BUSINESS WATCH

Seizing a golden opportunity

Peter C. Newman September 9 1985
BUSINESS WATCH

Seizing a golden opportunity

Peter C. Newman September 9 1985

Seizing a golden opportunity

BUSINESS WATCH

Peter C. Newman

Canada’s long-neglected gold mines are reaching for new life, as the tumultuous events in South Africa, which produces nearly two-thirds of the free world’s gold, threaten the continuity of bullion supply.

Among the entrepreneurs most likely to benefit from this flash of events is the agile duo of Peter Munk and David Gilmour, the onetime whiz kids of Clairtone fame, who now run Barrick Resources Corp. In partnership with Adnan Khashoggi, the legendary potentate of Middle East finance, and Prince Nawaf of the Saudi Arabian ruling family, they have put together a quintet of producing properties that already ranks them among the top 10 gold producers in North America. Within the next year Munk and his partners intend to acquire at least three more gold mines, which will move them to or near the top of the list of bullion producers outside of South Africa. “A few years down the line,” Munk told me recently, “when European pension funds invest in gold, they will have to switch from South Africa to North America. The value of gold properties on this continent—quite apart from gold going up as a hedge against the falling dollar—is sure to rise dramatically. People buy gold for security reasons, and you don’t buy insurance from a company doing business on top of a volcano.”

Munk’s company has achieved an astonishing turnaround. Only two years ago Barrick was a very minor player mainly into oil and gas. After several disastrous experiences with oil properties in the United States, Munk switched to gold, partly because bullion properties were then abysmally undervalued and because his European and Middle East shareholders are security-minded enough to believe in gold. “We analyzed how to get most economically into the business and concluded that the best entry point was not through stocks or options or gold bars but to buy producers and prospects that still have the stuff in the ground. That way you generate revenues while waiting for the gold price to rise.”

Barrick’s first gold venture was the mediocre Renabie mine near Wawa, Ont. That was followed by the Valdez Creek operation in Alaska, which was almost as lacklustre. Then, a year ago Munk hit it lucky by buying out the overextended but valuable assets of Camilo Mines Ltd., a deep shaft east of

Val d’Or, Que., which has an annual mill rate of up to 50,000 ounces of gold. The company was more than $70 million in debt to the Royal Bank, mainly because of its misguided diversification into gas and oil. Munk raised $30 million in cash from his friends in Canada and the United States and promptly sold off $33 million of Camflo’s energy assets. He now runs a near debt-free company.

Barrick shares have jumped 50 per cent since July, as the TSE’S gold index

reached new highs, while South African gold stocks dropped by one-third or more and last week stopped trading altogether. Munk’s most dramatic purchase was this summer’s acquisition of the Mercur gold mine in northern Utah, 50 km southwest of Salt Lake City. Paul Getty spent $120 million (U.S.) initiating the open-pit operation of this rich property dating back to 1870. Now Munk

and his partners have bought it for $40 million (U.S.). The shaft is expected to reach an annual output of 100,000 ounces of gold this year, accounting for half of Barrick’s production.

“I feel very good about it,” Munk purrs, “because there are gold mining companies which have been in business for decades and mill only a quarter of what we do. I don’t know what is in me but I just can’t stop trying to grow.”

The 44.44-per-cent interest in Barrick owned by Munk and Gilmour is worth at least $78 million. As well as Khashoggi and Nawaf, other investors include Norman Short of Toronto’s Guardian Capital Group, Joe Rotman, a Canadian investor rapidly expanding his natural resource base, and Samuel Montagu & Co., represented by senior partner David Hinde, the British merchant bankers who help set the daily value of bullion, along with the Rothschilds. The Kuwaiti Investment Office in London recently purchased a sizable block of Barrick stock.

To reduce its exposure to fluctuations in the price of gold, the company has pioneered a hedging program which involves selling part of its production under “put” options that allow the forward-selling of royalties. This gives Barrick the right (but not the obligation) to sell gold at predetermined price levels.

What Munk and his associates are putting together could become a major, world-class company, and it’s all based on his gamble, two years ago, that South Africa would blow up and that gold properties located in more stable parts of the world would benefit.

“The idea seems obvious,” he says, “but I went to major British and Canadian investment sources just 12 months ago, trying to raise capital on the basis of what was bound to happen in South Africa—and they laughed. They didn’t realize once such catastrophes happen, it’s much better to have been a few minutes early than one second late.”

Munk predicts a bloody denouement to the tragic intransigence of the African whites: “They’re very tough. This will be no Rhodesia, where there were 200,000 people with British passports and 6.5 million blacks. Here there are almost five million whites with no passports and 20 million blacks. The whites cannot be pushed out of South Africa. They have nowhere to go. It is going to be a long, protracted struggle. There is no solution.”