Barrick's Thornton said to seek China deal to rebuild gold miner

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By Liezel Hill and Matthew Campbell
Bloomberg News
Sunday, December 1, 2013

http://www.bloomberg.com/news/2013-12-01/barrick-s-thornton-said-to-seek...

Peter Munk built Barrick Gold Corp. into the world's largest gold producer by expanding into Africa and South America. Now former Goldman Sachs Group Inc. President John Thornton is betting on China to help revive the beleaguered company's fortunes.

At a Dec. 4 board meeting, Thornton will be confirmed as Barrick's next chairman, succeeding Munk, 86, who plans to retire at the Toronto-based company's next annual shareholders meeting after three decades, according to people familiar with the situation.

Thornton, 59, currently co-chairman, already helps to oversee long-term corporate strategy. As part of that remit, he's trying to establish partnerships with Chinese companies that may include investment in Barrick and future mining projects, said the people, who asked not to be identified discussing a private matter. China Investment Corp., the country's largest sovereign wealth fund, is among potential partners Barrick has met with, the people said.

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The leadership change at Barrick comes at the end of a difficult year for the company. It has lost 41 percent of its market value in 2013 while debt levels have soared after a slump in gold prices, rising operating expenses and a cost blowout at an $8.5 billion mining project in the Andes.

"Barrick needs to do whatever it can to get its debt paid down," said Rick de los Reyes, who manages about $1.1 billion at T. Rowe Price Group Inc. in Baltimore. "That balance sheet is going to be a really big problem."

Barrick has already taken steps this year to cut costs and improve its balance sheet. It raised $3 billion in a share sale last month, using some of the proceeds to repurchase bonds. Jamie Sokalsky, who started as chief executive officer in June 2012, has sold less-profitable gold mines and the company's energy arm and put other operations under review.

"They have way too many assets and many of them are legacy assets," Adam Graf, an analyst at Cowen Securities LLC in New York, said in an interview. "They should dispose of those assets and redeploy that capital."

With Thornton as chairman, there may be more changes ahead. A Wall Street banker without a mining background, he was behind the decision last year to bring in management consultant McKinsey & Co. to help evaluate Barrick's strategy, according to the people familiar with the situation. While he sees Barrick's top priority as remaining the leading gold producer, he's open to a rethink of the entire business, which may involve acquiring mining assets in other commodities, such as copper, they said.

Thornton's outside perspective may prove to be an advantage, said Don Reed, the CEO of Franklin Templeton Investments Corp., where he helps manage assets including Barrick shares.

"You don't always have to have tremendous experience at a given company to lead it," Reed said in an interview.

Thornton sees Barrick gaining an advantage by forming relationships with Chinese companies that can provide capital, engineering expertise and political influence, according to the people. He plans to use his connections to help seal a series of modest deals that may lead to a formalized partnership agreement, they said.

Barrick plans to issue an update after the Dec. 4 board meeting, said Andy Lloyd, a company spokesman.

Thornton spent 23 years at Goldman and was seen as a top contender to succeed Henry Paulson as CEO in the early 2000s, according to "Money and Power: How Goldman Sachs Came to Rule the World" (2011) by William D. Cohan. He departed in 2003 when it became clear Lloyd Blankfein would take the reins, according to the book.

After Goldman he headed to China, helping to start up a business leadership program at Beijing's Tsinghua University. He sits on the board of China Unicom (Hong Kong) Ltd., the country's second-largest mobile phone carrier, and is a member of China Investment Corp.'s international advisory board. He's also chairman of the board of trustees of the Brookings Institution, where he helped establish the John L. Thornton China Center.

That Chinese experience will be valuable at Barrick, said De los Reyes at T. Rowe Price. The country's economic expansion has made it the largest buyer of commodities from copper to iron ore. China overtook India this year to become the biggest consumer of gold.

Still, gold has slumped 25 percent in 2013 and is heading for its first annual decline in 13 years amid concerns about low inflation and the U.S. Federal Reserve curtailing debt purchases.

Despite that, Barrick is still Canada's most valuable mining company. It has remained independent while peers Inco Ltd. and Falconbridge Ltd. were taken over by foreign acquirers in the past seven years.

Barrick is also far from the only gold miner to struggle with lower metal prices. The world's largest gold producers have taken at least $26 billion of writedowns this year while also cutting spending and firing workers amid rising costs.

"That's not a recipe anyone envies," Templeton's Reed said.

Barrick currently operates two copper mines. One of them, Lumwana in Zambia, has disappointed. The mine was acquired when Barrick bought Equinox Minerals Ltd. in 2011 for C$7.3 billion ($6.9 billion). Barrick's results for the fourth quarter of 2012 included a $3 billion writedown on Lumwana after production costs were higher than expected.

Barrick had another setback in February when talks to sell its African Barrick Gold Plc (ABG) unit to state-owned China National Gold Group Corp. broke down.

The process foundered as the gold price declined, according to the people familiar with the situation. The experience was frustrating for China Gold. Dealing with Barrick was "like asking a tiger for its own skin," Tong Junhu, the general manager at the company's overseas division, said in an interview last month.

Barrick is still open to selling African Barrick, according to the people familiar with the situation. Barrick has already sold three Australian mines this year. The company and Goldcorp Inc., a Canadian rival, are trying to divest their jointly owned Marigold mine in Nevada, two people with knowledge of the efforts said Nov. 14.

Munk, a Hungarian immigrant who escaped the Nazis as a teenager, founded Barrick Resource Corp. as an oil and gas company before shifting to gold in 1983 with his first mine. Barrick has made at least 31 acquisitions since 1994, according to data compiled by Bloomberg. It became the industry leader when it bought Placer Dome Inc. in 2006 for about $10.2 billion including net debt, a record for a gold takeover.

"The ultimate goal is, in my case, to be the biggest," Munk said at a May 2011 conference organized by Bloomberg in Toronto. "Why would you be happy with halfway?"

That drive for scale spurred the decision to develop Pascua-Lama, a gold project 4,500 meters (14,700 feet) above sea level on the Argentina-Chile border. The estimated construction cost was $3 billion when development was approved in 2009. Barrick announced the suspension of construction work in October this year following cost overruns and an environmental dispute. By then the price tag had more than doubled.

Thornton joined Barrick as a director in February last year and was appointed as co-chairman in June of 2012. His $17 million compensation package proved to be controversial. An $11.9 million signing bonus was described by Canada's six largest pension fund managers in April as a "troubling precedent."

At Barrick's annual shareholders meeting that month, a non-binding resolution on executive pay had 85 percent of votes cast against it. Defending his co-chairman, Munk told the meeting that Thornton had useful contacts in China and that Barrick needed him to secure access to governments and protect against resource nationalism, the "ultimate threat to the very lifeline of the mining industry."

Pay hasn't been the only focus of investors' ire toward Barrick. Ontario Teachers Pension Plan said in October at least two-thirds of the miner's board should be independent. Howard Beck, a lawyer, and former Canadian Prime Minister Brian Mulroney have been directors for 18 years, while Munk's son, Anthony, has been on the board since 1996.

Barrick said in a Nov. 8 filing it's considering changes to executive pay and a "rejuvenation" of the board.

"I'd hope that where all this is going to come out is with a better governance process at Barrick, more independent directors, much more attention to having reasonable levels of compensation," said Michael Sabia, the CEO of Caisse de Depot et Placement du Quebec, Canada's second-largest public pension fund.

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