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Suitably enough, Barrick’s new chief executive will have a golden opportunity when he takes over at the world’s largest gold producer in 2009. Any day now, Peter Munk, the founder of Barrick Gold Corp. (TSX: ABX), will announce the fifth chief executive in the iconic Canadian company’s 26-year history and relinquish his crown as interim chief. Rumoured successors have ranged from experienced Canadian mining CEOs, including Goldcorp Inc.’s (TSX: G) recently retired chief exec Kevin McArthur, to an Australian chief exec with a PhD. Hints from Munk are scarce. “I like someone who is young—that’s because I’m old,” says the 81-year-old. “Someone younger than 51.”
Regardless of the age of Barrick’s new boss, he (and it will be a he) takes over as the stalled price of gold is proving to be a puzzle for those who know it best. What should the new chief executive anticipate and do to make 2009 a success—and secure Barrick’s place atop the gold world?
First, he must understand how this economic morass will affect Barrick and other gold producers. Although producers don’t set the price, the new chief executive should estimate how much he can get for Barrick’s product. Munk expected gold to hit between US$1,500 and US$2,000 per ounce in 2008, as uncertainty would force investors to the safe-haven metal. But investors had other ideas. Gold hit a peak of US$1,033 in March and skidded to about US$800 by early December. Munk and others have rationalized gold’s slump as a product of its own success: it has retained value better than other investments during the recent market volatility. Investors in need of liquidity have chosen to sell gold, depressing its price and leading to an oversupply.
Along with the depressed gold price, the stock price of producers has also stumbled. Over the past 12 months, for example, Barrick shares have gone from a high of $53.77 to a low of $22.51, and stood at $37.90 on Dec. 11. During third-quarter 2008, higher costs and lower production at Barrick’s copper mines led to lower-than-expected earnings, with adjusted per share earnings of 40¢US, compared with a street consensus of 47¢US. Blackmont Capital Inc. precious metals analyst Richard Gray says Barrick won’t have a problem meeting its 2008 production estimates of between 7.6 million ounces to 7.8 million ounces at a cash cost of between US$425 and US$445 an ounce. Gray, who has a 12-month target of $42 for Barrick based on a price of US$850 an ounce, says its fourth quarter is traditionally strong.
But the new CEO begins in 2009. Then what?
Chief financial officer Jamie Sokalsky expects that some of the pressure on gold will be gone. The price will ramp up for many reasons, Sokalsky said during Scotia Capital’s precious metals conference in December. They include the greenback running out of steam, an increase in money supply thanks to global stimulus packages, heightened monetary reflationary concerns, and restricted gold supply as projects short of financing get delayed. But some analysts doubt the ramp-up will come fast enough.
The trouble for Barrick in 2009 will be mining plans that are based on higher price assumptions, says David Christie, director of gold and precious minerals at Scotia Capital, who has a 12-month target price of $43 and a 2009 gold assumption price of US$825. Christie, however, says Barrick’s low cash costs can mitigate a low gold price; Barrick’s operations are mainly open pit mines where costs can be manipulated more easily than with underground mines.
Barrick has the industry’s only A-rated balance sheet, but Gray says that its massive US$4.6-billion debt and planned capital expenditures mean nothing will be added to its cash reserves in the next few years. Should Barrick want to increase its liquidity, Gray says, it could delay development in Chile’s Cerro Cassale and the South American Pascua-Lama project. That project borders Chile and Argentina, and although it has local environmental permits, a cross-border tax agreement hasn’t been reached. Another potential headache is the Cortez property in Nevada, anticipated to generate up to a million ounces a year once Cortez Hills starts production in 2010. Two native groups and two environmental NGOs are seeking a permanent injunction to block the project, claiming the production site is sacred land. Barrick expects no delay.
Barrick’s hedge book will also be under scrutiny in 2009, especially if the gold price doesn’t pick up. In a Nov. 2 note to clients, CIBC World Markets analyst Barry Cooper wrote, “At gold prices of about US$889/oz, one would be indifferent in what has been conducted on the hedge book this year….At prices of US$750/oz, the action taken over the past three quarters has put the overall hedge book about US$250 million worse off than had there been no activity.” The floating part of the hedge gives Barrick leverage to rising gold prices and therefore looks better, other things being equal, as prices rise, counters CFO Sokalsky. He adds, however, that the overall book must be put in context: at 9.5 million ounces, it is less than 8% of Barrick’s reserves. Gray suggests the smartest thing Barrick could have done was to buy back the hedge book when gold was at US$700. Barrick’s book has been underwater for many years, says Christie, but it shouldn’t be a cause for concern because there are more than 20 counterparties and no party has more than 10%.
And Barrick has undertaken some other hedges that have received kudos. Among those are its hedge on copper, which has a guaranteed price of US$3 an ounce when the cost hovers around US$1.60; its hedges on foreign exchange rates, and the purchases of Cadence Energy Inc. and Sturgeon Lake oil assets in September to hedge the oil price, which account for 25% of its operating costs. These were smart things for any mining company and bode well for Barrick’s future financial situation, says Gray.
While the new chief executive wrestles with financials and operations, he must also respect Munk’s legacy, and that includes being a proud Canadian company. Munk laments the sale of Canadian companies such as nickel giant Inco, which was acquired by Brazil’s Companhia Vale do Rio Doce (NYSE: RIO) in a deal that closed in 2007. Although Barrick has a seemingly insurmountable lead against competitors Newmont Mining Corp. (NYSE: NEM) and Goldcorp in terms of production—it would take an unlikely merger between them to overtake Barrick, says Gray—the new chief executive can’t let that slip. Barrick’s size prevents it from being a takeover target, and being the biggest is, well, a big deal to Munk. “I would love to say to you that it’s not important,” Munk says. “But please. You’re questioning human vanity. We are vain. I don’t care what human activity you undertake, but certainly in the corporate race, there is a value in becoming pre-eminent leader of your industry. What’s the point of running an operation if it can’t be No. 1?”
Growth is another matter, however, and it’s unlikely to occur via any major acquisitions. In December, Sokalsky said Barrick would look at merger and acquisition targets given its deep pockets and exceptionally cheap prices, but was cautious—because many of the targets were exceptionally cheap for a reason. Nothing has piqued corporate appetites yet. Rumours that Barrick’s new CEO would arise from an acquisition of Toronto’s Kinross Gold Corp. (TSX: K) were nixed after Barrick broke with its policy of not commenting on rumours and publicly stated that an acquisition was not in the cards. The other CEO that the Street rumbled could take over, Don Lindsay of Teck Cominco Ltd. (TSX: TCK-B), seems to have faded as a Barrick foray into a major non-gold acquisition seems increasingly unlikely.
Part of the new CEO’s strategy for building Barrick’s treasure chest will be largely unexplored assets, such as Nevada’s Turquoise Ridge, and converting current assets into productive ones. Feasibility studies expected in 2009 for Chile’s Cerro Cassale and Pakistan’s Reko Diq mines may chart that course, and assessments of palladium, platinum and copper assets will also be completed. Barrick must secure US$1 billion in financing for Pueblo Viejo in the Dominican Republic in 2009, which it says is on track to be completed in the first half of the year. The Buzwagi mine in Tanzania is scheduled to move into production in mid-2009 and is expected to produce 250,000 ounces annually. The new CEO could also command respect by purchasing largely unexplored single assets that end up being—pardon the pun—gold mines. Christie points to Reko Diq, which was purchased in 2006 with an estimated eight million ounces of gold and now boasts 14 million ounces in reserves.
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