On his desire to merge Barrick with Glencore:
Mr. Munk's idea was to create a diversified,
Canadian-based mining giant that could compete with BHP, the world's
largest mining group, Rio Tinto, Brazil's Vale (which bought Inco) and
Anglo American. Part of the rationale was financial. A diversified miner
would be able to insulate itself from the worst of the cyclical
downturns. Gold, for instance, and copper, are countercyclical; the
former is bought by investors when economies are falling apart, the
latter when economies are posting strong growth. Glencore's commodities
trading and logistics business, a robust money maker regardless of
prices, would also protect the enlarged group. The biggest companies
also have the best access to the international capital markets, a
necessity to sate the voracious capital appetites of mining companies.
Peter Munk: A mining magnate nears the end of his golden reign
The Globe and Mail
On
a chilly evening in early March, Peter Munk picks me up from my hotel
in his tiny Fiat Punto, manual transmission, that he drives himself. His
wife Melanie is stuffed in the back and our destination is the local
schnitzel restaurant, where the Munks are treated like anyone else in
Klosters, the Swiss ski village near Davos.
What a change. The
last time I spent more than a few minutes with Mr. Munk was in 2008, in
Montenegro's glorious Bay of Kotor, the Mediterranean's only fjord. We
were on his chartered superyacht, the 50-metre Te Manu, a nautical
pleasure palace with a crew of 11 that would have made any oligarch
proud.
Has Mr. Munk, the founder, co-chairman and former chief
executive officer of Barrick Gold Corp., fallen on hard times since
then? Yes and no.
At $27-billion, Barrick is worth less than half
of its peak in 2011, just before the gold price collapsed and the
financial horror of the company's now-suspended Pascua-Lama mining
project in the Andes was exposed. Mr. Munk's wealth has declined along
with the share price (although he owns only 2.1 million common shares),
but certainly not to the point where he is flying economy and forgoing
oysters and champagne.
Instead, the Fiat represents the new,
simpler life of the Hungarian emigrant to Canada who turned a motley
collection of gold assets into the world's mightiest gold producer. Mr.
Munk will leave the Barrick board at the company's annual shareholders'
meeting in Toronto on April 30, after which John Thornton will go from
co-chairman to chairman. The Barrick board meetings, endless encounters
with institutional investors and phone calls at three in the morning
will disappear, along with many of the perks that went with his status
as one of the world's most powerful mining bosses. The little Fiat will
get driven more often. The vacations in Klosters, which the Munk family
considers home, and Montenegro will get longer.
The transition
could save his life or kill him. Mr. Munk is 87 and has been equipped
with a pacemaker for more than a decade. His famous energy is draining
away and he knows he can't do the job any more. At the same time, the
man who spent more than half a century building businesses on five
continents could find that retirement bores him rigid, or worse.
"Leaving Barrick is like a Chinese restaurant, sweet and sour," he says
"Sometimes you feel sweet in your mouth, sometimes sour. I live it –
Barrick is me. But I have heart issues. I can't travel like I used to."
I ask if he's worried about his health. "I don't mind dying," he says. "I just don't want Barrick to die."
Indeed,
Mr. Munk is worried about Barrick's future. A couple of years ago,
before Mr. Thornton, a former Goldman Sachs president, joined the
Barrick board, he and Ivan Glasenberg, CEO of Glencore International
(now Glencore Xstrata), talked about merging their companies. Mr. Munk's
idea was to create a fully diversified multinational that could
withstand the jarring ups and downs of the commodities cycle.
If
that had happened, the world's biggest gold mining company and the
world's biggest commodities trader would have formed a global resources
giant to rival BHP Billiton and Rio Tinto, with a market value (based on
today's values) of about $67-billion (U.S.). "It would have been a
perfect combination," Mr. Munk says.
Mr. Munk talks to me from the
living room of his Klosters chalet, which is called Viti Levu, after
the Fijian island where he and partner David Gilmour started the
Southern Pacific Hotel chain in the 1960s. The woody chalet is large and
comfortable, with a heated pool in the basement, but is far from
ostentatious. Its best feature is the magnificent view of Gotschnagrat
Mountain, which the Munk family has skied since the 1970s.
Mr.
Munk stopped skiing two years ago, because of his heart, and it was a
big blow to his recreational life; he had skied every year for 71 years.
Melanie, his second wife, and their five children – two with his first
wife, Linda, two with Melanie, and one adopted – keep the family
tradition going. The walls are decorated with enlarged photos of the
skiing Munks. Melanie keeps a large family scrapbook in the living room
and shows me the newspaper articles about the ski disaster in March,
1988, when a Gotschnagrat avalanche severely injured the wife of her
cousin Charles Palmer-Tomkinson, who was skiing with Prince Charles, and
killed Major Hugh Lindsay, one of Charles's best friends. On separate
occasions, Mr. Munk and his wife have broken bones on the runs, which
are considered among the most challenging in Europe.
A mining mega-merger
When
I met Mr. Munk in Montenegro six years earlier, he was a mere 80 years
old and was full of bluster and optimism as he talked about his plans
for the future, as if he were an MBA fresh out of school. Gold prices
were on the rise and the financial crisis triggered by the Lehman Bros.
collapse was still a couple of months away. He and Barrick seemed on top
of the world.
At the time, Barrick, the product of 17 takeovers,
including Lac Minerals, Homestake Mining and Placer Dome, was the
unchallenged gold mining leader. It was on the verge of starting
construction of the enormous Pascua-Lama gold and silver mine, with more
than 15 million ounces of proven and probable gold reserves and an
astounding 675 million ounces of silver.
Mr. Munk was using his
fame and fortune – he denies ever reaching true billionaire status – to
have fun and make a few extra bucks on the side. The big non-Barrick
project was Porto Montenegro, the former Yugoslav naval base that Mr.
Munk and several rich partners, among them Russian oligarch Oleg
Deripaska and Lord Jacob Rothschild, are turning into a superyacht
marina and resort.
In typical Munk fashion, the investment happened through luck and circumstance.
A
few years earlier, he was swimming off his chartered yacht in Monaco,
felt something strange brush his skin and realized he had had a
distasteful encounter with a condom. At that point, he decided to ditch
the overcrowded and dirty waters of Monaco, learned about a discarded
naval base in clapped-out Montenegro, assembled a team of yacht-loving
investors and worked out a killer deal with the government, which allows
the owners of foreign-registered yachts to escape fuel taxes when they
fill up their floating gin palaces. The project has 200 yacht berths,
with another 200 to go. "I'm very proud of it," Mr. Munk says.
Meanwhile,
gold prices rose relentlessly – $1,200 (U.S.) in mid-2010, peaking out
at almost $1,900 a year later. Each $100 rise in gold was larding
another $750-million onto Barrick's bottom line. In 2011, profit was
$4.5-billion, the level of a big Canadian bank. In spite of the obscene
profits, Mr. Munk had no intention of leaving well enough alone. He knew
that one-product commodity companies were vulnerable to boom-bust
cycles (at the time, he was not aware that the Pascua Lama disaster
would accelerate Barrick's fall from grace).
So he called Ivan
Glasenberg, the head of Glencore (whose offices, in the Swiss canton of
Zug are not far from Klosters). Mr. Glasenberg is the secretive South
African-born accountant who learned the art of commodities trading from
Marc Rich of Marc Rich + Co. Mr. Rich made fortunes from trading oil and
other commodities but pushed his luck too far and was indicted in the
1980s for racketeering, tax evasion and trading with the enemy – Iran.
He was pardoned by Bill Clinton on his last day in the White House in
January, 2001, by which time Mr. Glasenberg and his team had taken Mr.
Rich's old shop and were transforming into a commodities-trading
powerhouse.
Through its own mines and a controlling interest in
Xstrata, the Anglo-Swiss miner that bought Canada's Falconbridge in
2006, Glencore was emerging as a mining force too. In 2011, Mr. Munk,
evidently well aware of the soaring value of Barrick's shares, which
could be used as a takeover or merger currency, started secret merger
talks with Glencore.
Mr. Munk's idea was to create a diversified,
Canadian-based mining giant that could compete with BHP, the world's
largest mining group, Rio Tinto, Brazil's Vale (which bought Inco) and
Anglo American. Part of the rationale was financial. A diversified miner
would be able to insulate itself from the worst of the cyclical
downturns. Gold, for instance, and copper, are countercyclical; the
former is bought by investors when economies are falling apart, the
latter when economies are posting strong growth. Glencore's commodities
trading and logistics business, a robust money maker regardless of
prices, would also protect the enlarged group. The biggest companies
also have the best access to the international capital markets, a
necessity to sate the voracious capital appetites of mining companies.
But
Mr. Munk's desire to transform Barrick into a BHP was also emotional,
which does not necessarily mean it was driven by shameless ego. Mr. Munk
decried the loss of Inco, Falconbridge and Alcan to foreign takeovers
during the great Canadian selloff in the middle part of the last decade
(which also saw Stelco, Dofasco, Algoma Steel and a raft of energy
companies vanish). At one point, during the "hollowing out" of Corporate
Canada, he charged into the Toronto offices of The Globe and Mail to
tell the editorial board that the sales would damage Canada's ability to
compete globally and that they should be reviewed carefully by the
federal government.
When Mr. Munk talks about vanishing companies,
he leaps out of his chair in the chalet and paces back and forth,
raging like a Fortune 500 King Lear. He rattles off the names of global
companies in small countries – NestlĂ© in Switzerland, Volvo in Sweden,
Philips in the Netherlands. "Why don't we have one?" he says. "Why the
hell should the Brazilians take our best nickel company?"
Mr. Munk
claims a merged Barrick-Glencore would have kept its Canadian identity
even if Mr. Glasenberg became the boss. The trading division would have
been headquartered in Switzerland, the mining in Toronto (the hometown
of Mr. Glasenberg's wife). However, the merger idea never made it beyond
the offices of Mr. Munk and Mr. Glasenberg. Mr. Munk says gold "didn't
fit into the trading pattern" of Glencore, which uses ships and
warehouses to trade coal and other bulk commodities. "It's also not easy
to get two cultures together and there would have been a great amount
of resistance from my shareholders, to switch them when there was a
runup on the gold price. It would be very difficult [for them to
contemplate] that the future cannot be in gold alone," he says.
But
Mr. Munk got a sort of consolation prize in the form of John Thornton,
who shares his ideas that Barrick should become bigger and more
diversified. "Operating under the Canadian flag is a huge competitive
advantage," Mr. Thornton says in phone interview. "The priority is to be
the world's leading gold company and to be the leading, or a leading,
copper company."
A disastrous mining project
Mr. Thornton
was Goldman Sachs's president and co-chief operating officer until 2003,
after which he delved headfirst into China. He served as a director of
HSBC Holdings, the bank whose roots are in China, until 2013, sits on
the international advisory council of China Investment Corp. and is a
professor at Beijing's Tsinghua University. He was appointed co-chairman
in early 2012 and awarded a $11.9-million (U.S.) signing bonus whose
disclosure a year later, when gold prices were sinking and Barrick got
whacked by a $4.4-billion after-tax impairment charge, enraged
shareholders. They voted against it, but since the vote was not binding,
the payment went ahead.
Mr. Munk defends his man to the hilt,
noting that the signing bonus was small compared to Barrick's market
value and arguing that Mr. Thornton is the right man to turn Barrick
into a global mining leader. "It took me years to find John Thornton,"
Mr. Munk says. "He wants to build a global entity."
If falling
gold prices were the only problem facing Barrick, Mr. Munk would be
leaving it relatively unscathed. But he is not – Pascua Lama took the
shine off his golden rule and delivered the message that the company
needs to learn a thing or two about mine development in difficult
terrain. The ultimate insult came when the market values of Vancouver's
Goldcorp and Barrick converged. At last count, Barrick's Toronto stock
exchange value was $27-billion (Canadian), Goldcorp's $25.8-billion. The
minor difference becomes shocking when you realize that Goldcorp's
annual production, at 2.67 million ounces in 2013, was well less than
half of Barrick's 7.66 million ounces.
Investors, in other words,
are valuing Goldcorp's per ounce production much more highly than
Barrick's. That will have to change if Barrick is to regain the
confidence of investors. To do so, Mr. Thornton and Jamie Sokalsky, the
CEO who replaced Aaron Regent, who took the fall for the Pascua-Lama
disaster, will have to ensure that Pascua-Lama's development costs are
tightly controlled once mine construction resumes and that a cost
blow-out like Pascua-Lama never happens again. "Priorities one through
five are operational excellence," Mr. Thornton said.
When Mr. Munk
talks about Pascua-Lama, his otherwise strong voice falls to a whisper
and he slumps in his chair. Indeed, the scale of the disaster is hard to
fathom. In 2013, Barrick reported a loss of $10.4-billion (U.S.), due
largely to the writedowns related to Pascua-Lama and the overpriced 2011
purchase of copper producer Equinox Minerals.
What went wrong? To
this day, Mr. Munk insists he doesn't know how the costs soared to
outrageous levels and why corrective measures were not taken earlier.
It's a classic mystery: Who knew what when? "I could not believe the day
[in 2012] when I was told we could be multibillion dollars over
budget," he says. "For 30 years, we never missed a budget."
Pascua-Lama
is located at a height of 5,000 metres in the Andes, on the southern
reaches of the Atacama Desert. Because of the dizzying elevation,
location in two countries and proximity to glaciers, it presented a
unique geopolitical, engineering and construction challenge. The air is
thin and the high winds and low temperatures can be vicious. Feeding the
thousands of workers and removing the garbage and human waste they
produced proved to be a hideously expensive logistical nightmare. "Every
hour of productive work required probably five hours of work to keep
[the employees] up there working," Mr. Munk says.
As Barrick was
building, the environmental regulations multiplied. "Each new rule
brought the need to build another wall," he says. "Resolving each and
every one of them resulting in more building. The cost of building
escalated to the point it was unreal."
The development costs went
to $8-billion from the initial $3-billion estimate (about $5-billion has
been spent so far). By last autumn, Barrick had had enough and put the
project into cold storage. It plans to revive it once gold prices
recover and it figures out a ways to control the costs. Bringing in a
development partner to spread the risk and the workload is one idea that
is gaining currency within Barrick's executive offices.
Enter Mr.
Thornton, who is impeccably connected in China. "One thing would be to
consider the Chinese as operational partners either for Pascua Lama or
the other mines," he says, referring to the other five big deposits
nearby. "The Chinese are very good at bringing in projects on time and
on budget."
Mr. Munk refers to a "specific event" that he and Mr.
Thornton had hoped to announce by now. He won't say what it was, though
it may have been news about a Chinese partner or possibly the sale of
African Barrick. Barrick tried to sell African Barrick, Tanzania's
biggest gold producer, to China National Gold Group, but those talks
collapsed last year. Since then, Barrick has been paring back its
controlling stake in African Barrick, although an outright sale of the
remaining 64-per-cent investment is not out of the question.
The
"event" could also been the purchase of a large gold producer. But given
the sharply reduced value of Barrick shares, their use as a takeover
currency has vastly diminished.
Mr. Munk has a month left on the
job. He will no doubt step down from the board with a standing ovation
at the annual general meeting. In spite of the Pascua-Lama fiasco, he
did build the world's biggest gold company and, for prolonged periods,
created a lot of wealth for shareholders. He also spared Toronto from
mining company oblivion during the hollowing-out era. While he lived
well, he did give away much of his wealth – $200-million (Canadian) and
counting – to good causes, such as the Peter Munk Cardiac Centre at
Toronto's University Health Network.
Barrick will never be far
from his heart. He hopes Mr. Thornton and the senior executives will ask
his advice on how Barrick can evolve into a global mining champion. He
would love to see Barrick achieve that status before he goes to the
great golden ore body in the sky. "Barrick is my legacy," he says. "The
thing is to leave something behind that is meaningful, especially for
me. I'm an immigrant. I owe Canada. Canada gave me everything I have."
Read the article online here:
Peter Munk: A mining magnate nears the end of his golden reign - The Globe and Mail
