Mr. Jamie C. Sokalsky, Barrick Gold's (ABX) new CEO, did his first earnings call on July 26, 2012, and it was a failure in terms of inspiring confidence and a vision of leadership among institutional and other investors as well as the media. Here's why.
Barrick's stock has lost $23 billion of market cap since September 8, 2011. Even more compelling is ABX's loss in value more recently as compared to GLD since April 21, 2012 when ABX was trading at $55.63 and GLD was trading at $146.74. Furthermore, on July 30, 2012 at 12:14PM GLD was trading at $157.16, yet ABX was trading at $32.95. This represents a substantial lack of correlation between GLD and ABX as well as an illustration of despair in comparing ABX to other key industry miners. While we recognize that there has been a general trend of miners to trade lower than the underlying asset during this period, the discrepancies in Barrick's performance is stark.
We understand that stock prices are more a reflection of market driven forces and often may not correlate directly with company performance. However, in Barrick's case, this is particularly visible and calls in to question serious corporate management issues. We first raised concerns about management issues in an email to Barrick's IR folks in March, 2012 raising concerns about senior management, and particularly Aaron W. Regent, Barrick's then CEO, and were reassured in a friendly 30 minute phone call back that "our concerns were not reflective of Aaron's great management." Regent was suddenly terminated on July 6, 2012 by Peter Munk, Barrick's founder and chairman. Munk also named John L. Thornton Co-Chairman, but we haven't heard anything about his role since the announcement.
In addition to an outright earnings miss and revenue disappointment on July 26, 2012, Sokalsky's presentation last Thursday was a further significant let down for its investors. The presentation itself and its accompanying discussion was more of a "project management/engineering" overview than a newly named CEO's first "supposedly inspiring and visionary" public investor conference. Mr. Sokalsky's presentation as the new CEO was analogous to that which a product engineer at Procter and Gamble would give outlining the chemical components of its shampoos, toothpastes, and dish soaps that are the backbone of its business.
We assume that "inspiring investor confidence" and demonstrating energetic corporate vision and leadership is important to Barrick inasmuch as its prior CEO, Regent was terminated on July 6, 2012 as the result, primarily, of poor stock performance as noted in Mr. Munk's statement on that day. ABX's continued poor performance since then reflects the market's assessment of Barrick's earnings results and Sokalsky's flop presentation.
While an earnings slip and revenue miss are expected to have some negative impact on stock, it is evident that Sokalsky's presentation did nothing to offset that, and in fact exacerbated the problem, based on ABX's breathtaking stock decline and trading volume during and after his call. ABX dropped 8% from $33.93 to $31.20 during Sokalsky's earnings call and ended the day with 22 million shares traded more than 2 ½ times its average trading volume.
His presentation was nothing more than an overview of troublesome projects such as Pascua-Lama, Lumwana, Pueblo Viejo, Chimiwungo, and Jabil Sayid. This, despite the fact that Pascua-Lama has been on Barrick's radar screen since 1993 or before and Barrick has been invested in it for well over 15 years on Sokalsky's watch as Treasurer and then CFO. Pascua-Lama alone represented almost 40% of the discussion time during the conference. Altogether, these five projects represented 15 of 22 slides (not counting title, management pictures, disclosure, and footnotes). These projects were all initiated on Sokalsky's watch as Treasurer and CFO at Barrick well before Aaron Regent joined the firm.
There was only a limited mention of US, Australia, and other global locations and strategy, and it was primarily in response to a late stage question about Nevada. Sokalsky sidestepped any questions that even came close to key issues such as Deutsche Bank's key question asking "what has fundamentally changed?" As a new CEO recently named on July 6, and who was the Treasurer and CFO at Barrick since 1993, Mr. Sokalsky certainly didn't generate any confidence that he is qualified to be in the role of CEO and a critical agent of rapid change. Sokalsky provided no open and transparent insight in to systemic and operational management issues that surely must be rampant at Barrick. He provided absolutely no strategic vision of Barrick in the future and its position in the industry. One needs only to point to stock performance and follow the company's public face to see that.
Sokalsky did highlight that costs and capital expenditures at Pascua-Lama had exceeded a 50-60% forecast increase over revised plan. This resulted in a more thorough management review and a senior management team visit to the site recently. Sokalsky added that it was his "second visit in the last couple of months." Of significant concern to investors is Mr. Sokalsky's comment that "we didn't learn about the magnitude of these changes until recently, certainly not -- until after I became CEO." We perceived this to be some sort of real management lapse, especially since he has been at Barrick Gold as Treasurer and then CFO since 1993.
Other than lip service, Mr. Sokalsky never framed a strategic management picture of the new and forward looking Barrick including Ammar Al-Joundi, who recently "rejoined" Barrick from Agnico-Eagle Mines, Ltd (AEM)., the smaller miner with abnormally large August 40 call open interest of 29,434 contracts as well as other very large in, at, or near the money options. We haven't a clue who is responsible for managing all of these troubled Barrick projects that Sokalsky highlighted in his quarterly performance call. Sokalsky was the Treasurer and CFO when all of these projects were originally budgeted and tracked. Yet as CEO he can't seem to deliver an inspiring presentation for Barrick despite the dire need for this.
Massive cost and capital expenditure excesses were not on his radar screen "until recently." Instead, he merely reported on a half dozen projects and stated that Barrick will be more cautious about investing capital in projects that it could not manage properly. We had assumed that as CFO, Mr. Sokalsky had been already doing that.
Well, if Barrick, the world's leading gold miner, can't successfully manage these projects, and Sokalsky can't supervise the budgeting and funding of these projects for the past 19 years, it follows that we wouldn't have confidence that he could lead and inspire the company and turn around their sub-par stock performance. We believe that the truth may lie somewhere in the notion that Barrick appears to be a very stale, complacent, arrogant, poorly managed, and detached company. One could easily conclude, based on just its stock performance since July 6, 2012, Sokalsky's presentation today, the market's reaction, and other miner's comparative performance, that Barrick is in a rapid state of decline and deterioration.
Disclosure: I am long ABX.