CAmagazine is the leading accounting publication and preferred information source for Canadian chartered accountants and financial executives.
Paul McLaughlin is a Toronto-based freelance writer www.paulmclaughlin.ca
Two years and two risky deals later, Barrick’s CEO Aaron Regent has shown the mining community that he’s one leader not afraid of taking chances
When Aaron Regent, the president and CEO of Barrick Gold Corp., addressed the annual general meeting of the world’s largest gold producer in April, he had a lot of good news to bestow.
In a matter-of-fact tone, the 45-year-old CA, who had been appointed to the challenging role some 27 months earlier, began by telling the assembled shareholders at Toronto’s Metro Convention Centre that Barrick had “a strong year in 2010.” That was an understatement. The price of gold had surged to US$1,228 an ounce last year, up 25% from the year before and more than 200% since 2004.
In May it was nudging US$1,512 on the New York Stock Exchange and in June reached US$1,540 an ounce. Those numbers contributed significantly to Barrick, which has 25 operating mines and six projects on five continents, being able to report record adjusted first-quarter net earnings in 2011 of US$1.1 billion, up 32% from the prior year’s same period. Operating cash flow also jumped, by 27% from the previous first quarter, to US$1.44 billion.
As Regent continued to chronicle Barrick’s impressive financial accomplishments, it’s likely most in the audience had a controversial development on their minds, one that both Regent, and Barrick’s legendary founder and chairman, 83-year-old Peter Munk, were about to address.
Two days before the AGM, Barrick made a surprise announcement: it had offered US$7.3 billion in a cash-only bid to purchase Equinox Minerals Ltd., a copper producer with operations primarily in Zambia and, to a lesser extent, in Saudi Arabia.
The news that the Canadian gold giant was about to almost double the revenue it generates from copper to about 20%, at a time when gold seemed to be on a never-ending glee ride, didn’t go down well with the markets. Barrick shares dropped almost 10% in the first week after the deal was disclosed.
The friendly acquisition, Regent said, was a unique and rare opportunity to purchase a substantial copper producer that had excellent potential to significantly increase production, especially in Zambia. “The financials of this asset are strong. At current copper prices [in about one year] the company will be generating about $1 billion of EBITDA. This has the potential to increase to about $1.5 billion with the expansion of Lumwana [the Zambian mine]. This will provide us with another major earnings and cash-flow generator.”
Regent’s rosy predictions for the copper deal are based on his belief that the mineral’s current near-record price will not drop significantly, as some analysts have predicted. “We believe that prices will continue to be well supported for the foreseeable future,” he says. “Demand is expected to increase by around 800,000 tonnes per year, underpinned by the emerging markets and China.”
No matter what transpires with the price of copper, the Equinox transaction is without question a gamble, a big enough one that Munk felt compelled to assure the audience that Barrick was not abandoning its core strength.
“Hear me loud and clear,” the dapper Munk proclaimed passionately. “Do not think that something we have worked for for 28 years is going to be given up. Who is so idiotic to kill the goose that laid the golden egg?”
For the second AGM in a row, Munk congratulated Regent on his character. Last year he referred to Regent’s “imagination, the new spirit [that he brought to Barrick], the entrepreneurial thinking [and] the visionary approach.” But one description seemed to override the others: “courage.”
This was used in reference to a huge undertaking that had dominated Regent’s first year at the gold company. In September 2009, Barrick announced it would eliminate its fixed-price hedge book, a bold move for which it raised US$4 billion and took a US$5.7-billion charge to earnings. This was the largest equity offering in Canadian history. When Barrick announced the termination of the hedge book it had said it would happen within 12 months. But by early December 2009, Barrick had paid off the balance. “We are lucky that we are in a business [where] we can judge performance by a very measurable matrix,” Munk told the 2010 AGM, “and the results are nothing more than spectacular, nothing less than outstanding.”
Two large and risky moves in just more than two years make it more than clear that when Barrick surprisingly selected Regent to helm the mining company it was getting a leader who was willing to take chances. Contrary to Barrick’s tradition of hiring from within, Regent was an outsider, whose most recent business card had read senior managing partner of Brookfield Asset Management and co-CEO of its infrastructure group. His education, however, was not a departure from the norm. Both previous Barrick CEOs — Greg Wilkins, who had become executive vice-chairman and remained in that role until he succumbed to cancer in December 2009, and Randall Oliphant — were also accountants. “I think [hiring CAs] is in keeping with the DNA of the company,” John Ing, president and CEO of Toronto investment dealer Maison Placements Canada Inc., told Reuters when Regent’s selection was announced, by which he meant the company was a buyer of properties rather than an explorer. “Barrick’s problem is like all of the gold companies’ in that they’re on a treadmill. They have to replace ounces. A money man with his background will be useful.”
Reaction to the hedge deal had been primarily positive. “The hedge book had long been a concern with investors,” said David Haughton, co-head of mining research, Toronto, at BMO Capital Markets. “Its elimination positions the company to fully benefit from development of its next generation of large-scale, lower-cost mines.” Many supporters of the company — and its critics, including one of its harshest — echoed Haughton’s sentiment. “I’ve hated Barrick for about the last 10 years, but I’ve recently changed my opinion,” says John Embry, chief investment strategist at Toronto-based Sprott Asset Management LP. What caused his abrupt turn in thinking? The hedge-book decision and the man who drove it. “Aaron Regent seems to be an open, decent, smart guy,” says Embry, “and that is not something I would have said has characterized Barrick in the past.”
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