Barrick Gold, once a top gold producer in the world, seems to have hit an exceptionally rough patch this month.
As a whole, gold producers have struggled as the price of the metal has dropped. But Barrick’s issues and consequent share price decline – to lows only experienced 20 years ago – began before the price per ounce even reached its peak in September 2011. Now Barrick leaves research analysts, investors and journalists wondering if there is a chance for salvation and whether current management, headed by Chairman John Thornton, are capable of achieving it.
Barrick’s acquisition of Equinox Minerals in April 2011 initiated the deterioration of the company’s relationship with shareholders. Some would argue there were some hiccups before but none were a C$7.3 billion (in cash, nonetheless) show of unapologetically poor judgement. How could such a large and successful company, with a world-class management team and an army of seasoned advisors, make an obvious mistake of such magnitude?
At first glance, the Equinox transaction was one mining company buying another, a common phenomenon in the industry. But, as much as metals and minerals are “commodities,” investors make their portfolio choices based on the demand for the metal in the economic environment.
Barrick is a gold producer and as much as gold is touted to be used in jewellery, medicines and the tech industry, its prime appeal is still as a hedge to economic downturns. The typical Barrick shareholder is bullish on the price of gold and therefore bearish on the economy, thus hedging against it.
Base metals (copper, nickel, lead, iron, amongst others) have more industrial applications, such as pipe making, steel manufacturing, wire fabrication and general constructions. These metals are used in projects for a growing economy that requires materials for infrastructure and manufacturing expansion. Equity holders of a base metals company, like Equinox, are bullish on the economy and anticipate demand for these metals and their prices to increase. A determined gold equity holder does not want to invest in base metals assets; if they did, they would just buy base metal company stock in the open market, without paying the 30% premium that Barrick offered Equinox shareholders in the deal.
This is very elementary analysis; nothing ground-breaking here. So, as the leading gold company decided to add base metals projects to its portfolio, Barrick’s executives may not have considered this simple line of thinking, which is, at the very least, disappointing to its investors.
Assuming that management and advisors had, in fact, considered investor interests and, specifically, portfolio strategies, they would appear to have ignored them completely and decided to go ahead with the acquisition. Becoming both a gold and base metals producer is an inconsistent strategy for profitability that led to rampant investor confusion. Even the investors who assumed that there was method to the madness could not tell whether Barrick had changed its strategy or could not find better uses of cash (different acquisition targets or exploration at existing projects). Some investors had questions for management; others simply assumed that management was out of ideas and sold their shares, triggering the 69% share price decline since the Equinox purchase announcement.
Barrick has since written down nearly the entire cost of the acquisition.
Of course such large mistakes take time to fix and restoring investor confidence may take longer than four years. On one hand, Barrick has recognized the error of its ways and has been selling its base metals projects. It has already disposed of the Saudi assets that came with Equinox and recently announced intention to sell part of its Zaldivar copper mine in Chile and use the proceeds to lower its debt by $3 billion this year.
Yet, investors continue to be the only ones carrying the burden of management’s poor decisions. Recently, 75% of Barrick shareholders, including heavyweights like CPPIB, the Ontario Teachers’ Pension Plan Board, BC Investment Management and Ontario’s OPTrust pension fund voted against the current compensation scheme for its chairman, John Thornton. Barrick responded that they had heard investors “loud and clear” and would review the structure in the future. But since the vote is non-binding, Thornton will keep the $12.9 million pay-out under the existing scheme.
Barrick investors have had every reason to be upset over the last four years. The situation raises further questions about the future of the company. Will investors start taking an activist role in the company? How will Barrick’s behaviour impact the way large funds see other gold industry players? Are drastic changes at large firms in the spotlight the only way to alter accepted policies in the whole sector? Historically, if a company cannot find a better use of cash than unreasonable acquisitions and unmerited executive payouts, investors will find a more suitable place to put their money.
Posted by Olga Ivleva, Senior Associate, Range Advisors
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