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Barrick is a compelling investment choice, for reasons that stand out in any diversified basket of stocks: for aggressive growth and financial strength that would make it a leader in any industry; and beyond that, for excellent leverage to rising gold prices.
Barrick Gold Corporation is an anomaly in the gold exploration and mining industry; it has little debt and low-cost production, yet high yield and even higher sales. Though Barrick began as a less than spectacular petroleum and oil company in Canada founded by Peter Munk and David Gilmour, they turned to prospecting in 1983 and became the quintessential success story. While gold mining operations may spend decades searching for the motherlode, Barrick began by acquiring established mines and bringing them to new levels of productivity and profit. On its Goldstrike Property on the Carlin Trend in Nevada, Barrick has established the Betze-Post and Meikle Mines: the former is the richest and most productive mine in the United States while the latter is the largest underground mine in North America. Ongoing exploration and drilling continue in the region, as well as on properties in Canada, South America, and Africa, with projections to reach more than five million ounces of gold production by 2003. Since Barrick's mining and processing facilities are among the most technologically advanced in the world, this is all but a fait accompli.
From Inauspicious Beginnings Come Great Things: 1980-85
The story of gold is as old as time itself. Ancient civilizations appreciated the beauty and malleability of the precious metal and many rulers had their likenesses fashioned onto coins. Gold's value was always an absolute; the possessor wielded both wealth and power. Barrick Gold Corporation's mission was never unique; yet how the company forged a name for itself and became the world's most profitable gold producer has been fodder for Canada's history books and led to studies at prestigious business schools. Few tales rival Barrick's meandering path to become a gold industry giant.
Although the gold standard was established in 1821, the story of Barrick Gold Corporation did not begin until more than 160 years later. Hungarian-born Peter Munk, whose family fled from the Nazis to Switzerland, came to Canada in 1948 with big dreams and even bigger ambition. After several ventures--some hits, others misses--Munk, his longtime partner David Gilmour, and several Arab investors founded Barrick Petroleum Corporation in 1980. The new company drew little notice until Munk and Gilmour bought Viking Petroleum and began working with the legendary D.O. 'Swede' Nelson to find oil. Much to their dismay, the partners never found any gushers and the industry bottomed out.
Munk then decided to go into precious metals, selecting gold as his venue, a field drastically in need of a boost. Targeting European pension funds with gold investments in South Africa, thenew Barrick Resources Corporation (later renamed American Barrick Resources Corporation)hoped to get fund managers to invest their capital in North American gold stocks. With growing discord in South Africa's political and financial arenas, Munk and his partners believed Barrick could offer a more prudent investment. The new Barrick went public on the Toronto Stock Exchange in May 1983 with 1.3 million shares. The sale garnered only C$2.5 million, just enough to get the fledgling company on its way.
The company's mission was simple yet of grand scale: dominate the gold industry by becoming North America's largest producer; acquire established properties with sound futures; be fiscally conservative; and protect the bottom line through an aggressive hedging program. Hedging, used by precious metals producers, was the use of complicated financial contracts to arrange forward sales at fixed prices, regardless--or rather in spite of--market fluctuations. The seemingly win-win formula--if prices went down, producers were protected by their contracted prices; if prices rose, they could sell additional reserves on the open market--was a boon for Barrick and such rivals as Vancouver's Placer Dome.
Barrick's second business tenet, to acquire working mines with potential, came into play just months after the company went public. The company bought a 23 percent stake in gold deposits in Alaska's Valdez Creek region, then joined up with Alaska Power & Light and the city of Juneau to explore over two dozen sites. Barrick's next move was to buy a half-interest in Ontario's Renabie mine. Though both the Valdez and Renabie mines produced gold, the former was eventually sold and the latter was closed.
In 1984 the tide turned with the acquisition of the debt-laden Camflo Mines Ltd. of Quebec. Camflo had a solid reputation for low cost gold production and top notch people, including Robert Smith, Alan Hill, and Brian Meikle, who stayed on board to work with Barrick. In addition to the Camflo mine came stakes in two other mines, one near Reno, Nevada, and another by Ontario's Kirkland Lake. The Ontario interest later became the Holt-McDermott Mine, Barrick's first major find from initial exploration to full production. The Nevada property led Munk and his team to staggering success and the coveted title of the world's most profitable gold producer. But first there were trials and tribulations to wade through.
Barrick went public on the New York Stock Exchange in 1985, issuing shares at C$1.40 each. Though more successful than its IPO on the Toronto exchange, the company was still relatively unknown to Wall Street and its investors. With minor triumphs from mining operations at the Valdez and Camflo, and ongoing development of the Holt-McDermott mine, Barrick was not only making money but hedging to stave off any market downswings. Bob Smith, who had come on board with the Camflo deal, was now Munk's leading developer and righthand man. Smith helped spearhead Barrick's next acquisition, Utah's oft-closed Mercur Mine, a neglected property Texaco Inc. was looking to unload.
After arduously pulling together the $40 million asking price, Barrick excitedly took possession of Mercur Mine and its surrounding property in Utah. During the long negotiations, Smith and his other former Camflo colleagues, Hill and Meikle, discovered Mercur had much more to offer than expected. The acquisition turned out to be a major coup--not only because of additional gold deposits--but because Texaco had poured over $100 million into updating the mine before deciding to sell. Barrick paid less than half what Texaco had put into the mine, while gaining a property with considerably more assets than anticipated. Mercur Mine brought Barrick into the big leagues of gold production; Barrick, in turn, brought increased production and state-of-the-art processing to Mercur. In the course of two years, Barrick's fortunes had multiplied: revenues jumped from $13 million with gold production of 34,000 ounces in 1984 to $42 million and 116,000 ounces in 1985.
All That Glitters Is Gold: 1986-92
In 1986 Barrick had another year of hidden advantages after the company's prospectors traveled to the gold country of the Carlin Trend in north central Nevada. On the surface, buying the Goldstrike Property, along the United States' richest gold vein, was a good purchase; beneath the layers of rock, Goldstrike more than lived up to its name. The legendary Carlin Trend was home to several mines and mining companies, including one of Barrick's chief rivals, Newmont Mining Corporation. Newmont's Genesis Mine was a huge operation and located adjacent to the Goldstrike Property. After negotiating two separate deals, each worth 50 percent, Barrick had complete control of Goldstrike. Despite some initial setbacks, Goldstrike was confirmed as the richest gold deposit in North America and a wholly owned part of Barrick's growing empire.
By the late 1980s the Goldstrike Property was home to the exceptionally prolific Betze mine (named for the two geologists who discovered it, Bettles and Kornze), with several developments underway. Barrick had increased productivity, sold some gold, and stored the rest for a rainy day. By now hedging was no longer a trend but the industry norm, with Barrick one of its leading proponents. Yet some analysts felt hedging was not in the best interests of shareholders if prices rose significantly, to which Munk said, 'Isn't it more important to have no downside?' Then he needed only point to the numbers--stock valuation had gone up nearly 190 percent on the NYSE for 1987 alone.
In 1989 Munk was the conquering hero to shareholders and the industry when gold prices took a dive to their lowest point in three years. Amazingly, Barrick's earnings were robust, up over 20 percent, while stock prices rose an incredible 94 percent. Hedging, at least the Barrick way, had paid off tremendously. The same was true again in 1991 when lackluster prices brought devastating losses for many of Canada's producers. Yet Barrick surprised its shareholders and competitors with a 59 percent leap in earnings and a 68 percent jump in production. The next year Barrick reaped even greater rewards, with net income climbing 89 percent to $175 million on total revenues of $554 million, with production costs falling instead of rising, and gold production reaching a new high of 1.3 million ounces.
Yet 1992 was most significant for two other reasons: the first, to continue its exploration of the Carlin Trend's Deep Post region, Barrick and rival Newmont agreed to a joint venture for the land adjacent to both their properties. This amicable agreement, the Newmont/Barrick HD Venture, came not long after Barrick considered a takeover of Newmont, which fell apart. In exchange for a 40 percent stake, Barrick performed the onsite drilling, while Newmont was responsible for the processing. Given the region's spectacular gold deposits, both companies had high hopes for the venture. Second, Barrick announced its intention to develop a massive underground reserve in what was called the Purple Vein. The new Meikle Mine, named after Brian Meikle, had over 6.5 million ounces of particularly high-grade gold.
'Do a Barrick': 1993-96
The next year, 1993, Munk received Canada's highest honor, when he was named an Officer of the Order of Canada for his contributions to the country and beyond. The honor was both a personal and professional triumph for Munk, who had come to Canada with high hopes--though no one had envisioned just how far he would take those aspirations. Barrick, meanwhile, was full speed ahead. In 1994 came another banner year when the company won a bidding war for Lac Minerals Ltd., which turned out to be the biggest gold company acquisition in North and South America at the time. Lac Minerals owned several properties, but the most exciting were in the El Indio gold belt in the Andes Mountains, and Barrick's development team hoped El Indio's deposits might rival those found at Goldstrike.
By 1995 Barrick had ten working mines and four in development. At the close of the year the company had produced 3.1 million ounces of gold and reported reserves of 37.6 million ounces, an all-time high; sales surpassed the billion-dollar mark at $1.28 billion. In 1996 Barrick was in fantastic form with gold reserves of over 51 million ounces, a 40 percent upswing from the previous year's reserves. The company had become the planet's most profitable gold company and its second largest producer (behind Newmont). Not only had Barrick mined three million ounces of gold during the year at an average cost of $193 per ounce (as opposed to the industry's standard of $269 per ounce), but the company had identified an additional 25 million ounces of new resources in the form of gold mineralization. In addition, the company had two years' worth of gold production in its hedging program, and in nearly a decade of hedging had created $500 million in extra revenues.
The company's name had even entered the vernacular, with investors and analysts searching for outfits that could 'do a Barrick,' or become as successful as Barrick had over the 13-plus years since it segued into gold mining. With the August takeover of Arequipa Resources, Ltd. of Vancouver, came the Pierina mine and an additional 47 properties in Peru with promising futures. Barrick put the Pierina deposits into development and continued its exploration of Chile's Pascua, which was now up to ten million ounces in production. The two properties were expected to generate up to one million additional ounces of gold to Barrick's annual output within a few years, while the company's joint venture with Newmont had brought in 1.2 million ounces in reserves since its creation the year before. The new Meikle Mine on the Goldstrike property in Nevada also began production in 1996, on time and on budget. Sales for the year were $1.3 billion for 3.12 million ounces.
Just before the end of the year, Barrick seemingly had its industry by the tail--excellent cash flow, high gold reserves, and some of the richest gold properties in the world. Yet a new gold find in Indonesia was about to rock the gold industry, and Barrick would be right in the middle of the resulting maelstrom.
The Bubble Bursts: 1997-99
By the beginning of 1997, Barrick announced its pact with the Indonesian government to acquire a 75 percent stake in the Bulsang gold deposit, believed to be the biggest gold find since South Africa's Witwatersrand. Completion of the deal meant Barrick would shed its rank as second largest gold producer in the world, and rise to number one. Gold prices, however, bottomed out and no one was left unscathed. As Munk wrote in the company's 1997 annual report, 'The past year brought a new and sobering reality to the gold business.' This was putting it mildly as Barrick was assaulted on all fronts--financially, in the press, and by a lawsuit filed by Bre-X Minerals Ltd. Although Barrick's size and reserves protected it from much financial fallout, the company announced the closure of its less efficient mines (numbering four) and took a major hit in the third quarter. According to Maclean's, the company had been valued on the stock market at $15.4 billion, and by the end of 1997 had fallen to $8.6 billion with gold at a 12-year low of $295 per ounce.
Barrick also took heat for its hedging practices, with detractors accusing the company and the other major producers of manipulating the gold market, which Munk vehemently denied. In addition, the Bulsang gold project in Borneo had become a vicious mess. Initially, Barrick believed it had secured a 75 percent share of the mine, much to the dismay of the Calgary-based Bre-X, who had staked the claim and wound up with only a 25 percent interest. It was a classic David and Goliath struggle; Bre-X accused Barrick of influence peddling, in the form of former Canadian Prime Minister Brian Mulroney (a Barrick board member since 1993) and former President George Bush (who had joined the board in 1995) to gain access to Indonesia's Suharto government. Before the dust settled accusations of graft and greed touched everyone involved, including Bre-X, who then leveled a lawsuit at Barrick for attempting to steal the golden egg. Barrick eventually withdrew from negotiations; Munk maintained the company pulled out because the Indonesian government wanted too much control of the operation as well as ten percent of the action.
For Barrick, 1997 had been a rude awakening; the company was not above major market fluctuations regardless of its hedging program, which Munk still firmly believed in. Yet despite an earnings loss for the year, revenues were still a robust $1.28 billion, and gold production was three million ounces. The troubled year also brought a few executive changes: Bob Smith, president of Barrick since 1985, left his post to become vice-chairman and John K. Carrington was named the new president and COO. Barrick, however, bounced back the following year: in 1998 operating cash flow was an amazing $539 million, after costs had declined 12 percent due to the program implemented the previous year. Having slashed its operating mines to five, gold sales remained almost the same at $1.28 billion (up by $3 million) for the year, income topped $300 million for the first time, and gold production increased by 200,000 ounces. Barrick was still the most profitable gold company in the world, and for every ounce of gold sold, the company earned six times more profit than its competitors.
In October 1998, Barrick suffered a heavy blow when Vice-Chairman Bob Smith passed away. Generally referred to as 'the soul of Barrick,' Smith had helped steer the company to its preeminence in the 1990s. Smith's successor as vice-chairman was Carrington, and Randall Oliphant, formerly executive vice-president and CFO, took over as president and CEO.
The company again came under fire in the late 1990s for its hedging practices, during another industry slump causing substantial losses. With prices reaching their lowest point in 20 years, and Barrick's sales soaring in 1999, the finger-pointing was inevitable. Barrick was accused of dumping too much gold on the market, triggering lower prices, when some of the blame lay with banks and the International Monetary Fund's plans to unload substantial amounts of their gold reserves. Ironically, Munk lobbied hard to get the banks and the IMF to reconsider, since the gold market was in such disarray. They complied; gold prices soared; everybody was content--until the next downswing. Several of the industry's top producers, however, including Barrick, Placer Dome, and Cambior, Inc., vowed to decrease their hedging programs.
While the Indonesian debacle was over but not forgotten, Barrick still went after promising properties. In 1999, following Placer Dome's lead, Barrick went to Africa and soon acquired Sutton Resources. Sutton had been exploring the Bulyanhulu property, situated in northwestern Tanzania, extolled as East Africa's largest gold deposit with reserves of 8.8 million ounces of exceptionally high-grade gold. For every Bulsang, there was a Bulyanhulu--and Barrick had far more of the latter than the former. The company finished the year with gold sales of $1.42 billion, net income of $331 million (up 10 percent from the previous year), and production up another 500,000 ounces for a total of 3.7 million ounces of gold.
2000 and Beyond
Barrick on the brink of a new century was much the same as Barrick historically&mdashquisitions, steady production, and exceptional profit. In March, the company reached an agreement with TNR Resources to buy many of its Argentinian properties, an area in which Barrick was already established through its El Indio gold belt explorations and mining. Yet Peter Munk was determined not to take his company's fortunes for granted. Quoted in the corporate history by Peter C. Newman, which Barrick commissioned and published in 1995, Munk said: '... We tell each other not to get too euphoric. I remind them [his executive management team] not to be caught in the deadly sin of hubris. We must never start believing we're invincible; that would be fatal. I keep repeating to my people--and I make them repeat it back to me so I'm sure they get it--that we are still the same human beings we were 10 years ago when we were struggling. Balance sheets change but people don't. We'll never get too big for our britches.'
Principal Operating Units: Bulyanhulu Property (Tanzania); Goldstrike Property; Pascua-Lama Property (Chile); Pierina Property (Peru).
Principal Competitors: Anglo American Corporation; Cambior Inc.; Goldfields of South Africa; Homestake Mining Company; Newmont Mining Corporation; Placer Dome Inc.