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So Big It's Brutal

Being No. 1 in the world doesn't mean life is easy for Barrick Gold.
The Colossus must finesse some delicate balances as it searches for
the sweet spot in the ground and in the hedge book

By Charles Davies
The Globe and Mail, Toronto
Friday, May 26, 2006

To reach Barrick Gold Corp.'s Goldstrike property, you take U.S.
Interstate 80 west from Elko. The turnpike winds along the Humboldt
River through the cowboy country of northeastern Nevada, a parched
terrain of low mountains and frying-pan valleys covered with
sagebrush and cheat grass. Occasionally, a steer bearing the shaggy
remnants of its winter coat can be seen on a hillside, basking in
the spring sun.

As he pilots our van along at 120 clicks per hour, Barrick
communications manager Lou Schack provides a running commentary on
the doings of the irascible cattlemen and sheepherders of Basque
descent who share the region with native Americans and adherents of
communes with fanciful names like White Buffalo Nation. All in all,
he says, "it's a good place for people to hide out."

Or find gold. At the town of Carlin, Schack turns the van north on a
worn two-lane blacktop, dodging mud-spattered school buses filled
with miners going off their shift. We twist through property owned
by Barrick rival Newmont Mining Corp. and into the Tuscarora
Mountains. Some 40 kilometres on, we reach Goldstrike, a 10,367-acre
complex consisting of the Meikle and Rodeo underground mines, the
Betze-Post open pit, and two processing plants used to crush, roast,
leach and otherwise coax gold out of the dull grey ore.

The pit itself is vast, 3,000 metres across and 550 metres deep. You
could comfortably fit several sports stadiums inside it. A fleet of
haul trucks inch along the sloping pit grades. They're nine metres
high, each one bearing 330 short tons per load. But from the top
edge, they are just so many mechanical ants.

Goldstrike sits on the Carlin trend, a sedimentary formation that
holds the greatest concentration of gold in North America. In the 20
years since Barrick bought a 50% interest in the property and
assumed its management, the haul trucks have lugged two billion
short tons of ore to processing, yielding 29.5 million ounces of

Barrick assumed total control in 1987, a prescient move given the
extraordinary contribution that Goldstrike has since made to its
revenues. Last year, 37% of Barrick's production came from this
site. And, according to the company's geologists, there are another
17 million ounces waiting in the ground.

Barrick's other Nevada treasure, of which it acquired a 60% stake in
the company's hostile takeover of Vancouver-based Placer Dome Inc.
earlier this year, is an hour's drive to the southwest. The Cortez
property is a sprawling open-pit complex that yielded more than
900,000 ounces of gold last year. If one includes a nearby surface
mine under development, the site holds another 10.5 million ounces,
enough to keep the haul trucks busy for the next 28 years.

By buying Placer Dome -- a feat that cost $10 billion (all currency
in U.S. dollars) --Barrick has become the world's largest gold
producer, surpassing Newmont and U.K.-based AngloGold Ashanti Ltd.
The projected output this year from Barrick's 27 mining operations
around the globe could be as much as 8.9 million ounces, compared
with 2005's 5.5 million. The company is also looking forward to more
projects coming on line: nine of them, spread across North and South
America, Africa, Australia, and Russia. The company has an estimated
139 million ounces of reserves.

There's more good news. Barrick's earnings performance has improved
dramatically since the early part of the decade, and even its
chronically under-appreciated shares are gaining some ground. With
the price of gold touching heights not seen since the late 1970s,
the company's future would seem to have a guaranteed lustre.

Except that it's not easy being golden.

Greg Wilkins doesn't get out to Nevada much, or to other mine sites,
for that matter. And when he does, Barrick's 50-year-old chief
executive says he's there more as a motivator than an operator. His
job, he says, is to "communicate corporate vision." That's a picture
as serene as the view he gets from the company's modernist, glass-
walled headquarters high atop Toronto. "We anticipated that the
market was going to improve for us and we made a lot of decisions to
support that," Wilkins says. "The board committed $1.2 billion to
the development of four new mines, and they've just opened within
the last six to nine months. And Placer Dome is a great fit. Now we
have a pipeline of $5 billion to $7 billion of new projects to work

Even without Placer Dome, Barrick was dealing from strength. In
2005, the company's gold sales were up 21% to $2.35 billion, while
net income soared 61% to $401 million. First-quarter 2006 earnings,
released early in May, were also promising, with net income up 239%
to $224 million, thanks partly to the inclusion of Placer Dome
operations. Wilkins, a chartered accountant, has been prudent with
the balance sheet, leveraging things gently last year by boosting
long-term debt 4% to $1.7 billion -- no burden, given Barrick's
nearly $12.8 billion in equity capital.

Wilkins's priority for 2006 is to complete the integration of Placer
Dome, creating a corporation that is both less and more than the sum
of its parts.

Less because the sale of all of Placer Dome's Canadian operations as
well as smaller properties in Chile and the Dominican Republic to
Goldcorp will shortly be completed. The net gain for Barrick: $1.6
billion. Meanwhile, Placer Dome's senior management has left,
separation packages in hand. By Wilkins's count, the combined
company is down 250 jobs, a light trim in a company with just over
20,000 employees.

More because the new Barrick will not only be more diverse
geographically, but more efficient. Wilkins thinks the company can
save $200 million a year through rationalizing, reducing finance and
tax costs and applying its enhanced purchasing power.

To ensure that investors see the light emanating from the recharged
company, Wilkins promises to make serious progress in fixing what
one analyst calls Barrick's "Achilles heel": its hedge book. For
most of its 23 years, Barrick has sold significant portions of its
production in the forward market to stabilize revenues and satisfy
the banks that finance its projects. Hedging works nicely when gold
prices are falling, by guaranteeing a fixed return on production.
But when gold prices are rising, as they have been more or less
consistently since 2001, hedging locks a producer into prices that
are well below those on the spot market.

As of Dec. 31, Barrick had fixed-price forward contracts with
bullion dealers and industrial customers covering 12.5 million
ounces -- approximately a year and a half's worth of production.
Another 700,000 ounces were committed to floating-price forward

Long-time Barrick watchers like John Ing of Maison Placements Canada
Inc. argue that the large hedge book amounts to an "opportunity
cost" for the company because all of those contracted ounces --
despite their 10-15-year terms -- could well end up being sold at a
significant discount to the spot price. The company confirms this,
noting in its 2005 annual report that, based on year-end spot gold
prices, the value of its fixed price and floating gold sales
contracts at Dec. 31 was a negative $1.54 billion.

Wilkins's predecessor as CEO, Randall Oliphant, lost his job in
early 2003 principally because the hedging issue had driven off
investors. Later that year, Wilkins adopted a "no new hedge" policy:
The company would avoid new hedges and try to reduce the book.
Buying Placer Dome, however, fattened it instead. Subsequent
unwinding of contracts has reduced the book to 14.3 million ounces,
and Wilkins promises it will be down to 9.5 million ounces before
the end of 2009. That said, he defends a reasonable level of hedging
as an essential risk management tool for the company.

Still, he'd be wise to follow through on his promise. Over the past
year, even as bullion has taken off, Barrick's stock has yo-yoed to
a roughly 20% gain on the TSX (it recently traded at $34). By
comparison, the S&P/TSX Capped Gold Index (Barrick and 16 senior
Canadian gold companies) is ahead about 85%, and the Amex Gold Bugs
Index, which tracks 15 of the largest unhedged gold stocks in the
U.S., is up 115%.

Goldstrike, and Nevada, aren't just where the gold is for Barrick.
The property and the state are the crucibles in which Barrick's
aspirations and challenges are made plain. It is, for starters, the
hothouse where the culture of the new post-Placer Dome company is
being nurtured.

Gold-watchers suggest that the cultural adjustments may be the
hardest ones for the post-merger company to make. "Barrick has a
much more growth-oriented, aggressive management style," says Geoff
Stanley, who follows gold stocks for BMO Nesbitt Burns Inc. in New
York. "It's entrepreneurial, whereas Placer Dome was much more
process-oriented and much more a traditional mining company. Perhaps
digging holes was more important than making money to Placer."

Senior Barrick people are somewhat less inclined to snipe, having
decided that what began as a hostile takeover should ultimately be
seen as a friendly affair. Alex Davidson, executive vice-president
of exploration, allows that Placer Dome was a "very tired, plodding
organization," adding that none of the acquired company's senior
exploration people were asked to stay on. And in general, he
suggests, the relatively older executive crowd at Placer Dome
wouldn't have been a good fit at Barrick. "Maybe they thought they
were aggressive," he says, before pausing to reconsider. "We don't
want to run them down. They were different."

As a Goldstrike veteran, Tracy Miller hasn't had to adjust
culturally, but she personifies another crucial aspect of Barrick's
Nevada experience -- the company's font of smarts on how to
efficiently run a large-scale mine. Miller has been at Goldstrike
for 16 of her 43 years, lately as engineering manager. At
Goldstrike's administration building, in a dimmed meeting room that
overlooks the open pit, she aims a slide projector at a screen
behind a box of doughnuts and a cluster of foam cups, and launches
into the mine's tale of accomplishments.

It is an impressive narrative of how a $62-million investment
engineered by Barrick's legendary chairman, Peter Munk, not only
gave the company extraordinary amounts of gold but also a corporate
culture: a safety-conscious operating approach, a strong sense of
environmental stewardship, and a welter of programs designed to
improve efficiency. Miller discusses how the Courageous Leadership
program gets staff at all levels to reduce accidents; how water
pumped from the Betze-Post open pit is returned to the water table
or channelled to nearby ranches for irrigation; and how a program to
give a little TLC to the 3.6-metre-high, $30,000 tires used on the
haul trucks saved $1.7 million last year.

Initiatives like this make Goldstrike a kind of Barrick
University. "From a technical point of view, that's where we train
our miners and geologists," says Davidson. "It's a really good base
of operations from which we can go out and explore in Russia or
Tanzania or wherever."

Goldstrike and the other Nevada operations also predominate in
Barrick's overall exploration effort. With Placer Dome folded in,
Barrick's 2006 exploration budget will rise to $170 million from
2005's $120 million. One-half of that total will be spent on lands
close to existing projects, many of them in Nevada. And waste ore at
major sites will be re-evaluated, since, with rising gold prices,
it's now worth processing it to extract previously uneconomic
amounts of gold. "Our guys are still learning in Nevada," says
Davidson. "It's quite amazing.

"Nevada is the base on which everything else builds."

It's not all good, though. Miller's slide show hints at some of the
darker aspects of mining, including the environmental and political
problems that any international mining company has to shoulder. By
definition, any gold producer is chewing through an awful lot of the
planet to extract small amounts of a substance that doesn't qualify
as a critical industrial product and is mainly used for jewellery
and as a safe haven for speculators.

One of the inherent issues is workplace safety. Amid all the good
news, Miller quietly notes that three people have died on the job at
Goldstrike in the past two years.

All in all, 20 workers have died at Barrick sites worldwide over the
past five years. If you add in Placer Dome's fatalities, the total
rises to 41. Using criteria developed for its Canadian social
investment database, Jantzi Research ranks Barrick sixth-best among
23 gold producers on health and safety issues. The ranking would be
higher but for the fatalities and some other instances of health and
safety violations. Conversely, Jantzi notes that Barrick's overall
lost-time injury and recordable incident rates have been declining
in recent years.

Then there's the environment. Company pride aside, Barrick's water-
handling practices at Goldstrike have caused concern, says Jantzi
mining analyst Irene Sosa. In 2003, she says, a U.S. Bureau of Land
Management study of the mine's groundwater pumping practices noted
that two sinkholes had developed within six kilometres of the open
pit. The bureau also commented that several area springs had dried
up and that some animal and fish habitats were being disturbed. This
prompted Barrick to improve habitats, fund water quality research,
and redirect water flows. This year, the company will continue to
work at restoring area springs.

Sosa also thinks Barrick should keep an eye on the land claims of
the Western Shoshone Nation. Despite a 1989 U.S. Supreme Court
decision that ruled against their claim to vast portions of Nevada
and California, including the Goldstrike and Cortez properties, the
Western Shoshone, backed by the likes of the United Nations and the
Organization of American States, have continued to press their case.

Barrick has avoided direct involvement in the land claims issue,
taking the position that it should be worked out by the Western
Shoshone and the U.S. government. Besides, the company has had
bigger social-responsibility problems elsewhere, like its Pascua-
Lama project on the Argentinian-Chilean border. As part of its
environmental impact work at the site, the company initially
suggested moving three glaciers, angering the likes of Chile's
Regional Environmental Commission, which saw a threat to the
livelihoods of some 70,000 peasants who depend on glacial runoff for
agriculture. Barrick eventually backed off and secured the project's
approval, but not before further upsetting the locals by assembling
a group of experts who suggested that global warming would likely
eliminate the glaciers well before the open pit reached them.

Along with its own mistakes, Barrick has inherited Placer Dome's
sins. Placer Dome sold its 40% stake in Marcopper Mining Corp. in
the Philippines province of Marinduque in 1997, but the methods it
used to dispose of tailings beforehand have produced a legacy of
fouled bays and rivers as well as class-action lawsuits, the most
recent of which was filed against the company last October by the
province's governor.

Sosa also points to the mess Placer Dome left behind at its 75%-
owned Porgera mine in Papua New Guinea. There, tailings have long
been discharged into rivers (an illegal practice in Canada). A class-
action suit was launched this year. More damning still is the number
of trespassers killed by security forces at Porgera -- eight since

Barrick declines to discuss Porgera because of the ongoing legal
battle. Wilkins says the company is working through its lawyers (the
same lawyers who worked for Placer Dome) "to consider what our
responsibilities are." But he indicates both the environmental and
security problems will be fixed. "We have one standard for our
environmental stewardship and human relations," he says. "It's a
worldwide standard and we don't go to the minimum in jurisdictions
in which we operate."

Until those disputes are settled, Barrick will have to accept a
rather equivocal rating on its overall corporate social
responsibility. "We recognize that they've done good things and that
their management systems and reporting practices are better than
other Canadian mining companies and at the level of most large
international counterparts," says Sosa. "However, we have concerns
about the impact of some of their operations."

Some of the numbers in Miller's slide show indicate an even larger
business challenge confronting Barrick than the social-
responsibility files represent. Goldstrike is now a little beyond
its prime, with a production curve that's edging down and a cost
curve that's creeping up. A high spot market is all very nice, but
you still require the gold production to take advantage of it.

Rob McEwen, CEO of U.S. Gold, another Nevada operator, says Barrick
and other major producers are all in the same cost-production
squeeze, one that's compounded by the difficulty of finding
significant new deposits in most parts of the world. He suggests
that buying Placer Dome was a smart move toward long-term survival,
particularly because its Nevada holdings could turn out to be
elephantine. "There's a light going on in everybody's head. Could
the Cortez trend turn out to be as large as the Carlin trend?" he
says. The fact that all this highly prospective property is in the
U.S. is just a bonus. "This is the one place where we have the
infrastructure, where we know the geopolitical situation, and the
currency works in our favour," says McEwen.

For Barrick, naturally, Nevada figures large in its plans to stay on
the sunny side of the cost/production equation. All told, the
company estimates it will spend up to $7 billion over the next five
to seven years to realize a pipeline of projects representing 60
million ounces of gold, not to mention substantial amounts of silver
and nickel (a legacy of acquiring Placer Dome). With a current
market capitalization of $26 billion, a cash position of $1.2
billion and a solid credit rating, the company has the heft to pull
off the outlay.

Barrick has always grown largely by acquisition. Having whet his
entrepreneurial appetite on high-end stereo systems and hotels in
the South Pacific, Peter Munk initially developed Barrick in 1980 as
a junior oil and gas company. In 1983 the underperforming energy
assets were sloughed off to Munk's privately held Horsham Corp. and
Barrick was reconstituted as a mining company. To go shopping, Munk
often used innovative financing techniques, at times raising money
with gold funds, precursors of the hedging practice that gave
investors a shot at escalating royalty payments in the event gold
prices rose. Barrick snapped up such heavyweights as Camflo Inc. in
1984, Lac Minerals Ltd. in 1994, Sutton Resources in 1999, and
Homestake Mining Co. in 2001.

Wilkins has been along for much of the ride. A Montreal native and
Concordia University graduate, he migrated to Toronto in 1978 and
became a CA. After a short, unrewarding stint at Molson Cos., he
joined Barrick in 1981. When Barrick morphed into a mining company,
Wilkins initially stayed behind to "clean up the mess" of stranded
oil and gas assets, all the while being tutored by Munk. He later
returned to Barrick and worked his way up to chief financial officer
before leaving in 1993 to run Horsham, later merging the firm with
the Munk-controlled real estate company Trizec Corp. to create
TrizecHahn Corp. It was subsequently converted into a U.S. real
estate investment trust.

Wilkins's sojourn at Horsham saved him from some dark times at
Barrick. Despite generally solid bottom-line results, the company
faced operating troubles at mine sites from Nevada to Tanzania and
ongoing investor irritation over the hedge book's effect on the
share price. As a result, in early 2003, CEO Randall Oliphant --
like Wilkins, an accountant by training and a long-time acolyte of
Munk's -- was shown the door.

Wilkins, who knows something about risk taking -- if only by virtue
of his avocation as an auto racer -- got the nod as Oliphant's
replacement. He wasn't fully pleased by what he found on the mother
ship. "There was a hubris that had grown up in the company because
it had been very successful. It was, 'Boy, we know how to do things
and so we're going to continue to do things the Barrick way.'"

That "way" was centralized command-and-control decision making. The
approach worked fine when Barrick was a small company with
relatively few mining sites but it was not adequate for the new,
global Barrick. Wilkins soon devolved the company into five regional
business units, each with operational decision-making authority. He
re-examined Barrick's worldwide project pipeline, from Pascua-Lama
in Argentinian and Chile to Cowal in east Australia. And he
tightened up the balance sheet by initiating a share buyback, partly
in anticipation of coming across an acquisition bargain. Last
November, he found it in the underperforming shares of Placer
Dome. "On a relative basis, it was a good time to pounce," he
says. "We were accused of being opportunistic."

But not by analysts, who generally have good things to say about
Barrick and Wilkins. "I'd say he's done a quite commendable job of
gaining the respect of shareholders," says CIBC World Markets gold
analyst Barry Cooper. But the jury of investors is still out on the
virtues of the merger. "He was on a good track for good share price
performance up until he bought Placer Dome," says Cooper. "But keep
in mind that when you make a strategic move that's for the next five
to 10 years, you can experience short-term pain for long-term gain."

The sky is a dull gray on the spring morning of Barrick's annual
meeting in Toronto, but the mood inside the Metro Convention Centre
theatre is dazzling. Pockets of spontaneous applause break out
during the presentations. Standing at a podium emblazoned with the
Barrick logo before a cinemascope-sized graphic display of the
company's global reach, Wilkins leads shareholders through the past
year's triumphs and hints at a long and prosperous future for a
company that now has unprecedented size and clout.

He's followed by the 78-year-old Munk, resplendent in a dark gray
pinstripe suit, pale blue shirt, and a luminescent pink tie. Munk
pauses for effect and then leans over the podium. In a gravelly
voice speckled with traces of his Budapest childhood, he delivers a
rumination that is both self-congratulatory and self-deprecating, a
nod to Barrick's humble origins and a prelude to a glorious
future. "I can't help but sit back and say that what we have done
here has been spectacular," he says. "But it's not the mines and
it's not the reserves, [and] it's not the credit rating that's the
best in the industry. What makes me proud, what makes me
exceptionally happy, are the intangibles those intangible values
of integrity from which every decision automatically springs. It's
the culture that this company has had in its DNA from the time it
bought Camflo Mines."

You should give as good as you get. Integrity, as Munk says, means
many things in gold mining, including paying people fairly for their
work and contributing to local communities. It can even mean, he
says puckishly, funding and building housing projects for miners in
places like Elko, "that dusty, miserable Nevada town with one


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