Barrick Gold Corporation (NYSE:ABX)
2013 Annual Meeting of Shareholders Conference Call
April 24, 2013 10:00 am ET
Peter Munk – Founder and Chairman
Sybil E. Veenman – Senior Vice President and General Counsel
Jamie C. Sokalsky – President and Chief Executive Officer
I think we’re just past 10 O’clock; apologize for delay. I think time has come to start our meeting and call it to order. So in our usual program, let me greet you and welcome you to the Barrick’s AGM.
I’ll welcome you on behalf of my Board, my Executives, many of them are here. As you probably know, and if you didn’t, you should read the paper this morning, I’m the Chairman of Barrick Gold. And on behalf of the Board, I would like to welcome you to this Annual Meeting of Shareholders, and express our appreciation for your attendance.
I would like to introduce to you now, to the other members of my Board, who are here today. In alphabetic order Howard Beck; William Birchall; Donald Carty; Robert Franklin; Brett Harvey; Dambisa Moyo; The Right Honourable Brian Mulroney; Anthony Munk; Gustavo Cisneros; Steven Shapiro; Jamie Sokalsky and John Thornton.
With the consent of the meeting, your consent, I will ask Sybil Veenman, Senior Vice President and our General Counsel to act as Chairman during this meeting.
Sybil E. Veenman
Good morning. With the consent of the meeting, I’ll ask Faith Teo, Vice President, Assistant General Counsel and Secretary to act as Secretary of this meeting, and representatives of Canadian Stock Transfer Company as agents for CIBC Mellon to act as scrutineers.
As a courtesy to those around you, please ensure that your cell phones and your BlackBerries are turned off. There are three matters of business to be dealt with in the formal part of this meeting, the election of directors, the appointment of auditors, and an advisory vote on executive compensation.
We’ll conduct the vote on each resolution by ballot. Shareholders who’ve already voted by proxy do not need to complete a ballot. Forms of the ballot were distributed to shareholders and proxy holders when they registered this morning. If you have not received the form of ballot, you should raise your hands that the scrutineers can distribute them to those entitled to vote.
For convenience, certain shareholders and proxy holders have been asked to move in second resolutions today. Following the formal business of the meeting, we will present an update of those activities, after which we’d be happy to respond to any questions.
The scrutineers have confirmed that a quorum of shareholders is present, and I declare the meeting properly constituted. The annual report, the consolidated financial statements and the auditor’s report have been mailed to shareholders, and are available here today. We’d be pleased to deal with any questions concerning the financial statements during the general question period.
We’ll now proceed with the election of directors. The Board has determined that the number of directors to be nominated is 13. All of the directors proposed for a nomination in the Management Proxy Circular have agreed to stand for election. At a further meeting open for nominations for the election of directors, and I believe the Roy Almeida has some nominations in this regard.
Any further nominations; there being no further nominations, I declare the nominations closed with someone now move and someone second to the resolution electing those nominated. We have the seconder.
Each shareholder or proxy holder should record their vote for this resolution under item one on the ballet. When you finish voting, please sign and also print your name on the ballet and keep your ballet for voting on further matters of business, still be collected following the last matter of formal business at this meeting.
The next item is the appointment of auditors and I believe Mary and Marrone has a motion in this regard. Seconder, you should record your vote for this resolution under item two of the ballet. It is now in order to consider the third item of business in the notice of meeting. The Board of Directors has adopted a non-binding advisory vote relating to executive compensation to provide shareholders with the opportunity to express their views on Barrick’s approach to executive compensation as described in the management proxy circular. I believe Hugh Handyside has a motion in this regard.
Seconder, you should record your vote for this resolution under item three on the ballot. When you’re finished voting, if you’ve not already done so, please sign and also print your name on the ballot. Once you’ve completed your ballot, please raise your hand so that the scrutineers may collect them. The formal part of this meeting is now terminated. We will report the voting results once the scrutineers have tallied the votes.
Now we will turn to some presentations addressing our 2012 performance, and the outlook for 2013 and beyond.
Jamie C. Sokalsky
Well good morning everyone, and thank you for attending Barrick’s 2012 Annual General Meeting. I’m obliged to draw your attention to this cautionary statement regarding forward-looking information first. It’s been a tough year and a challenging year for Barrick.
And before I get into the presentation, I also want to acknowledge the significant share price weakness for the past few weeks’ right up front. There are a number of reasons for this. One is the severe gold price correction earlier this month, which triggered a sharp sell-off in gold equities. But Barrick share price has clearly underperformed the group as a result of some recent uncertainties.
Two weeks ago, we announced the suspension of construction on the Chilean side of our Pascua-Lama project in response to an injunction and also to address some environmental and regulatory concerns. Although it’s still too early to assess the impact on the CapEx and the schedule, I can assure you that we will not continue to spend capital if we do not have a strong indication of the required timeframe to address these issues in short order.
I also want to stress that we continue to have a solid investment grade balance sheet and sufficient financial liquidity including strong access to debt markets to meet our objectives. And our underlying business is very solid and you saw that with the release of our first quarter results this morning.
Our key assets which include some of the best and lowest cost mines in the world are performing very well and generating strong operating cash flow. I can assure you that every one within Barrick shares your disappointment over the share price performance and we will do every thing we can to reverse that.
2012 was a difficult year for Barrick and we faced some significant challenges, some out of our control, some within our control. We were also not immune to the broader investor delusionment with the gold sector which has stemmed from a growing disconnect between the gold equities and the rising gold prices we had seen prior to this year. The message from investors on this disconnect has been clear and rightfully so, the industry needs to do things differently. And Barrick recognize that need for fundamental change last year. I believe we’re among the first in our industry to shift course and we are taking actions.
Last July, we began repositioning Barrick around a new disciplined capital allocation framework that prioritizes shareholder value creation. This framework is focused on two key objectives, risk adjusted returns and free cash flow. And following this, we recalibrated our long-term production targets determined we would not build any new mines, we launched a portfolio optimization process and made significant reductions to our capital and operating costs. And we made a lot of progress on repositioning the company to deliver higher returns and free cash flow to our shareholders, but we have more work to do.
At Pascua-Lama, we experienced some challenges that lead to a significant increase in capital cost and a delay to the schedule. But we moved quickly to reset the project structure and hired Fluor, a world leader in this area to assume responsibility for overall construction management. And we completed a comprehensive review of the cost and schedule and also significantly strengthen the projects overall management team with top industry experts and just recently added two very senior Chilean veterans to the project.
Our operating results at the Lumwana mine in Zambia continue to be disappointing and I am fortunately required us to record $3.8 billion impairment last year. When we acquired Lumwana, our view was that most of the value lay in the Chimiwungo deposit. But after completing a new mine plan with updated costs estimates, it was apparent that mining it would be at much higher costs than we anticipated resulting in that impairment.
Last year, I established a new global copper leadership team, task with improving the operating performance at Lumwana and we’re making progress of doing that. We also decided not to proceed with an expansion to focus on cash flow and value creation rather than just focusing on production – for production sake. Lumwana remains a multi-decade mine on one of the best copper belts in the world and it’s a great option on the copper price. But again, we won’t chase production just for the sake of it.
While we had some challenges, which I’ve just discussed, we also had some significant achievements in 2012. We had strong operating results and record operating cash flow. And we successfully completed our Pueblo Viejo mine in the Dominican Republic, a long life low cost operation. And we double the resource for the second year in a row at our Goldrush discovery in Nevada, located right next to our world-class Cortez mine.
For 2012, we’ve reported strong adjusted net earnings of $3.8 billion, which were the second highest in the company’s history. And as I mentioned, our operating cash flow of $5.4 billion was a company record. We produced 7.4 million ounces of gold at all in sustaining costs of just over $900 per ounce and total cash cost of less than $560 per ounce, the lowest of the senior group. This was the 10th consecutive year that we met our gold production guidance. And our copper output was about £470 million at cash cost of just over $2 per pound.
As I mentioned this morning, we released our first-quarter results for 2013. I was very pleased to be able to report that net earnings and adjusted net earnings were about $850 million and $925 million respectively. And we generated again healthy operating cash flow of about $1.1 billion and these solid numbers were driven by solid and strong operational performance.
We produced 1.8 million ounces of gold at better than expected cost this quarter. We reported low all-in sustaining cost of just over $900 per ounce, well under our guidance for the year and total cash cost of only $561 per ounce. So it’s very rewarding to see that our disciplined capital allocation framework with its sharp focus on cost reduction has been incorporated in our day-to-day operations. And our Regional Presidents and Mine Managers have embraced this mandate. They are running the business the way it should be run to produce solid results.
Copper production was about £130 million at cash cost of $2.46 per pound. But we also announced that we’ve identified about $500 million of additional costs and capital reductions over and above the cost that we announced earlier this year and in turn have reduced our CapEx, exploration and all in sustaining cash cost guidance already for 2013.
This is a graph that I think everyone here is probably painfully aware, we certainly are. So mentioned at the beginning, gold equities have continued to disconnect with gold prices and I’d like to provide a bit of context on this and what I view is some of the reasons for it. This graph shows a decline of the gold equity index as a percent of the gold price. It’s not a great trend. It’s a clear picture of the disconnect story between gold and the gold equities and that effect was further exacerbated as you can see here by the financial prices, although it bounced pack it kept coming down.
Over the past decade, our industry has been focused on increasing gold production essentially to take advantage of rising gold prices. This was often done without a focus on our rate of return leading a poor track record on capital allocation and declining free cash flow. And today, we find ourselves in a very different environment than a decade ago. Higher cost fold operating capital, longer project lead times, increasing resource nationalism and a lack of large new economic discoveries have fundamentally altered investors’ perceptions of risk. And when it was launched in 2004, the gold ETF offered an attractive alternative to investors’ one in gold exposure without the perceived risk we have in the industry as gold equities.
And while it is meant higher gold prices, the gold ETF has also attracted more than a $100 billion of capital much of which would have previously been invested in the gold equities. And a higher operating cost was one of the key reasons for investor disappointment that the higher gold prices have led to the mining of lower grades.
The lowering of the amount, it needs ton of ore of rock mined and you can see that on this graph, the red line is the decline in the amount of gold in the rock that we’re mining, the average grade, while the gold prices going up by 500%.
May not this decline in grade may not seem like much, but it’s had a dramatic impact on both operating and capital costs. And what this means is that companies have increasingly been mining at higher cost and developing large low grade deposits which also require much higher CapEx. And as you can see in this next chart, this has put pressure on cost and producers have also been spending more on exploration G&A and sustaining capital gold production levels.
Late last year, the industry began moving to a better measure of what it really cost to take gold out of the ground all-in sustaining costs and its how we’re running our business. These all-in industry costs are up significantly as you can see on this graph in the last decade and that’s negatively impacted the margins investors were expecting at higher gold prices and combined with the other factors, I’ve already mentioned, this has translated into much weaker share prices and investors have made it very clear that they will not reward production growth in and of itself as they have in the past.
They want improved rates of return and free cash flow. It’s a message that we’ve embraced at Barrick and one that we began to act decisively on last year with the introduction of our disciplined capital allocation framework. This framework is focused on maximizing those risk adjusted returns and free cash flow and so, all options that we look at including investment and exploration projects, acquisitions or returning capital to shareholders are ranked and prioritized against these two key metrics.
And this model will continue to drive the future direction of the company and we expect it to position to Barrick to increased shareholder returns and reduced debt overtime. At its core, we’re driving this change guided by a simple phrase and it’s one that I’ve been reiterating in the last year since I became CEO, “Returns will drive production, production will not drive returns.”
And I have to say, we’re starting from a very strong base. We have premier assets in some of the most favorable perspective mining jurisdictions in the world and this is one of our competitive strengths. If you look at global mine production, there are very small, there is a very small number of large deposits and we’re fortunate to have a large percentage of them in our portfolio. These assets have the ability to deliver enhanced returns to Barrick through their low cost, long lives, upside potential and access to already established infrastructure in the regions that they are.
In fact, Barrick owned and operated four of the top eight producing gold mines in the world last year. Cortez, Goldstrike, Lagunas Norte and Veladero, and this year Pueblo Viejo will be in that class. All four are located in the Americas and the largest two Cortez and Goldstrike are in Nevada, one of the most politically stable mining friendly jurisdictions in the world.
I’d like to briefly highlight these four key assets which form the high quality core of our production last year. Cortez is a tremendous asset and it is our largest mine. Last year, it produced nearly 1.4 million ounces of gold at low, all in sustaining costs of about $545 per ounce compared to the company wide average of just over $900 per ounce and this area has excellent exploration potential particularly at the Goldrush discovery, we announced in 2011.
Of our total 2013 exploration budget, more than 40% of it is allocated to Nevada where we see the most potential in our portfolio and where we have a very large land package. And our core project there is Goldrush, this discovery is world-class, it’s growing rapidly, it’s a 100% owned in a favorable jurisdiction and is located right next to Cortez, one of our flagship mines.
In 2012, we doubled and upgraded the total resource at Goldrush for the second year in a row to over 14 million ounces and the deposits still remains open in multiple directions. And this district contains a wealth of other exploration opportunities, which we think have excellent potential to yield new discoveries.
The Goldstrike mine, one of the mines that really started Barrick on its path continues to be a very solid contributor to gold to Barrick and last year produced 1.2 million ounces at all-in cash cost, all-in cost of about $670 per ounce. Since we acquired Goldstrike, the mine has produced 39 million ounces but it still has 12 million ounces in its reserves.
The Lagunas Norte Mine in Peru, which was a Greenfield discovery by Barrick in 2002 is our lowest cost mine and has been an outstanding success. Last year, it contributed about 750,000 ounces at very low all-in cost of only $370 per ounce. Since it began operating in 2005, it has consistently outperformed feasibility expectations for production in every single year and cumulatively it has produced over 50% more than originally estimated. The Veladero mine in Argentina has also exceeded expectations since it has entered production in 2005 having exceeded feasibility production estimates in each of the last four years; and cumulatively it has produced more than 20% more than originally expected; and last year it contributed over 750,000 ounces at all-in cost of about $715 per ounce.
So, this gives you a sense, this pie chart gives you a sense of the size, quality, and importance of these four key gold assets to our overall production and costs. Of the 7.4 million ounces we produced last year, they accounted these four mines alone accounted for more than four million ounces or 55% of the total of our production. And the average all-in cost for these four mines was lower than $600 per ounce, nearly 40% lower than our overall average and it is particularly these assets, which have the ability to drive meaningful higher returns and free cash flow for the company well into the future.
Last year, I mentioned we launched a full review of our portfolio and we determined that various assets and projects do not currently meet our investment criteria. As a result, we cancelled spending for marginal production and recalibrated to a more profitable target of 8 million ounces of gold by 2016 and 600 million pounds of copper by 2015, and we are continuing to pursue opportunities to optimize our portfolio by divesting assets that do not meet that investment criteria, including sales of non-core assets.
The team at Pueblo Viejo have done a tremendous job of this asset into production on schedule and within capital guidance. The operational ramp up is proceeding as expected and we expect to reach full capacity in the second half of the year. The government of the Dominican Republic has expressed to the joint venture there that it wants a greater share of the benefits from this mine and we are still in discussions, but we are only willing to agree if the result is fair to both parties and at this point the outcome is uncertain. If the government imposes unacceptable terms, we have the ability to pursue our rights under international arbitration.
This is a recent aerial shot of the processing facilities in Argentina at our Pascua-Lama project. Two weeks ago, we suspended construction in Chile following conformation of a court order preliminary in junction. This is related to a constitutional rights action filed last September alleging non-compliance with certain requirements of the Chilean environmental approval. Construction in Argentina where the majority of the projects critical infrastructure is located has not been affected today. But since early this year, we have been repairing and improving the water management system in Chile and it’s important to note that there have been no adverse impacts on water quality or glaciers.
We are currently working through the alternatives available to us. As I said earlier, we will not continue to spend capital if we do not have a strong indication of the required timeframe to resolve these issues in short order. We are serious about disciplined capital allocation. That means we need to consider all options including the possibility of suspending the project. We’ve seen some positive results on global cost reduction and we are aggressively pursing further reductions to improve our free cash flow generation.
We’ve reduced our 2013 outlook in a number of key spending categories. With the beginning of the year, we launched a companywide overhead review and cut $100 million from the budget. We’ve identified $500 million of additional cost reductions this quarter, and today we announced revisions to our 2013 guidance including a reduction in our all in sustaining cash costs, a reduction to our total CapEx guidance by $500 million and a reduction of our exploration budget by $100 million to between $300 million and $340 million. And that’s about $200 million lower than 2012. But we’re still spending on the right targets; it represents a nearer focus on the most perspective targets. And we expect to do more through our ongoing companywide review.
I mentioned in today’s challenging environment, we have no plans to build any new mines. And we have a large number of – that we have a number of large undeveloped ore bodies such as Cerro Casale and Donlin. But they do not currently meet our investment criteria. Therefore, we have no plans to construct them in this challenging environment. So I’ve outlined, we’ve made significant strides to put Barrick on a path to materially higher free cash flow post 2014, including the removal of $4 billion in previously planned capital expenditures last year.
Last year, although we generated a record of nearly $5.5 billion of operating cash flow, our total CapEx exceeded this amount. Large component on this was project CapEx mainly for Pueblo Viejo, which is now complete and Pascua-Lama. But with no new mines to be built, we expect to be generating significant amounts of free cash flow after 2014. We recognize that the market needs to see evidence that we can execute on this strategy and can assure you, we are absolutely committed to delivering on it. If we are successful and I believe that we will be, the company will have a much greater potential to increase shareholder returns and reduce debt over time.
We have good financial flexibility with over $2 billion in cash, another $2 billion available on our credit facility, and over $1 billion in operating cash flow this quarter. Our repayment obligations in the next few years are quite low, but the majority are maturing beyond 2023.
In fact our debt repayments through 2017 total less than our operating cash flow last year. We continue to have solid investment grade credit ratings and good access to the debt markets at low interest rates and we expect to be tapping the U.S. debt capital markets to repay and further term out debt sometime this year.
Since becoming CEO I have also made it clear that disciplined capital allocation cannot come at the expense of our commitment to corporate responsibility. Even in these volatile market conditions we won’t cut cost that jeopardize our ability to operate in a socially and environmentally responsible manner.
I believe operating in this way is vital to achieving our business goals and to maintaining our license to operate. As everyone knows mining is an increasingly complex and challenging business where new risks and rules are constantly changing and it demands more sophisticated approaches to operate in both a profitable and sustainable way. At Barrick, we conduct our business based on a core philosophy, namely that doing the right thing is good business. We recognize that our continuing success depends on our ability to manage the impacts of our activities and share the benefits of our business with communities, governments, our shareholders and employees.
Our business is a natural engine of economic opportunity. We create jobs. We provide a stable source of revenue to governments and maximize local and regional purchasing.
Last year, we spend about $9 billion on goods and services for more than 15,000 suppliers in our host communities and countries. This represents a significant contribution to economic development, particularly in developing countries, which can some times be overlooked in all of misinformation circulating about mining.
We put in place strong management systems in five key areas, security, human rights, the environment, safety, and community relations, which provide clear direction and set out our obligations. And we’ve made important strides over the past year, our new community relations management system is driving a more disciplined professional approach that is enabling us to work more effectively with communities, track our commitments and deliver benefits.
More than half of our operations are now certified under the ISO 14001 and we’ve enhanced our water and energy and biodiversity programs and we continue to be recognized as a carbon disclosure leader in Canada and we are exploring more alternative energy sources.
And as part of our Human Rights Compliance Program globally, we provide a human rights training to more than 10,000 employees, strengthened due diligence in our hiring practices and are conducting site-based human rights assessment.
The Porgera mine in Papua New Guinea, we are implementing a human rights remediation program to address past incidents of sexual violence, and to combat the serious problem of violence against women in the Porgera valley.
Barrick invests in every community where we operate, and we do this because we have a direct stake in the success and stability of these communities, and because we see our role as a partner in sustainable development.
In 2012, these wide ranging investments totaled $54 million from education and health to programs for endogenous people from infrastructure to sustainable livelihoods; these investments reflect no local needs and priorities, and often involve a multi-stakeholder approach.
And I’m pleased that our performance continued to be recognized in 2012. We retained our listing on the Dow Jones Sustainability World Index and the NASDAQ Global Sustainability Index. We are also named the Corporate Knights’ Global 100 list of the Most Sustainable Corporations.
As CEO, I’m very proud of the progress we are making, and I want to thank our employees for furthering our commitment to responsible mining worldwide. As we advance through 2013, we have a clear set of priorities and targets we are committed to delivering on. We recognize that we need to deliver on those commitments. It’s critical to execute on these priorities to improve our share price.
First, we must meet our production and cost guidance and our strong first quarter results show we are on track to do that. We need to ramp up Pueblo Viejo to full capacity and as I indicated, this is going well. We’re also currently working to gain clarity around the legal and regulatory issues at Pascua-Lama and assessing our options there.
We need to improve the operating performance at Lumwana and having completed the new mine plan and identified some concrete areas to reduce costs; we’re in a much better position to affect some material improvements there in the future. Our Goldrush deposit continues to grow and we’re advancing a pre-feasibility study for completion next year.
We need to realize the opportunities we’ve identified to optimize our portfolio including the sales of non-core assets and we have some sales processes underway. While we made some very good progress at cutting cost, we also need to identify more ways to reduce those. Encompassing all costs, capital expenditures, operating costs and all other expenses to run the business, and as I’ve mentioned, we can’t rely on the gold price to go up to drive our returns. We have to manage our business without of the promise of a higher gold price.
But as I said, we also won’t cut cost to jeopardize our ability to operate in a socially and an environmentally responsible manner. And we remain committed to further strengthening our corporate responsibility practices and performances.
So, just to wrap up, this has been a tough year for Barrick and our shareholders. It seems as if our company has been under siege with several disappointments and setbacks. All I can say to you, our employees and investors as well as many other stakeholders we have is that I feel your disappointment and I give you my commitment that we will do everything we can to ensure Barrick remains a strong and prosperous company and improve our share price.
We have the outstanding people and high quality assets to make this happen. Progress and economic prosperity is driven by people who have a vision and the energy and perseverance to follow through despite setbacks a longer way. And these qualities are what made Barrick a great company and we still possess them in ample measure.
What’s required now for our company is to maintain focus and pull together to confront the challenges that we face and I am confident that we will do just that and deliver the returns our shareholders deserve and rightfully expect.
To our employees, I want to express my sincere gratitude for all of your support, hard work, dedication and commitment particularly during these unsettling times. And finally to our Founder and Chairman, Peter Munk, our Co-Chairman, John Thornton and our Board of Directors, I thank you for your valuable guidance and support and I look forward to reestablishing the faith and trust of our investors and stakeholders with you.
I now like to turn the podium over to our Founder and Chairman, Peter Munk.
Jamie, congratulations, I’ve always been proud from day number one, of being part of Barrick in the call today. I think it was about a year ago that I stood here and I must say that a smaller audience that times to bring out more people, and I understand that includes me. But I stood here a year ago and I listened to our people making a presentation that sort of enlisted the achievements of the past year, that’s what AGMs are all about. They were here in April 2012, so they review with the 2011 results.
First recall, at least those who’ve been here, that at the end of this great presentation, I turn to our management team and our CEO then and I said you know this is just great, every part, every you fire on every cylinder, but where’s the meat. This is a public company, it’s all about shareholder value and yet, we’re producing record profits, we’re producing the highest cash flow, our EBITDA was over $8 billion, record, record, record. Optimism about the gold price was rising and yet our share prices languishing. There is something wrong. Now Jamie, I will not approach you or your team with that acquisition today.
A year-ago today, the fundamentals were brilliant. The results were exceptional, optimism about gold mining and gold prices were universal. We were riding high, our financial rating was the highest in the industry, we were the unquestioned global leaders, we had a greatest pipeline of new projects and to top it all of, which really was a critical thing that gave me my optimism.
The engine of creating shareholder value in the previous 20 years has been growth, growth of production, growth of mining; produce more gold, produce more gold, after all you buy gold shares to be exposed to a largest amount of gold. And Barrick at that time was looking forward to the next 12 years, i.e. this past year to open up two of the most spectacularly unique gold mines Pascua-Lama and Pueblo Viejo ready to open in the year following two mines that had exceptional production, exceptional long life, mine lives and the very low production cost, what more can you do.
So, no wonder that all of us were full of optimism. We had all those criteria that in the past previous 25 years contributed to gold price companies or gold companies share price performance. Well, what can I say to you, the fundamentals today, 12 month later could not be more different than they were, I mean 12 months ago. Two mines are both in trouble. Our write-offs from our move into larger copper component as well as the capital commitments for the two mines and others have multiplied in needs were more cash and to try to solve issues and problems that certainly but not anticipated done.
Gold itself is under attack. There is real concern now without pointing fingers, their traders and the analysts who are now – I’ll get into that bit later, who have certainly, probably some justification, pointed that that trees don’t grow to the sky and there is a limit to this bonanza for a previous 10 or 12 years that covered up all kinds of mistakes and flaws and missed ups purely by having a higher gold price.
And indeed, pessimism today as you can see, I can’t recall in our last decade, when gold price would have gone down that quickly. So, there is, customers about the industry, there is issues concerning about our ability to run and own the mines in light of ever-growing nationalism, resource nationalism, understandable.
You know, you’re sitting there, you’re a new President of Latin America, a smaller country and you are just been elected, you got serious issues with your budget. You got two choices, keep on taxing the people, the certainly has proven itself not to be at proper move by politicians or go after that big multinational huge global corporation with billions of dollars of assets and say now hold on, we signed this contract with you few years ago, you are making more money and we say hold on that’s why you have taxes and that’s why we have sharing program.
They say that’s not good enough, we wouldn’t have signed that contract had we known that gold is at 1500. The fact that you go back and say what would have happened if gold’s had gone the other way, would you have been there to pay us? No. It’s totally understandable. This is the essence of this enormously rapidly growing resource nationalism that’s right now just a word for us, but it is the ultimate threat to the very life line of the mining industry, which ultimately will cause an enormous spike of course in commodity prices because as you know the x-factors and (inaudible) one company after another stopped mining activities because how can you, you are getting endangered. By the time you finish your mine they take it away from you, or they want to give you punitive taxation.
So, the politicians on the one hand cannot do anything, but what the popular will demand and miners are increasingly squeezed after they have been calmed, they’ve been attracted, they’ve been incentivized to come in because a country that has a huge gold deposit or copper deposit or iron deposit, you know they could be sitting on it and once the mine is built they say, it’s our iron, our coal, our gold, yeah but it was also their gold for 50 years, without a $3 billion, or $4 billion, or $5 billion or $6 billion investment that gold does not produce tax revenues. That gold does not produce jobs, but that’s the reality of the new road and that reality has not been ameliorated or softened by the fact that countries under Mr. Chávez and Mr. Morales and there is a whole slew of new modern populist leaders who may not follow the rule of law like we expect them to do.
So if you take a company like us and we have problems like we did and please do not let me for single moment give you the impression that this is our problems are entirely other people’s faults. We are, we have made our own mistakes for which we should be paying for and I will go into them. But beyond our own mistakes, beyond the fact that we happen to be the biggest and in the past history of industrial evolution and public companies, you don’t get penalized very much by being the biggest.
In the mining industry if you are, if you have stuck to Goldstrike today, it would be the dialing of investors. But by having 10 mines and are having 20 mines and are having 25 mines, you are exposing yourself to more and more countries. Nationalism, resource nationalism, new governments, punitive governments, more aggressive regulatory systems driven by a whole cadre of chains and highly competent lawyers mostly from the U.S.A. create lawsuits, they follow the American paradigm and they extract more and more and put more and more pressure on governments, which naturally react to it, so the environmental resume goes bigger.
When Pascua-Lama, our biggest mine on the Argentine Chilean border, but this started at about seven years ago or we decided to start it. That mine was meant to cost about $3 billion and they were pretty accurate customers. They were no different from all the other dozens of mines we built. And then from a $3 billion, it became a $3.5 billion. Then from $3.5 billion it became $5 billion. And then from $5 billion it became $8 billion.
And while no doubt management has something to do with it, but they were the same competent mine managers and engineers and technicians who we had before, and we never had an overall like that. What’s happening is that this enormously altered public perception of environmental concern NGO’s, human rights, water quality, air quality, etcetera, etcetera, etcetera become – put one on top of the other and how do governments react, impose five more regulations. They are now libraries, libraries filled with reports, one report after another, from every little aspect of air quality to particle discharge to road conditions to dust conditions when you are building a mind.
And each and every one of those can be changed. And every time they get changed, they get changed for the worse. So, please understand that why we most likely shut ourselves through the foot? We shut ourselves through the foot because we could have stayed put in the great financial position not start Pascua-Lama, not start Pueblo Viejo, today I think your treasury would be $10 billion, $15 billion.
[Need to] have an easier management job. Our political problems would have been minimized to a much more manageable dimension. So, why did they do it? Well please, please bare with me for a minute. All you can do in life whether you’re trying to build a successful family, a successful business, a successful any kind of activity is built on your past example. Barrick has produced 20 years when it started until eight years ago or seven years ago is grown from producing 14,000 then 52,000 then 138,000 mines and grew and grew and grew.
In that 20 years, Barrick’s shareholders saw their investment multiplied 40 times. In 20 years as we became the leaders in the gold industry from 14,000 ounces in (inaudible) Ontario. And I opened off my ex-partners is still here who with whom I had to share the 28,000 mines because he couldn’t afford the whole 28, so we ended up with 14.
The shareholders benefited year in and year out because they’ve been able to grow. So when in all six and in all five, the option that rose, shall we carry on and shall we drill more mines, we are already the biggest, shall we go further? Hey we did but we believed is our responsibility to generate and create more shareholder value.
So it pushed the button, did we know then that we are go into run into every year more and more difficulty, did we know them that the same governments who practically backed us to invest in the remote areas, to provide jobs, to provide opportunities for education, to provide foreign exchange, to provide for taxes, are you going to be changed and new government will say who are these foreigners? Why would they take our gold away from us? And then of course they got a whole tool of environmental weapons and they can put more and more pressure on you.
So please understand that these are entirely new unique problems, the industry has changed and the best illustration, I think, was one of the charts Jamie put on the blackboard here, that in the process gold miners on the London, on the Johannesburg, on the Sydney, on the New York Stock Exchange, that had the highest multiples, small, medium or big.
Our multiples were between 40 and 45, at the time when the (inaudible) and the multiple miners and diversified miners, had multiples of 10. So of course we also been able to use our shares freely, because it was the best currency you could have. And Barrick grew faster, became larger, that of the best people, and it was natural for us that we are not going to rest on our laurels, it was felt to be our responsibility to do that.
And unfortunately, when you commit to build a mine, unique mine 40,500 meters up in the mountain Pascua-Lama between two countries first time in the history, mining that we got two major independent countries to sign a protocol under which their whole mining industry can change, by sharing absolutely everything open borders, customs, taxation and we were proud of getting there. But did we know then that this move penalizes, will set us more and more and will come with billions of additional costs and once they are halfway, it’s very difficult to walkaway.
If you add to that the softening with the gold price, if you add to that that we had a major write-off in our copper business, all of which you can attribute to our management and our decision to broaden our revenue base. It really by mid-year, by early part of this year, it would result if there is mouth and if we look like the perfect store.
Now, let me say it you equally, and I hope I didn’t leave out any other negatives because, believe me, I go home to bed every night, that’s all I think about. I don’t pat myself in the shoulder that reproduce the saving of the two bucks announcing gold struck.
But I do look at the negatives that’s our job, that’s where we have to come into help. It was clear that the collapse of multiples of the gold equities, the collapse of values universally across the board from [NASA] to England, to Australia, to Latin America and to pad on to USA. The shareholders start to rebell, because in this crust, which was a logical move after 20 years of that kind of behavior producing the right results, in that crust of growth.
We have committed more and more capital in lower than lower grade mines in bigger and bigger mines, which meant that the extra cash that this company’s should have earned for their shareholders and gold grow some 600 to 1,200 if you are shareholder of the company, you expect more than thrice of payout. You covered your overheads at 600, the 1,200, the next 600 belongs to me nonsense, nonsense. Every one of our companies, every one of them fraternity members in the gold industry in fact moved the other way. They had less free cash flow because the mine cost, the environmental cost, the social cost have increased disproportionally, inflation has taken over.
So please understand when I talk about the perfect storm that would not be an unfair exaggeration. Well the paradigm had to be changed because the ETFs of course that were major cause of that enormous shift in the multiples. Just remember in the same six years, I’m talking about ETFs ever started which I think our rold gold concept of which we are the largest members. I think put a $40 million to start this new experiment in the New York Stock Exchange called gold ETFs.
By last year, by last year, ETFs took a $140 billion, let me repeat that from $40 million in seven years, they attracted a $140 billion of gold investors money. You know where it came from? From Barrick, from Newmont, from Anglo, from Kinross from all the conglomerations of the companies and because there was no country exposure with the ETFs when gold are up 150 bucks, you got a 150 bucks more value.
They were not concerned and they were not on danger that management in their quest for growth will commit 5 billion to Tanzania or to Mauritania or whatever Kinross did, whatever Goldcorp did, whatever Newmont did in Peru, all over the place, every miner in the last six months shut down major mines, (inaudible) did, BHP did, we did, Newmont did, everybody did, and this was a beginning, because the paradigm shifted so dramatically in direct proportion with the change of multiples.
Remember, in this period, gold activities moved from 40 to 45 multiples i.e. price per share earning ratio down to eight, nine, seven. Now that doesn’t tell and give a message to gold company owners, boards and managers, I don’t know what it does. So this whole reorientation, which we initially thought was a cyclical issue, became so clearly a secular issue that again it required a major change of the whole strategy.
And I must say total respective to Jamie, who after all came after being a most successful CFO for many years and understood a) the seller reaction since he dealt with them daily, b) the implications of cash flow and high cost. He was appointed at the beginning of June, the first thing he has done is, he announced an absolutely crystal clear policy that became now the new motto expressed maybe in different words of new paradigm in the mining industry generally.
Not one of the old CEO was from the year ago are in place. All the BHPs, all the Xstrata’s, all the Anglo’s, all the major companies, Newmont’s all changed CEOs and the CEOs, the new ones swear by that paradigm that we, and I’m very proud of saying that and should hope, we are the leaders in the industry. We have articulated and announced. The problem with a new paradigm, when you have 25 mines, when you are a global leader, when you operate in 21 countries, this is hard to switch.
You can’t cut-off, Pascua-Lama, you can’t cut-off many of your mines and as I said, this was a major decision but had to be executed. And so, I’m so excited to give you a background of the circumstances that created the problems and the circumstances we’re facing, and I just wanted to know that with all the issues and I guess Jamie gave you more details and better color than I, I can only give you the background, I can only tell you categorically that Barrick will not give up, Barrick will still be under new paradigm but that may take longer rather than shorter to execute.
Barrick still will be a global leader, Barrick still will be a Canadian icon, Barrick will still carry on and create the jobs, provide the social services to schools, the hospitals and all of you, shareholders and my Board will be universally proud of it.
But that kind of reawakening which counts on the capabilities, on the confidence, on the management team of the company that built from 14,000 answers in two decades in a very established industry, the largest of its type, globally, not many Canadian companies have achieved global accepted leadership, universally in our generation.
So, Barrick has done something unique. That unique creativity also provided the Barrick team with unique competence, with unique confidence with the ability to co-operate to work together and that is going to be the driving force that will ensure that Barrick will re-emerge again. But at the same time at the leadership level, at the intellectual leadership level, at the Board level and eventually you formulate in your own mind role of a Board which is more than just put a stamp of approval on issues.
There is some fundamental issues particularly that is significant paradigm change. That required a brand-new approach to government contacts, government contacts well all you got to do is go down with one of your friends on the Advisory Board to meet (inaudible) who embraces you as though Peter come and invest more money in Argentina, we need a job. So go down to Nevada and how you read Ivan, because he comes from a mining family and he wants more mines in Nevada.
It’s a different ball game when you got a new government who wants to penalize you. When you got new governments in many, many countries, we talk about 25 mines in 21 countries. And many of those mines are endangered by unilateral action and many of those governments as much as we respect them and all part of the United Nations do not have the same perception of the rule of law, as we in Canada accept.
This required a whole new approach, a whole new access and the whole new strategic vision to approach and deal with these governments at the highest level by somebody who – we in Canada didn’t have many qualifications for. And that is where the subject I want to touch upon for a moment, John Thornton has come up. There’s more, we’ve been looking around for somebody else, that kind of qualification, of that kind of unique access contacts, of that kind of exceptional recognition and profile which all lead by combining three carriers and compressing them in 25 years, only John has done as far as we were concerned and maybe they have some others, but they may not have been available.
John had not only become the youngest head of Goldman Sachs in a most critical area first in England and the whole of Asia. John not only has been the most effective strategic member of some of the most important global boards, internationally, globally, universally. But John also was amongst a few corporate leaders, who at age 40 said, I’ve done it, I am the President of Goldman Sachs, I am now ready to move my next career and moved to China.
At the invitation of the then government, and became the head of the most prestigious Beijing university business school. At that time, when China, it’s leadership realized the communism is a great word but making money is more important, if you want a 1 billion people to eat.
So business became very, very important and to open up the first business school and heading up that business school, 10 years ago, and educating in that particular class, some of the current leaders provides the kind of trust, the kind of acceptance, the kind of relationships in a country where the few for our next phase of growth, the mining industries growth, if your shares go down, your multiples go from 40 to 10, you are not going to use your shares anymore as a currency.
If you got a paradigm shift, you got move on to new areas that requires capital, capital for resource development of which Barrick is probably the best example to date to do it internationally. Capital partners, who would they team up with more than with someone like Barrick, if you got somebody in Barrick who they can trust, who they can rely on.
So John not only provided the access and really unorthodox access to many of the governments, where the danger was that, if we don’t have proper access to new governments we may loose one of our mines. And please remember when we look at a mines and talk about our mines, we talk about $2 billion, $3 billion, $4 billion investment in 25 countries again not all of them follow our adherence to law and the word of law.
So I commies my board, I attract the world, I looked around, my age is easier to be better connected and I found that John had all these unique abilities but he had one more qualification that I thought no one else had. He in contrast to all the people of that caliber shared the dream, shared the vision and was prepared to put his shoulders to the wheel.
It’s one thing to find people of the highest caliber but if they are run – Manhunter, they run Hewlett-Packard or they run News Corp., they are not going to do much for Barrick. John was ready to move to his next carrier. He had his investment banking 10 years, he had his fantastic academia for 10 years and being the head of possibly the world’s most respected think tank, the Brookings gave him again an enormous access and contact level that no one could use better than Barrick operating globally.
So John was prepared to give up his other options and believe me, John was a highly desirable, well-known commodity, major corporations, major hedge funds, there is plenty of black stones globally in the Middle East and China where money doesn’t matter. So when we paid the kind of money, we played John to buy Barrick shares with, a we had to secure him and we could only secure him against the competitive environment and so that made it somewhat difficult.
Let me just say to you before I carry on and talk to you a moment about gold. Let me just say to you that I personally, my Board unanimously, and the management team consistently, since this company was founded, is totally aligned, totally supportive to every aspect of what ISS stands for. We believe that pay a public company should be modest.
We believe that pay should be tailored to the achievements. We believe that pay should come after performance. It was hard to have someone pay on performance, if he would not have been able to join to perform. So we had a bit of a tick in an execution and sometimes you have to do things, which may not be popular at the moment, but which you believe in your heart and you’re able to convince those who sit around the table with you cannot commence clearly the whole press core globally. But I could commence my directors and they could satisfy themselves.
That the right thing was to have this advance investment into securing and increasing are built it to secure some of our billion dollar mine assets by his access. To secure the kind of access, he can’t give us, and the creditability he can provide us with in attracting major capital that can be the trigger point for direct next exponential growth which will happen.
And you if you compare the $10 million or $15 million where you got to buy shares; you please compare it to a company whose asset base is $40 billion. And please I would like category to show you and our Board asked me individually to tell you all that we are 100% supportive of the rules established by the institutions, regarding public companies, by those which are then promulgated by the ISS totally.
But please also understand that rules are reinforced by exceptions. And if ever there was exception from a rules supply as an average around the Canada company, please look at Barrick with 95% of its assets to tune of $40 billion, in 23 countries, some of them endangered. You don’t think it’s worth going through the extra mile to be sure that we have an extra protection to it.
You know, we set as you could see here, 1.1 billion in sustaining capital to sustain the mines, the 25 mines. You know those shovels and trucks cost $5 million, $4 million, $10 million. No one knows whether it bought six more shovels and how much that would do at Pascua-Lama.
I promise you that John will do more for Barrick to six more shovels. So, I just beg you to accept the fact that we are totally supportive of the rules, we will not deviate from those rules but having said that we also realize as intelligent human thinking people, who are not robots the sometimes of rules got reinforced and strengthened by the exception and we believe that Barrick is different from Barrick is different from Tim Hortons, Barrick is different from Canadian National, Barrick is different from Power Corporation, Barrick is different from Rogers, great great Canadian companies all icons in their own way, all of them, all their assets, sitting at home in a very comfortable country where the rule of the law is a rule of the law, where you don’t need excess professional contacts and leverage to make sure that you’re being heard and as you can protect that asset.
Barrick is no different, totally different, I really try to search through and there is no other Canadian company that has got that quantity, 40 billion and that geographical dispersion of its assets. I’d like to apologize again, because I look to mean not to my Board, I want to convince them, I had to sell them against all kinds of oppositions, so please if you want to give me help, give anybody help I’m here. Don’t blame my Board.
I’d just like to end up this way too long presentation, I have been thinking about it so long and the more articles I read that a paper that are critical, which is wonderful, the most stimulated I’m to talk to you longer. So you are lucky that I’ve not read this morning’s press yet but let me just say to you that since we are in a gold business, I should really talk about gold. And I’m not going to say much, I’m not a gold bug, we spent 15 years hedging.
But I do believe that gold in contrast to all other commodities is driven entirely by the comfort level of people with money globally India, Abu Dhabi, New York, Venezuela that’s what gold is all about. Jewelry people buy today, they can buy 20 carats, 18 carats, nine carats gold, it looks yellow, it shines, it has nothing to do with taking up 2,000 tons of gold a year but takes up 2,000 tons of gold is the uncertainty of people who control money, trying to protect their wealth.
And let me just say to you and I don’t want to go into details and I love you to read those 200 analysts from Goldman Sachs down to Deutsche Bank, all of them think that they are the experts and they forecast your gold prices when they say well next year it goes from 1,420 down to 100 and 311, well maybe next time this forecast, the direction of the wind here from now.
And if they are that smart to be able to forecast the comfort level and the various tragedies that can arise from Jihadists to bombers from Iraq to the Arab Spring to the upheavals in China and India, and the wealth creation in these countries all of which end up in people buying gold.
And they believe that Europe and its currency is in the right way that the European politicians really have solved their problem of the European Central Bank by printing more money, not tightening the belt, not saying we spend $100, but we only generate 80 income, let’s cut off $20 of our budget. No, we print more money to make us feel better, and let me tell you, the U.S. is not much better.
So if you add up all that and just add one more important factor to how people feel and how they go back and be attracted to gold. Just think how China feels? Just think how those three countries who between them have $9 trillion dollars of U.S. dollar savings, and who love to have a reserve currency.
Well, there have been only three reserve currencies recently, one was the German Mark before Euro, the U.S. dollar now and the British Pound 100 years, okay, not one of them managed to get there without having a predominance of overwhelming gold reserves in their treasury.
Check Fort Knox, check the Deutsche Bank and check the Bank of England. China has less than 3% of its enormous accumulation of U.S. dollars in gold. So, think about that. And if you don’t think that the problems of the world have been solved and if you think that the world is not having may be to more problems unless then maybe you should be pessimistic about gold and join the Goldman Sachs analysts who encourage you to sort it.
But if you believe in the long-term protection of what you and your children own, whether you are a country or whether you’re a person, then do what the most cautious people do and buy the one commodity that cannot be repented and again I am not here to bug, also pitch you gold that’s not my job. I’m just telling you how I think about gold and you can take it or leave it.
Thank you very much for listening to me. I’d like to conclude just saying and I really, I’m grateful that all of you listened so patiently to this rare over long model, but I guess as you keep on coming, but I’ll be fired soon so, you don’t worry.
The new guy will not talk that longer, he won’t have a self-confidence, but I want to know please that I am enormously proud and I so remain to the rest of my life, enormously proud of Barrick, not because Barrick is my legacy and my creation, it isn’t. Anybody who said that is biasing, it’s a team effort, but Barrick is a Canadian icon, Barrick has created tens and tens of thousands of jobs and nothing today, nothing today globally, it’s more in demand than jobs and opportunities for young people.
Barrick has built hospitals. Barrick has educated several thousand people at our cost and Barrick has made social contributions throughout the globe wherever it works. Barrick’s ethics, morality and decency never been questioned. We’ve never been accused of either overpaying our executives up until now, or bribing people, Barrick has never been charged.
I’m enormously proud of being the founder and a participant in this great Canadian human enterprise. And I promise you it shall remain that. Thank you.
[No Q&A session for this event]
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