Barrick’s Thornton Weighs Return to Gold HedgeSteven Frank and Christopher Donville
Four years after Barrick Gold Corp. stopped hedging bullion sales, its next chairman, John Thornton, says the practice makes sense and is worth considering.
Thornton, a former Goldman Sachs Group Inc. president and currently Barrick’s co-chairman, spoke yesterday after the world’s biggest producer of the metal announced he would succeed Chairman Peter Munk next year.
Barrick spent at least $5.6 billion in 2009 to get out of fixed-price sales contracts as it bet on rising gold prices. The metal is heading for its first annual drop in 13 years, having declined 27 percent so far in 2013. That slump has helped to erode earnings and prompted gold producers to take at least $26 billion of writedowns this year,
“As an outsider, I always thought it made great sense to hedge,” Thornton told reporters at Barrick’s Toronto headquarters. “I can’t understand for the life of me why that wouldn’t be an active topic that you would be carefully following at all times.”
Once a strategy used by Barrick and other major gold producers such as AngloGold Ashanti Ltd., hedging fell out of favor in the past decade as companies found themselves locked into lower prices as gold rose. Producers de-hedged 8.16 million ounces in 2009, according to a report from London-based researcher GFMS Ltd. the following year.
Thornton is right to suggest hedging is useful, said John Goldsmith, a Toronto-based fund manager who helps manage about C$5.6 billion ($5.3 billion) at Montrusco Bolton Investment Inc.
“The smart companies are going to be the ones that use put options or enter into forward contracts for a portion of their current year’s production to guarantee that production, to guarantee that cash flow,” Goldsmith said by phone.
Gold for immediate delivery dropped 1.4 percent to $1,226.64 an ounce at 9:07 p.m. in London. Barrick fell 2 percent to C$16.39 at the close in Toronto, extending its decline this year to 53 percent.
Barrick has endured 18 months of turmoil. In addition to the gold-price drop that spurred $8.7 billion of writedowns, it fired its chief executive officer last year after a disastrous copper acquisition and revealed ballooning costs at its biggest construction project, the Pascua-Lama mine in the Andes.
Current CEO Jamie Sokalsky has sold three Australian mines this year and has put others under review as the company faced criticism from shareholders to cut costs and increase cash flow.
As well as announcing that Munk, 86, will retire at its next annual shareholders meeting, Barrick said yesterday it’s nominating four new independent directors and adopting a new executive-compensation plan. It also said James Gowans will start as chief operating officer in January.
Canada’s biggest pension funds wanted new independent board members and said Barrick should consider replacing directors who had been there longer than 20 years and were close to Munk, two investors briefed on the matter said in September. An $11.9 million signing bonus for Thornton starting as co-chairman was described by Canada’s six largest pension fund managers in April as a “troubling precedent.”
The independent directors nominated by Barrick are Ned Goodman, CEO of Dundee Corp., a holding company with investments in precious metals and other assets; Nancy Lockhart, a former chief administrative officer of Frum Development Group; David Naylor, a former University of Toronto president; and Ernie Thrasher, founder of Xcoal Energy & Resources LLC, a coal-trading firm.
Directors Howard Beck and former Canadian Prime Minister Brian Mulroney won’t stand for re-election at the shareholders meeting, Barrick said.
“We’re encouraged by the steps the company seems to be taking to enhance the role of independent directors,” said Maxime Chagnon, a spokesman for Caisse de Depot de Placement du Quebec, Canada’s second-biggest pension fund and one of the investors that criticized executive pay at Barrick as excessive.
Goodman’s nomination was welcomed by Robert Gill in Toronto who helps manage C$8 billion including Barrick shares at Aston Hill Financial Inc.
“He brings instant credibility in a very important circle of Barrick shareholders, the institutional investors who are informed,” Gill said yesterday by phone.
Thornton, 59, said yesterday he’s seeking to form a partnership with Chinese companies with a view to possible cooperation on mining projects in the future.
Thornton has connections to China, which was where he headed to in 2003 after departing Goldman. He helped establish a business leadership program at Beijing’s Tsinghua University and is a member of China Investment Corp.’s international advisory board.
“China will in fact be at the center of just about everything, certainly the world’s economic growth and the world’s commodities,” he said.
While Barrick’s priority is to improve its gold operations, it also has the ability to be a “world-leading company” in other minerals, according to Thornton.
“That’s the kind of journey that I feel we’re on,” he said. “And when I look out over the next two decades, that’s where I’d like Barrick to go.”