Gold­man banker takes on world’s largest gold miner

John Thorn­ton, for­merly of Gold­man Sachs, tossed the rule­book when he took over Bar­rick

Waterloo Region Record - - Business - JAC­QUIE MCNISH

Min­ing is fa­mously boom and bust. Money and pa­tience are manda­tory. In bad times, com­pa­nies sell as­sets and close mines. In booms they buy up all they can.

John Thorn­ton threw that rule­book out when he took over strug­gling Bar­rick Gold Corp., the world’s largest gold pro­ducer. The for­mer Gold­man Sachs Group Inc. pres­i­dent was an in­dus­try am­a­teur, as were most of his top hires. He fol­lowed Gold­man as a model for com­pany com­pen­sa­tion. In­stead of buy­ing when prices re­cov­ered, he cut costs and sold as­sets.

Mr. Thorn­ton, 64 years old, spends only two or three days a month at Bar­rick’s Toronto head­quar­ters. He com­mu­ni­cates con­stantly with his team by email, some­times fir­ing off re­quests late at night or when ex­ec­u­tives are on va­ca­tion, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. If he doesn’t re­ceive a quick re­sponse, Mr. Thorn­ton re­peats the re­quest with the new sub­ject line: “re­send­ing,” these peo­ple said.

At one point, he grew so frus­trated about the lack of progress with a messy min­ing dis­pute in Tan­za­nia that he in­ter­vened to strike a set­tle­ment with­out telling many of the com­pany’s ex­ec­u­tives and di­rec­tors.

The for­mer banker’s turn­around plan has suc­ceeded in rein­ing in Bar­rick’s debt. It has also eroded the com­pany’s gold pro­duc­tion and re­serves. In­vestor un­cer­tainty about the miner’s plans has con­trib­uted to a 33% share price de­cline in the past 12 months.

Shares of its clos­est ri­val, New­mont Min­ing Corp. trade at more than three times that of Bar­rick’s, re­flect­ing in­vestor con­fi­dence that it is on course to sur­pass Bar­rick as the world’s largest gold pro­ducer as soon as next year.

Last year Bar­rick sold a large stake in an Ar­gen­tine gold mine that ranks as one of the world’s largest.

“You can’t re­place a qual­ity as­set like that,” said Pierre Las­sonde, a Cana­dian gold min­ing en­tre­pre­neur and re­tired New­mont vice chair­man. “Fi­nan­cial dis­ci­pline is im­por­tant, but if you don’t in­vest money to ex­plore or ac­quire qual­ity gold re­serves you are shrink­ing to obliv­ion.”

Mr. Thorn­ton is ap­proach­ing Bar­rick more like an ac­tivist in­vestor. He said he was in­flu­enced by Wil­liam N. Thorndike’s 2012 book, “The Out­siders: Eight Un­con­ven­tional CEOs and Their Rad­i­cally Ra­tio­nal Blueprint for Suc­cess,” a fa­vorite among that crowd. He has given copies of the book to dozens of Bar­rick ex­ec­u­tives, even though none of the com­pa­nies pro­filed are min­ers.

“‘The Out­siders’ ar­gued that the most suc­cess­ful com­pa­nies in his­tory all em­pha­sized free cash flow as their sin­gle most im­por­tant met­ric. We do not ac­cept that gold min­ing de­serves some spe­cial kind of ex­emp­tion,” Mr. Thorn­ton said in an writ­ten re­sponse to ques­tions.

Free cash flow is a mea­sure of how much cash is gen­er­ated by a busi­ness af­ter ac­count­ing for big pur­chases such as equip­ment or prop­erty. Hav­ing low or neg­a­tive

cash flow could re­strict Bar­rick’s abil­ity to make ac­qui­si­tions with­out adding debt. Mr. Thorn­ton said the com­pany re­cently re­jected buy­ing some mines be­cause the deals didn’t meet his in­vest­ment cri­te­ria.

Af­ter push­ing Bar­rick to cut costs and get rid of less pro­duc­tive mines, Mr. Thorn­ton has more than halved Bar­rick’s ap­prox­i­mately $13 bil­lion in debt. The com­pany has be­come more prof­itable, re­port­ing an ad­justed profit of $876 mil­lion last year, com­pared with a loss of more than $10 bil­lion in 2013.

It is also a much smaller com­pany. To­day Bar­rick owns large stakes in about a third of the nearly 30 mines it held when Mr. Thorn­ton was ap­pointed. Some of the re­main­ing mines are plagued with op­er­at­ing and po­lit­i­cal prob­lems, while oth­ers have shrink­ing re­serves of ore for fu­ture pro­duc­tion.

Bar­rick’s gold pro­duc­tion has fallen more than 25% since 2013 to 5.32 mil­lion ounces last year. Ri­vals such as New­mont have built or in­vested in new mines in re­cent years. Bar­rick ex­pects to pro­duce 4.5 mil­lion to 5 mil­lion ounces of gold this year, and that out­put could fall sub­stan­tially within a decade—as­sum­ing no large gold price in­creases—if Bar­rick doesn’t ac­quire new mines or fur­ther in­vest in ex­ist­ing prop­er­ties, said Chris Mancini, an an­a­lyst with Ga­belli Gold Fund, an as­set man­ager that owns Bar­rick stock.

As Bar­rick’s min­ing foot­print has shrunk, pro­duc­tion costs have risen and the free cash flow Mr. Thorn­ton prizes has dipped to a loss. In July, the com­pany re­ported neg­a­tive free cash flow of $172 mil­lion in the sec­ond quar­ter, a sharp drop from a pos­i­tive cash flow of $43 mil­lion in the prior-year quar­ter.

Mr. Thorn­ton said Bar­rick is fall­ing short of its op­er­at­ing per­for­mance goals largely be­cause of de­clin­ing gold pro­duc­tion and min­ing in­ter­rup­tions in Tan­za­nia and Ar­gentina. “We

are nowhere near where we want to be,” he said.

He ac­knowl­edges share­holder pres­sure to ex­pand, but said he con­tin­ues to in­sist on a 15% longterm re­turn on in­vested cap­i­tal, as­sum­ing gold re­mains at about $1,200 per ounce. He blames reck­less buy­ing by min­ing com­pa­nies in the past decade for sig­nif­i­cant stock price de­clines.

Mr. Thorn­ton has dis­cussed a num­ber of strate­gies with Bar­rick’s board, in­clud­ing re­treat­ing as a global player to fo­cus mostly on U.S. gold mines, peo­ple fa­mil­iar with the mat­ter said. That could in­clude the sale or spin off less prof­itable gold and cop­per mines in a num­ber of coun­tries, in­clud­ing Aus­tralia, Africa, South Amer­ica and Canada, these peo­ple said. Vari­a­tions on this plan are still un­der dis­cus­sion, they said.

Sev­eral of Bar­rick’s ex­pe­ri­enced se­nior min­ing ex­ec­u­tives have left the com­pany in re­cent years. Its pres­i­dent, Kelvin Dush­nisky, said he’s leav­ing at the end of Au­gust. No re­place­ment has been named and the com­pany hasn’t had a CEO since 2014.

Mr. Dush­nisky, who de­clined to com­ment, found him­self in an awk­ward po­si­tion in Oc­to­ber when he joined the di­rec­tors of Bar­rick’s 64%-owned Aca­cia Min­ing PLC at its Lon­don head­quar­ters for a board meet­ing.

The ses­sion was in­ter­rupted when an em­ployee burst into the room with news that Mr. Thorn­ton was at a press con­fer­ence in Tan­za­nia dis­cussing Aca­cia, peo­ple fa­mil­iar with the meet­ing said. The agree­ment he was un­veil­ing would see Tan­za­nia lift a ban on gold con­cen­trate ex­ports in re­turn for a pay­ment of $300 mil­lion, or nearly 40% of Aca­cia’s 2017 rev­enue, plus joint own­er­ship in Aca­cia’s three Tan­za­nian gold mines.

Aca­cia’s stunned di­rec­tors, in­clud­ing Mr. Dush­nisky, had not been con­sulted, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. They learned about the de­tails

watch­ing Mr. Thorn­ton’s Dar es Salaam ap­pear­ance.

Mr. Thorn­ton de­clined to dis­cuss his rea­sons for propos­ing such a large pay­ment. He said he de­cided to in­ter­vene per­son­ally af­ter he grew frus­trated with the lack of progress be­tween Aca­cia and Tan­za­nian of­fi­cials.

Mr. Thorn­ton’s steady re­frain about fi­nan­cial dis­ci­pline left in­vestors un­pre­pared for the move.

Since Bar­rick con­firmed Aca­cia would be on the hook for the $300 mil­lion pay­ment, Aca­cia’s shares have fallen by more than 40%. Its CEO and CFO have re­signed. Two of Aca­cia’s three gold mines in Tan­za­nia, all of which his­tor­i­cally ac­counted for about 10% of Bar­rick’s to­tal pro­duc­tion, re­main idle.

Mr. Thorn­ton is a late­comer to the min­ing in­dus­try. He re­tired as pres­i­dent of Gold­man in 2003, af­ter a 23-year ca­reer with the firm as a deal maker and head of Euro­pean and Asian ex­pan­sion. He par­layed his Asian ex­pe­ri­ence into a ca­reer as ad­viser and teacher with the busi­ness school at Ts­inghua Univer­sity, one of China’s top schools.

His China con­nec­tions at­tracted the at­ten­tion of Bar­rick’s founder, the late Cana­dian min­ing mag­nate Peter Munk, who in­vited Mr. Thorn­ton in 2011 to be a mem­ber of the com­pany’s ad­vi­sory board. By 2012, he was pro­moted to Co-Chair­man of its board of di­rec­tors.

When swoon­ing gold prices in 2013 threat­ened to un­ravel Mr. Munk’s am­bi­tious global strat­egy, Mr. Thorn­ton tapped his ex­pe­ri­ence as a Wall Street banker to try to ne­go­ti­ate a po­ten­tial merger with Colorado-based New­mont.

The two com­pa­nies dis­cussed com­bin­ing min­ing as­sets in the Amer­i­cas and spin­ning off less lu­cra­tive in­ter­na­tional prop­er­ties into a sep­a­rate com­pany, peo­ple fa­mil­iar with the dis­cus­sions said. Mr. Thorn­ton’s abra­sive ne­go­ti­at­ing style con­trib­uted to a rift be­tween the two

com­pa­nies, these peo­ple said.

Even though the deal failed, Mr. Thorn­ton was ap­pointed Bar­rick’s ex­ec­u­tive chair­man, with a man­date to shrink the debt-laden com­pany. The prob­lems fac­ing Bar­rick were the out­come of its “lack of strate­gic fo­cus, poor cap­i­tal al­lo­ca­tion and weak ex­e­cu­tion,” Mr. Thorn­ton said in his writ­ten re­sponse.

Mem­bers of Mr. Thorn­ton’s ex­ec­u­tive team have back­grounds in Sil­i­con Val­ley, fund man­age­ment and the British Mil­i­tary. Only two of the 12 se­nior ex­ec­u­tives at Bar­rick have over­seen min­ing op­er­a­tions, re­flect­ing Mr. Thorn­ton’s move to hand more au­thor­ity to re­gional min­ing ex­ec­u­tives.

Mr. Thorn­ton de­scribed his fo­cus on tal­ent as an “ob­ses­sion,” and said he be­lieves ex­ec­u­tives with tech­ni­cal and other non­min­ing skills are es­sen­tial to bring­ing mod­ern prac­tices to the costly and time-con­sum­ing busi­ness of min­ing. He hired a pri­vate-eq­uity in­vestor two years ago to over­see the com­pany’s cor­po­rate in­vest­ments and last year hired a chief dig­i­tal of­fi­cer who would pro­vide high-tech anal­y­sis to cost-cut­ting.

Bor­row­ing from the part­ner­ship model Gold­man em­ployed be­fore it went pub­lic, Mr. Thorn­ton in­stalled a new com­pen­sa­tion plan that has made all of Bar­rick’s 10,000 em­ploy­ees com­pany share­hold­ers. He cur­rently owns more than 2.7 mil­lion com­pany shares through per­sonal in­vest­ments and com­pen­sa­tion and has ex­horted se­nior ex­ec­u­tives to fol­low his lead and make ad­di­tional stock pur­chases. In an ef­fort to fur­ther align his staffers’ in­ter­ests with that of share­hold­ers, he dis­cour­aged the word “em­ployee” in com­pany com­mu­ni­ca­tions, a per­son fa­mil­iar with the mat­ter said.

Since Mr. Thorn­ton took the helm at Bar­rick in 2014, em­ploy­ees and in­vestors alike have seen the com­pany’s stock price fall by about 37%. Ben Dum­ment con­trib­uted to this ar­ti­cle.


John Thorn­ton spends only two or three days a month at Bar­rick’s Toronto head­quar­ters. He com­mu­ni­cates con­stantly with his team by email.

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