Business

BARRICK'S GOLDEN OPPORTUNITY

How do you sell more of a fading precious metal? Make it fashionable again.

KIMBERLEY NOBLE November 12 2001
Business

BARRICK'S GOLDEN OPPORTUNITY

How do you sell more of a fading precious metal? Make it fashionable again.

KIMBERLEY NOBLE November 12 2001

BARRICK'S GOLDEN OPPORTUNITY

Business

How do you sell more of a fading precious metal? Make it fashionable again.

KIMBERLEY NOBLE

Nobody can believe the time. It’s already past midnight and there’s still a fair-sized crowd hanging around the lobby bar of downtown Denver's Westin hotel: “Randall and his troops,” as Barrick Gold Corp. CEO Randall Oliphant and his entourage from Canada are known in international gold circles, plus two or three high-profile Wall Street analysts and a few executives from other top mining companies. Tomorrow will be the second day of the gold industry’s most exclusive conference, an invitation-only super-summit that is to this business what Davos is to world economics. Most of the guys at the bar have breakfast meetings, and they admit they should all be in bed. But this isn't about drinking: most are knocking back light beer and mineral water. At this first major gathering since the U.S. terror attacks, they have a need to talk about what has happened. More than that, they need to be with others who understand that, horrible as it sounds, there’s nothing like political uncertainty for goosing the price of their product.

When investors feel good, they buy tomorrow’s technology; in times of peril— and falling interest rates—they prefer Swiss francs and gold. It has not all been smooth sailing, but gold might be the only major business in the world that looks better as a result of what happened on Sept. 11. The spot price, quoted in U.S. dollars, rose substantially after the World Trade Center collapsed and, although it’s slipped back down several times, has spent most of the past two months hovering around $280—a psychological threshold that has some analysts predicting gold could make a comeback, and climb above $300 for the first time in four years. Moreover, what gold market commentators refer to as “the anthrax developments” have gener-

ated hope that it’s heading higher. “Who knows?” an Australian analyst who works on Wall Street tells the gathering at the Denver bar. “This could be fun.”

Opportunistic? Certainly. Ghoulish and a bit grotesque? Perhaps. Even the gold types at the bar hate sounding so cheerful. Oliphant himself will later confess to feeling extremely torn. “I have mixed feelings,” Barrick’s chief says on the way home to Toronto. “It’s hard to see people bragging about how much our industry has prospered since Sept. 11. We all wear the American flag on our lapels, but at the same time we’re so excited. Gold’s up $20 and everything’s great and we’re going to the moon.” In the short term, experts say that where gold goes next will depend on what happens in Afghanistan. In the long haul, however, it could depend even more on what’s going on at Barrick.

Randall and his troops are in Denver on a mission. First, they want the most influential investors in their industry to understand why they agreed to one of the mining industry’s most unexpected and ambitious mergers—amalgamating sleek young Barrick with one of the oldest companies in the business, 125-year-old Homestake Mining Co. of Walnut Creek, Calif. The $3.5-billion share exchange, under which Homestake will be absorbed into Barrick, will repatriate some of Canada’s most important gold mines, and

transform the Toronto-based company into a top international player that’s in line to give the legendary AngloGold Ltd. of Johannesburg a run for its money. Second—and, given the stubborn and fragmented nature of their business, actually more difficult—the Barrick contingent wants to persuade its competitors to do something the gold industry has never done before on this scale: advertise.

Oliphant, 42, a bit of a sleek young thing himself, heads up a small but influential group of gold producers who have a proposal: every company, large and small, will be asked to pony up cash for a campaign that rekindles consumer interest in gold jewelry. What they have in mind would be something like Gucci has done for designer leather and De Beers for diamonds. The plan—which will require a $300-million annual contribution by 2004—is still in its infancy, and has already split the gold industry along a deeprunning fault line.

On one side are the pro-jewelry people

who think any gold sales are better than a few or none. On the other are mining executives and investment managers who resent jewelry marketing as a frivolous enterprise that detracts from gold’s higher purpose as a repository of wealth. Oliphant has been appointed by his peers as the gold executive most likely to be able to figure out how the first faction can win over the second. “Its like herding cats,” he says. But its going to make—or break— the worlds gold companies. “Ifwe cant do something as an industry to market our product,” Oliphant told lunching delegates during a heated discussion, “we’ve got nobody but ourselves to blame if it keeps wandering off into obscurity.”

It’s difficult to believe he’s really talking about gold, the precious metal that triggered the human stampede that created the Yukon as well as modern California, and, in the mid-1990s, led to the scandal of Bre-X Minerals Ltd., the largest stock market fraud since the South Sea Bubble. If nothing else, however, the 1997 Bre-X debacle served to underscore what the mining industry has known for years: it’s a lot easier to sell the idea of gold—espe-

cially if it’s still in the ground—than it is to find customers for the real thing. Gold bugs argue that their favourite commodity is doing just fine, thank-you, and point out that it continues to sell well, and at relatively high local prices, in India, Turkey and much of East Asia. True enough. Yet it doesn’t change the facts: there’s no such thing as a gold shortage. Except for a few caches of lost treasure, virtually all the gold that’s ever been mined, an estimated 140,000 tonnes, is still available. The bottom line, as far as gold producers are concerned, is that real gold prices, which factor out inflation rates and currency fluctuations, have fallen significantly since 1990.

Experts cite plenty of reasons for this: the growth in gold production in the past cen-

tury; the amount dumped on to the market by European and Asian governments in the 1980s and 1990s, after the price was deregulated; a new generation of performance-oriented central bankers who want their gold to help pay its own way, and thus allow it to be rented out to speculators; and stiff competition from a long list of equally safe, but much more lucrative investments, primarily U.S. dollars and government bonds. Then there’s the thorny question of how much damage gold producers are inflicting on the market themselves.

On one hand, they danced in the streets in 1999, when 15 European central banks agreed to voluntarily limit gold sales for five years—an agreement the industry has decided to treat like an international treaty, and has dubbed the Washington Agreement on Gold. On the other, critics charge, gold producers cancel out any meaningful gains because they can’t resist making quick profits from rented gold. Producers borrow gold from central or private bullion banks, pay a fee known as the lease rate, sell the gold, pocket the proceeds and reinvest the money in treasury bills or bonds—a controversial strategy known as hedging. The gold can be replaced out of production, although more often the leases are perpetually renewed. The mining companies are, in fact, the central banks’ biggest rental customers. While this boosts gold company profits— Barrick, for example, has earned an extra $200 million (U.S.) a year for the past decade by hedging—critics worry that practitioners risk becoming lazy opera-

tors, because they can make more money hedging than actually mining gold.

Oliphant can spend hours disagreeing. For years, in fact, that was his job, especially once a year in Denver. Barrick founder, chairman and longtime CEO Peter Munk—one of the enduring entrepreneurial characters of Canadian business, though he has significantly reduced his personal stake in Barrick—would work the crowd, in that imperial way of his, before striding off to have private dinners with British bankers. Oliphant, a former Coopers & Lybrand chartered accountant from Scarborough, Ont., whom Munk hired in 1987, was the person who stuck around to answer the nitty-gritty questions about Barrick’s balance sheet and hedge book. If called upon, he says, he’s prepared to do this again. “We don’t think we have any negative impact on the market,” he says. “In fact, we believe we have a positive

one because we create greater liquidity in the market and we don’t sell when the price is weak.”

Since 1999, however, Oliphant has held Barrick’s two top jobs, a tricky task that has required replacing both the urbane Munk and down-to-earth former president Bob Smith. This means using his time in Denver to address what he views as more pressing matters: the merger and the marketing plan.

Pension funds love Barrick’s stability; that’s why the company has the highest market capitalization of any in the industry. Yet investors have not been wildly enthusiastic about Barrick’s post-merger prospects. Homestake’s share price rose to reflect the premium built into the bid, but Barrick’s shares dropped 11 per cent of

their value to trade as low as $22.20 last summer. They are now back to roughly the same price as before the Homestake announcement. The challenge, Oliphant says, is to make people see what he calls “the broader picture” arising from the Barrick-Homestake merger. “I want them to really look at what it means that we are putting two of the world’s largest gold companies together.”

Barrick and Homestake look like a good match, assuming shareholders approve late this year or early next. Oliphant—who will head the new Toronto-based company while Homestake chairman and CEO Jack Thompson remains in San Francisco as a non-executive vice-chairman—has pushed the legal envelope as much as possible by setting up a team to tour all the mines and report back on the best way to start integrating right after the scrutineers count the votes. “From the day we close,”

says Oliphant, “we are one company”—a company that, even after administrative and management staff cuts, will employ around 9,000 people and rank as the world’s second-largest gold producer.

It will control hefty segments of some of the largest gold deposits in Canada, the United States, South America and east Africa, with names that read like a history of the international gold-mining business: Goldstrike, Hemlo, Eskay Creek, El Indio. (Not that this always pays off: Barrick is currently fighting a bitter battle with human rights critics who claim that up to 50 people were buried alive at a mine in Tanzania three years before Barrick took it over; Barrick strongly denies the allegations.) The new company will also have four mines in Australia, a continent where Barrick has never operated before, including a 50-per-cent stake in a gold deposit that’s been called the asset at the heart of the industry’s merger mania: Western Australia’s fabled Kalgoorlie gold field, including the Super Pit mine. Jokes Thompson: “You’ll be bumping into us wherever you go.” If Barrick and Homestake had been one company in 2000, they would have been responsible for fully 7.4 per cent of total world production—six million ounces of gold. Numbers aside, the merger will make Barrick second only to Anglo3 Gold in global influence.

Of course, to sell all that product, you still need buyers. The image of gold as a luxury item has sunk so low that few expensive jewelry stores promote it any more; they tend to recommend silver or platinum as being more fashionable. “We put so much effort into getting gold out of the ground,” Oliphant says, “and so little into selling it.” Hence the plan to market gold the way “A diamond is forever” boosts gems. A McKinsey & Co. consultant’s study unveiled in Denver estimates that such a campaign could add between $30 and $40 to the spot price. So far, 70 per cent of the world’s gold companies say they’re in favour. Oliphant must decide how to persuade the other 30 per cent to change their minds—and start writing cheques before year end. “We’ve got to seize the moment,” he says. “Unfortunately, there’s a lot more gold available than people are willing to buy or rent. All we can do is take the bull by the horns.” And to hope, whether they like feeling this way or not, for a good long war. ESI