Legacy of Peter Munk, one of Canada’s most important entrepreneurs, hangs on solving Barrick Gold’s problems

Last updated: November 7, 2013 4:51 pm

Peter Munk’s legacy hangs on solving Barrick Gold’s problems

By James Wilson

Peter Munk’s long business career has brought him into plenty of difficulties as well as triumphs – but the Canadian entrepreneur marks his 86th birthday on Friday amid one of his toughest challenges yet. Barrick Gold, the mining group that Mr Munk has steered over three decades and turned into the world’s largest gold miner, is in the throes of one of Canada’s largest capital calls, raising at least $3bn of equity. It comes in the teeth of deep gloom about gold prices after a sharp sell-off this year, and after Barrick decided to suspend work on Pascua-Lama, its flagship new mine, admitting that the ballooning costs of the South American venture made it unviable for the foreseeable future. Barrick made a $5bn writedown on the mine this year.Beyond these operating and financial difficulties, Barrick’s challenges are also about Mr Munk himself. Some investors have this year been increasingly hostile towards the company’s corporate governance standards – including the continued influence of Mr Munk as chairman, and the presence on the board of a côterie of close allies, some of whom have been directors for almost 30 years. His son Anthony is also on the board.

Barrick’s balance sheet, its Pascua-Lama project and its corporate governance “have been front and centre of investors’ concerns”, says Jorge Beristain, an analyst at Deutsche Bank in New York.

Trying to ease these concerns and cement support for the equity issue, the miner has promised plans for “rejuvenation” of its board and extra independent directors by the end of the year, as well as for anoverhaul of its pay practices after criticism of a $12m award for John Thornton, the former Goldman Sachs banker named co-chairman last year.

The circumstances point to a troubled end to the long career of Mr Munk at Barrick. Some who know him well believe he may be prepared to step down as early as next year’s annual meeting, leaving Mr Thornton as chairman. That could presage a wider management and board shake-up.

However allies of Mr Munk, whose influence at Barrick is in stark contrast to his relatively small holding in the company, also consider that he will not step away until confident that Barrick is back on a sound footing – with the capital raising and the Pascua-Lama suspension seen as key steps towards that end.

“Peter has a huge amount of emotional capital tied up in the business. He is not going when he sees it in its hour of need. He wants to help put the ship back on course and a huge amount of work has been done this year,” says a supporter.

Entrepreneur has known failure and success

Peter Munk’s three decades as the driving force at Barrick Goldhave been just one lengthy chapter in a career that has seen him lauded as one of Canada’s most important entrepreneurs – and one who has known humbling failure as well as success, writes James Wilson.

Since the 1960s his businesses have ranged from Clairtone stereo equipment, which collapsed in the early 1970s, to the Trizec commercial property empire, sold for more than $5bn. A refugee from the Nazis in 1940s Hungary, and a trained electrical engineer, he made Toronto his home and been a prominent philanthropist in Canada.

At Barrick Mr Munk started with one Canadian mine and built the world’s largest gold miner by output through deals such as the acquisition of Placer Domein 2006. Mr Munk has espoused the idea that “being a founder is for life” but as his career draws to a close he faces criticism that the time has come to cut his influence at the company and allow boardroom renewal.

More is at stake than just Mr Munk’s legacy. Barrick’s attempt to restructure highlights the strains in the “Big Gold” model that had the world’s leading producers striving for size and scale, chasing ever more marginal production as the gold price soared. With debt and costs also rising Barrick, which owns more than two dozen mines across five continents, is selling off smaller and higher cost operations – though it failed to sell African Barrick Gold, its UK-listed subsidiary, at the start of the year – and axing 1,800 jobs from a bloated corporate structure. “There is not a single aspect of our business that we have not been evaluating,” said Jamie Sokalsky, Barrick’s chief executive, as he justified the share issue.

Just five of Barrick’s mines produce more than half of its 7m troy ounces of gold annually, and the mismanaged development of Pascua-Lama exemplifies the ends to which large gold miners have had to go to try to replenish reserves. The project is more than 5,000m up in the Andes and straddles Argentina and Chile, forcing the company into arduous negotiations with two governments. While Pascua-Lama’s costs would be low once in production, the mine has so far cost more than $8.5bn and is only half built. It has added to the strain on Barrick’s balance sheet, where debt soared to more than $15bn after its acquisition of copper miner Equinox in 2011.

Barrick’s Equinox deal has made it a test bed for the idea that gold miners – which once attracted better valuations than miners of other metals – could sensibly diversify. The deal soured many investors on Barrick, but its copper output is rising. Newmont Mining, Barrick’s largest gold rival, is now also publicly exploring a big expansion into copper.

Barrick’s capital raising – what one underwriter advertises as a “once in a decade chance to buy” with the share price at about $19 compared with more than $50 two years ago – is underwritten by banks. However anything less than a full take-up of the offer would be a severe embarrassment to the company and a blow to its relations with the underwriters. The equity raised will be used to cut net debt by about 20 per cent, with a full repayment of debt due next year.

“It is not a long-term fix but it buys time,” says a banker at a North American institution.

Deutsche’s Mr Beristain believes more gold miners will need to raise equity if the gold price continues to hover at about $1,300 per troy ounce or lower. Gold soared from $300 per ounce in 2003 but has fallen from above $1,600 per ounce this year. Miners’ costs escalated over the same period, leaving many mines barely profitable.

“There is going to be a limited window for equity issuance for the gold sector. As a company you do not want to have to go back to the market,” he says. “I give Barrick credit for being further along than many gold miners in reshaping their balance sheet. They had to move more urgently because they were in the biggest trouble. There is nothing like having your feet to the fire.”

November 7, 2013 4:02 pm

Barrick caps Peter Munk’s career spanning stereos and property

By James Wilson

Peter Munk’s three decades as the driving force at Barrick Gold have been just one lengthy chapter in a career that has seen him lauded as one of Canada’s most important entrepreneurs – and one who has known humbling failure as well as success.

Since the 1960s his businesses have ranged from Clairtone stereo equipment, which collapsed in the early 1970s, to the Trizec commercial property empire.

Even after selling Trizec in a deal worth almost $9bn in 2006, a deft move given the financial crisis that was to hit property, the restless Mr Munk was moving on to turn a former Adriatic naval base into a superyacht marina, drawing in investment from the likes of Oleg Deripaska, the chief executive of Rusal, the Russian aluminium group, and Bernard Arnault, the chief executive of French luxury goods group LVMH.

A refugee from the Nazis in 1940s Hungary, and a trained electrical engineer, he made Toronto his home and had been a prominent philanthropist in Canada.

At Barrick Mr Munk started with one Canadian mine and built the world’s largest goldminer by output through deals such as the acquisition of Placer Dome in 2006. Mr Munk has espoused the idea that “being a founder is for life” but as his career draws to a close he faces criticism that the time has come to cut his influence at the company and allow boardroom renewal.

Barrick’s Peter Munk: Stubborn, proud and leaving on his own terms

Peter Koven | 08/11/13 | Last Updated: 08/11/13 6:37 PM ET
Five years ago, the Financial Post asked Peter Munk when he planned to retire from Barrick Gold Corp. His response: “When they kick me out.”

But that wasn’t really true.

Mr. Munk is as stubborn and proud a businessman as there is. And despite the numerous calls for him to step aside in recent years, he was always going to leave on his own terms.

On Friday, Mr. Munk’s 86^th birthday, Barrick disclosed that he plans to retire. No timeline was provided, though sources said the departure will most likely come at next year’s annual meeting, when the company plans to introduce new directors in a long-awaited overhaul of its board.

Investors have gotten increasingly fed up with the board in recent years, as it has made some awful strategic errors and approved some outlandish pay packages for company insiders. Mr. Munk, the founder and chief authority at Barrick for 30 years, was the key figure behind every move and the natural lightning rod for investor dissent.

It would be easy to look at Friday’s disclosure as a sign that Mr. Munk is caving to shareholder pressure to resign, particularly since the disclosure came in a prospectus for a US$3-billion equity offering that Barrick’s bankers are struggling to sell. Roughly a quarter of the stock has not been sold , according to sources.

But in reality, angry shareholders were not the singular factor behind this move.

The simple fact is that Barrick has repaired much of the self-inflicted damage it committed in recent years. And with a successor in place and ready to take over, this is an ideal time for Mr. Munk to move on. The disclosure provided some clarity for the street, which is skeptical of almost everything that comes out of Mr. Munk’s mouth these days.

His departure does not come as a surprise; he has signalled several times that his days at Barrick are nearing an end. Last year, he named former Goldman Sachs President John Thornton his co-chairman. Mr. Munk was so desperate to secure Mr. Thornton’s services that Barrick paid him a US$12-million bonus just for taking the job.  Mr. Thornton assumed greater responsibility this year, meeting with many of the miner’s top shareholders.

Meanwhile, the big problems at Barrick have been addressed. The troubled Pascua-Lama project has been suspended, meaning it will stop sucking billions of dollars out of the miner’s treasury until the many problems surrounding it have been resolved. And the over-levered balance sheet is being repaired by the equity offering. The company has also improved the performance of many of its operations, most notably the Lumwana mine in Zambia.

These factors all allow Mr. Munk to retire with his head held high. That would not have been the case six months ago.

Mr. Munk’s legacy at Barrick has been tarnished by two key recent mistakes: botching construction of Pascua-Lama, and taking on billions of dollars of debt to buy a copper company. Those errors, along with falling gold prices, forced Barrick to dilute shareholders with the recent equity offering and to record a series of embarrassing writedowns. It reported the second biggest quarterly loss in Canadian history last August, driven by more than US$9-billion of impairment charges.

But those issues do not overshadow his positive contributions. In just over two decades, the Hungarian immigrant grew Barrick from a tiny junior into the world’s largest gold producer by being aggressive and unconventional. He pulled off many gutsy acquisitions over the years, and his gold hedging strategy helped the company emerge strongly from the gold bear market in the 1990s. He was also lucky at times – most famously, he tried and failed to get a piece of Bre-X’s Busang deposit, which turned out to be a massive fraud.

The one deal he never pulled off was a merger or joint venture with Newmont Mining Corp., despite the many potential synergies between the two miners in Nevada. Mr. Thornton is an M&A whiz, and there is speculation among investors and rival gold companies that he will try to engineer a transaction in the future.

There was minimal reaction in Barrick’s shares to the news of Mr. Munk’s pending retirement on Friday. That shows it is far from surprising.

J.R. Sauder, a principal at activist shareholder Two Fish Management (which has targeted Barrick), said he is skeptical about any board changes until there is evidence that they will be good for shareholders.

“After the recent equity raise by Barrick, we believe the company prioritizes their credit rating over the interests of shareholders,” he said.

One of the Barrick directors that will be replaced is former Prime Minister Brian Mulroney, according to a report.