barrick into a more diversified mining giant has suffered from nightmarish bad timing. After years of defying economic gravity—largely because of high Chinese demand—prices for all metals have recently crashed back to earth. Meanwhile, production costs have soared with sharp rises in the prices of everything from fuel to labour, as well as a trend toward higher taxes and stronger environmental regulations in the previously mining-friendly developing world. “It’s really bad. Investors have lost confidence in the entire sector,” says John Gravelle, a mining specialist with PricewaterhouseCoopers. “But gold got it first and got it worst.”

Since reaching a record high of $1,920 an ounce in September 2011, gold prices started declining, then went into free fall this past spring, hitting a low of $1,180 in June. But even with the current price hovering around the $1,300-per-ounce mark, the economics of the business have changed. The rich, close-to-the-surface veins like Goldstrike are mostly played out. And the yields from new, deeper discoveries, often in remote locations, are frequently as low as a gram or two per tonne. Barrick’s latest all-in costs of $919 per ounce actually makes it one of the more efficient gold miners. Kinross’s costs are $1,038 per ounce, and Goldcorp’s $1,135. But that doesn’t alter the fact that at present, most of the newer mines and developments across the industry are at best breaking even.

Munk long ago confessed that he is more interested in the thrill of the deal than penny-pinching management. “Nothing happens in life if you sit back. I happen to be an activist. I don’t believe in sitting back.” And in the immediate future, Barrick seems more likely to be the target of a takeover than the author of one.

The last time his compensation was such an issue—back in 1991, when he cashed in a bunch of stock options and took home a pay packet worth $31.6 million, setting a new Canadian record—Munk was defiant. Facing withering attacks from shareholders at the annual general meeting, he stood in place and fired back. “I did make $32 million and I deserved it . . . I’ve created $12 billion in value,” he said. And his final riposte earned him thunderous applause: “What this country needs is more Peter Munks, not less.”

Now, faced with a company that has lost more than half its value over the past two years, there is little room for such bravado. And maybe not even a dignified goodbye.


 

Peter Munk’s final play

  1. Barrick’s All-in costs are not $919. This figure refers to All-in Sustaining Costs. All-in costs are in the $1,275 range. The difference between the 2 costs: AISC refer to life of mine costs for existing mines, AIC includes cap ex costs for new ming projects such as Pascua Lama. The values quoted for Goldcopr and probably Kinross also err in AIC vs. AISC.

    • So I have a question for anyone who knows…is this a good time to invest in Barrick, if they’re looking at bringing in new blood and revamping the board and the price of stock is relatively low?
      Any suggestions for a newbie on the block.