Investors sour on bid by former Goldman executive to fix Barrick, the giant miner
By Jacquie McNish
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 7, 2018).
Mining is famously boom and bust. Money and patience are mandatory. In bad times, companies sell assets and close mines. In booms they buy up all they can.
John Thornton threw that rulebook out when he took over struggling Barrick Gold Corp., the world's largest gold producer. The former Goldman Sachs Group Inc. president was an industry amateur, as were most of his top hires. He followed Goldman as a model for company compensation. Instead of buying when prices recovered, he cut costs and sold assets.
Mr. Thornton, 64 years old, spends only two or three days a month at Barrick's Toronto headquarters. He communicates constantly with his team by email, sometimes firing off requests late at night or when executives are on vacation, according to people familiar with the matter. If he doesn't receive a quick response, Mr. Thornton repeats the request with the new subject line: "resending," these people said.
At one point, he grew so frustrated about the lack of progress with a messy mining dispute in Tanzania that he intervened to strike a settlement without telling many of the company's executives and directors.
The former banker's turnaround plan has succeeded in reining in Barrick's debt. It has also eroded the company's gold production and reserves. Investor uncertainty about the miner's plans has contributed to a 33% share price decline in the past 12 months.
The stock price of Newmont Mining Corp., Barrick's closest rival, is currently trading at more than three times Barrick's, reflecting investor confidence that it is on course to surpass Barrick as the world's largest gold producer as soon as next year.
Last year Barrick sold a large stake in an Argentine gold mine that ranks as one of the world's largest.
"You can't replace a quality asset like that," said Pierre Lassonde, a Canadian gold mining entrepreneur and retired Newmont vice chairman. "Financial discipline is important, but if you don't invest money to explore or acquire quality gold reserves you are shrinking to oblivion."
Mr. Thornton is approaching Barrick more like an activist investor. He said he was influenced by William N. Thorndike's 2012 book, "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success," a favorite among that crowd. He has given copies of the book to dozens of Barrick executives, even though none of the companies profiled are miners.
" 'The Outsiders' argued that the most successful companies in history all emphasized free cash flow as their single most important metric. We do not accept that gold mining deserves some special kind of exemption," Mr. Thornton said in an written response to questions.
Free cash flow is a measure of how much cash is generated by a business after accounting for big purchases such as equipment or property. Having low or negative cash flow could restrict Barrick's ability to make acquisitions without adding debt. Mr. Thornton said the company recently rejected buying some mines because the deals didn't meet his investment criteria.
After pushing Barrick to cut costs and get rid of less productive mines, Mr. Thornton has more than halved Barrick's approximately $13 billion in debt. The company has become more profitable, reporting an adjusted profit of $876 million last year, compared with a loss of more than $10 billion in 2013.
It is also a much smaller company. Today Barrick owns large stakes in about a third of the nearly 30 mines it held when Mr. Thornton was appointed. Some of the remaining mines are plagued with operating and political problems, while others have shrinking reserves of ore for future production.
Barrick's gold production has fallen more than 25% since 2013 to 5.32 million ounces last year. Rivals such as Newmont have built or invested in new mines in recent years. Barrick expects to produce 4.5 million to 5 million ounces of gold this year, and that output could fall substantially within a decade -- assuming no large gold price increases -- if Barrick doesn't acquire new mines or further invest in existing properties, said Chris Mancini, an analyst with Gabelli Gold Fund, an asset manager that owns Barrick stock.
As Barrick's mining footprint has shrunk, production costs have risen and the free cash flow Mr. Thornton prizes has dipped to a loss. In July, the company reported negative free cash flow of $172 million in the second quarter, a sharp drop from a positive cash flow of $43 million in the prior-year quarter.
Mr. Thornton said Barrick is falling short of its operating performance goals largely because of declining gold production and mining interruptions in Tanzania and Argentina. "We are nowhere near where we want to be," he said.
He acknowledges shareholder pressure to expand, but said he continues to insist on a 15% long-term return on invested capital, assuming gold remains at about $1,200 per ounce. He blames reckless buying by mining companies in the past decade for significant stock price declines.
Mr. Thornton has discussed a number of strategies with Barrick's board, including retreating as a global player to focus mostly on U.S. gold mines, people familiar with the matter said. That could include the sale or spinoff of less profitable gold and copper mines in a number of countries and continents, including Australia, Africa, South America and Canada, these people said. Variations on this plan are still under discussion, they said.
Several of Barrick's experienced senior mining executives have left the company in recent years. Its president, Kelvin Dushnisky, said he is leaving at the end of August. No replacement has been named, and the company hasn't had a CEO since 2014.
Mr. Dushnisky, who declined to comment, found himself in an awkward position in October when he joined the directors of Barrick's 64%-owned Acacia Mining PLC at its London headquarters for a board meeting.
The session was interrupted when an employee burst into the room with news that Mr. Thornton was at a press conference in Tanzania discussing Acacia, people familiar with the meeting said. The proposed agreement he was unveiling would see Tanzania lift a ban on gold concentrate exports in return for a payment of $300 million, or nearly 40% of Acacia's 2017 revenue, plus joint ownership in Acacia's three Tanzanian gold mines.
Acacia's stunned directors, including Mr. Dushnisky, had not been consulted, according to people familiar with the matter. They learned about the details watching Mr. Thornton's Dar es Salaam appearance.
Mr. Thornton declined to discuss his reasons for proposing such a large payment. He said he decided to intervene personally after he grew frustrated with the lack of progress between Acacia and Tanzanian officials.
Mr. Thornton's steady refrain about financial discipline left investors unprepared for the move.
Since Barrick confirmed Acacia would be on the hook for the $300 million payment, Acacia's shares have fallen by more than 40%. Its CEO and CFO have resigned. Two of Acacia's three gold mines in Tanzania, all of which historically accounted for about 10% of Barrick's total production, remain idle.
Mr. Thornton is a latecomer to the mining industry. He retired as president of Goldman in 2003, after a 23-year career with the firm as a deal maker and head of European and Asian expansion. He parlayed his Asian experience into a career as an adviser and teacher with the business school at Tsinghua University, one of China's top schools.
His China connections attracted the attention of Barrick's founder, the late Canadian mining magnate Peter Munk, who invited Mr. Thornton in 2011 to be a member of the company's advisory board. By 2012, he was promoted to co-chairman of its board of directors.
When swooning gold prices in 2013 threatened to unravel Mr. Munk's ambitious global strategy, Mr. Thornton tapped his experience as a Wall Street banker to try to negotiate a potential merger with Colorado-based Newmont.
The two companies discussed combining mining assets in the Americas and spinning off less lucrative international properties into a separate company, people familiar with the discussions said. Mr. Thornton's abrasive negotiating style contributed to a rift between the two companies, these people said.
Even though the deal failed, Mr. Thornton was appointed Barrick's executive chairman, with a mandate to shrink the debt-laden company. The problems facing Barrick were the outcome of its "lack of strategic focus, poor capital allocation and weak execution," Mr. Thornton said in his written response.
Members of Mr. Thornton's executive team have backgrounds in Silicon Valley, fund management and the British military. Only two of the 12 senior executives at Barrick have overseen mining operations, reflecting Mr. Thornton's move to hand more authority to regional mining executives.
Mr. Thornton described his focus on talent as an "obsession," and said he believes executives with technical and other nonmining skills are essential to bringing modern practices to the costly and time-consuming business of mining. He hired a private-equity investor two years ago to oversee the company's corporate investments and last year hired a chief digital officer who would use high-tech analysis in cost-cutting.
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