Barrick Gold’s John Thornton won’t back down

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John Thornton will tell you he saved Barrick Gold Corp. from certain destruction and set it up for fresh success. The company’s shareholders are not convinced. To many of them, Barrick looks like the incredible shrinking company.

Who is right?

Mr. Thornton, executive chairman of the world’s biggest gold company since 2014, and a former Goldman Sachs Group Inc. president, is utterly convinced his overhaul of Barrick has changed the Toronto company for the better – even though its shares have dropped almost 40 per cent in the past year alone and are down by more than half since their most recent peak, in 2016. In an exceedingly rare interview – this is one boss who avoids the media – he is coming out of his shell to defend a turnaround strategy that seems to have alienated investors rather than please them.

"Chasing ounces,” as he puts it, is not his strategy. His plan is to recreate Barrick as a gold company that does not operate like a gold company, while inviting big-name Chinese miners to invest in Barrick projects. To him, growth does not necessarily mean more reserves, mines and production; it means more free cash flow – the money left over after the company pays its operating bills and capital expenditures. When free cash flow expands, so does the company’s ability to invest in new projects and dole out riches to shareholders.

His plan has, so far, substantially reduced the size of the company by getting rid of the second-tier mining properties. His problem is that Barrick’s share register is still loaded with the investors he doesn’t view as ideal – traditional gold investors – and they do not seem to be buying the free-cash-flow pitch. They wince when they see mines being sold and reserves going in the wrong direction. Indeed, Barrick is about to lose its status as the top producer to Denver’s Newmont Mining Corp., whose market value is already higher than Barrick’s.

But Mr. Thornton’s strategy is backed by a 2017 Paulson & Co. gold-industry report that lays out the sector’s perennial bad performance – “serial value destruction” – such as capital costs that routinely exceed returns on capital. The report says that, since 2010, misfiring investment strategies have triggered some US$85-billion in writedowns, with Barrick among the guilty parties. The standout performer has been London-listed Randgold Resources Ltd., which invests only in high-return projects and produces double-digit returns on capital. Mr. Thornton greatly admires Randgold and wants to emulate its superior returns. Randgold has earned a 93-per-cent total return for shareholders in 10 years; Barrick, a 61-per-cent loss.

"Some shareholders make the facile assumption that growth in ounces leads to growth in other financial metrics, and we know that’s not true,” Mr. Thornton says. "If we could wave a wand, we would have only true long-term investors, which will include generalist investors who are not normally gold investors.”

Despite the pushback from some investors, and the fallen share price, Mr. Thornton is sticking to his guns and seems to be evolving from executive chairman to executive cheerleader. He believes that Barrick – now deleveraged, profitable more often than not and capable of throwing off cash – is finally in a position to grow, albeit carefully, and that means developing projects beyond the phenomenally successful Goldstrike play, the reserve that vaulted Barrick into the big leagues.

And the rumours are wrong, he says: He’s not hitting the road any time soon. He feels his job is only half done and he has no intention of hiring a chief executive to finish the hard lifting. He’ll lead that charge, he insists: "I’m not leaving until this company is in the shape it ought to be in. … Everything I have done in my life I have done to a high standard. I have always stuck at things until I was either chucked out or achieved what I want to achieve.”

John Lawson Thornton arrived in London last week on Barrick’s Gulfstream V jet – flying commercial is not his style. A tennis fan, he had been at the U.S. Open in New York, where he saw Novak Djokovic play. All three of his sons are tennis players; the youngest, Elisha, plays on the European junior circuit. His daughter, Alexandra, prefers horses. She is on the British national show-jumping team (the three oldest kids were born in the U.K. and have British passports).

Mr. Thornton is sitting in a private room on the second floor of the Pasley-Tyler club on Berkeley Square, in London’s Mayfair, one of the world’s wealthiest neighbourhoods. George Hamilton-Gordon, who would become British prime minister in 1852 and was forced to resign after taking the blame for the botched Crimean War, was one of the illustrious inhabitants of the 18th-century house. The building became a quiet retreat for executives in 1996. Its walls are covered with classic and modern art; the recent works include pieces by Damien Hirst, Banksy and Nick Walker.

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Mr. Thornton fits well into the prim surroundings. He wears a trim, dark blue, two-button suit, light blue shirt and conservative blue tie. He has an enviable mane, by now all grey. Every couple of minutes, he flicks his head back like a fashion model to clear the hair from his face. He speaks forcibly and never provides short answers – even to short, direct questions. Everything is put into context. "Let me explain…” he says, explaining away for several minutes or longer.

He radiates confidence and mettle, not surprising for someone who almost made it to the very top of Goldman Sachs, where he worked from 1980 to 2003, building its London and Asian businesses – China would become his specialty – and earning his reputation as a savvy mergers-and-acquisitions artist. By the last decade, he was so wealthy that he could pay US$80-million for a limestone villa in Palm Beach, Fla., which he shares with his wife, novelist Margaret Bradham Thornton. "It’s an oasis,” he says.

He is well rounded – type-A polymath might be good description.

Born in Manhattan and raised in nearby Bronxville, he has a history degree from Harvard, is one of Ford Motor Company’s longest-serving directors, is chairman of the board of trustees at the Brookings Institution think tank in Washington, D.C., and holds, or has held, a flurry of directorships and advisory roles in companies and agencies ranging from Rupert Murdoch’s News Corp. and Laura Ashley Holdings to the China Investment Corp. sovereign wealth fund and the China Securities Regulatory Commission. He regularly advises the Chinese authorities, including China Investment Corp., on U.S. President Donald Trump’s escalating trade wars and other Trumpian matters.

Barrick was built by Peter Munk, the Hungarian-Canadian mining and property tycoon who retired as chairman in 2014, leaving behind an ailing company, and died in March at 90. Mr. Thornton and Mr. Munk had known one another since the 1980s, when they met through David Wynne-Morgan, the old British PR warhorse who was Mr. Munk’s long-time communications adviser. At the time, Mr. Wynne-Morgan worked with Mr. Thornton on hostile-takeover defences.

As Mr. Munk grew frail in old age, and as Barrick took on appalling amounts of debt and created messes in a few spots, notably in Tanzania and at the Pascua-Lama property in the Andes, he blew senior executives out the door and began looking for a new boss who could fix the company. His first choice was said to be Nathaniel Rothschild, the British mining financier and son of the fourth baron Rothschild, Jacob Rothschild. When the courtship faded, Mr. Munk turned to Mr. Thornton and, in 2012, appointed him co-chairman. Mr. Thornton’s decision to accept the job was no doubt made easier by the pay package, worth US$17-million in his first year.

When he became executive chairman two years later – Barrick has had no chief executive since Jamie Sokalsky left in September, 2014 – he didn’t have to think hard about what to do. Barrick was sitting on more than US$15-billion of debt, had sunk some US$8-billion into Pascua-Lama with nothing to show for it, had almost blown its brains out on the wildly overpriced, $7.3-billion (Canadian) purchase of the Equinox Minerals copper-gold company in 2011 and was bleeding horrendous amounts of cash.

And the price of gold was falling. Mr. Thornton ("the new sheriff in town” – his words) hit the panic button. "Barrick was in very bad shape in the sense that its balance sheet was way, way out of whack, especially for a company that depends on gold prices for its fortunes,” he says. "It was facing an existential crisis. If the gold price had gone badly against it, then it would have been in real trouble.”

He would hammer the debt and costs down fast through asset sales and a vicious round of staff reductions that have yet to end. But what he really wanted to do was give the company a personality change. "Taking it back to the future,” as he puts it, by making it a lean, entrepreneurial partnership with no middle management, just as he believes it was in the early days when Mr. Munk and his cronies were running, and owning, the show.

The asset sales were designed to propel Barrick into the premium end of the gold-mining sector, even if it meant shrinking the company drastically. Mr. Thornton wanted to keep only "first-tier” assets, defined as those capable of producing 500,000 ounces a year over 10 years and occupy the lower half of the cost curve. Everything else was up for grabs. Of the 18 assets – mining projects or stakes therein – that have been sold outright, partly sold or closed since 2006, eight of them went out the door under his reign. The good news is that debt has plunged by almost two-thirds, to US$5.8-billlion, at last count. The bad news is that production has fallen by about a quarter, to last year’s 5.3 million ounces, and output will be no more than five million ounces this year and possibly a few hundred thousand less.

The middle-management headcount has fallen by half, to 700 or so, and is still falling. "Seven hundred is still far too many,” Mr. Thornton says. "We want to get it down to 300. At Goldman Sachs, [cutting] 10 per cent was like breathing. We did it every year.”

Next up for the Thornton treatment was the ownership culture, or lack thereof. Shortly after he became executive chairman, he discovered to his shock that only two managers owned Barrick shares. He insisted that all employees become owners. Today, they collectively own two million shares, and Mr. Thornton owns 2.7 million (he has invested all his compensation in Barrick shares). He also created a Wall Street-style partnership system, which has seen the top 50 employees “elected” to partnership level by a vetting committee. Their compensation is in good part tied to a long-term incentive program that is paid in shares, which cannot be sold until they retire from the company.

The upshot, he says, is that the new Barrick has gone back to its roots, embracing the culture created and honed by Mr. Munk in Barrick’s glory years, before it became a top-heavy, accident-prone colossus. "Barrick back then had a partnership culture, a decentralized business model with a very small, high-quality head office that only allocated capital and allocated people,” Mr. Thornton says.

Has his overhaul worked?

The share price says no. The shares have fallen twice as fast in the past year as Newmont Mining Corp.’s, even though Barrick’s debt load is vastly smaller and profits have returned – the adjusted net profit last year was US$876-million. (In 2013, the loss was an astounding US$10-billion.) The company has reported positive free cash flow, but in the second quarter the figure was negative US$172-million. Falling gold production can take some of the blame, along with supply problems in Tanzania and Argentina and greater investment in the core Goldstrike properties in Nevada. The bigger problem might be the lack of a growth strategy – or at least one that is apparent to investors.

Pierre Lassonde is among the non-believers in Mr. Thornton’s strategy, even if his old partner, Seymour Schulich, is buying into it (in an e-mail, Mr. Schulich said, "If [Mr. Thornton] ever leaves, I would sell out”). Mr. Lassonde, the former Newmont president who founded Franco-Nevada Corp., the gold royalty company, with Mr. Schulich, thinks Mr. Thornton, who had never set foot underground until he joined Barrick, "totally misunderstands” the mining business.

He believes Mr. Thornton’s effort to maximize cash flow by working the high-grade mines hard and discarding the relatively low-grade ones will hurt the business over the long term because it reduces the reserve life, meaning the chances of hitting a jackpot cyclical upswing, which tends to happen every few decades or so, are cut short. He also thinks selling big mines is a big mistake, even if their ore grades are not in the top tier, because gold finds of any size are becoming a rarity. “History has shown that most of the value in the mining business comes from the drill bits, not from financial transactions,” Mr. Lassonde says.

John Thornton may be a great believer in his Barrick turnaround plan, but he has not been a great in-your-face salesman for the company in the way Peter Munk was. He almost never gives interviews or talks to analysts, though he does meet with the big-name shareholders.

Unlike Mr. Munk, he is not seen as the public face of Barrick – the company really has no public face. Like Mr. Munk, he has a reputation for being a bit too much in control. As if to prove the point, Kelvin Dushnisky parted company with Barrick, where he had been president, in July to become chief executive of South Africa’s AngloGold Ashanti Ltd. Barrick insiders say Mr. Dushnisky, a Barrick man since 2002, wanted to run a big gold producer and knew he would never get that opportunity as long as Mr. Thornton was around.

Aware that the market is not buying his message, Mr. Thornton is trying to convince shareholders that Barrick is set to resume growth.

Three new projects will add about one million ounces a year, but they won’t come on stream for at least four more years and won’t really move the production needle that much. A little more than a decade ago, Barrick was producing more than eight million ounces a year, about 50 per cent more than last year’s output. Mr. Thornton is also busy recruiting partners for some of Barrick’s most promising projects, suggesting to some investors that he is giving away a heap of potential future value. Mr. Lassonde says Mr. Thornton "doesn’t seem to understand how hard it is to find great deposits, as he is selling out some of Barrick’s best.”

Analysts agree that waning production can rattle investors even if the financial metrics have improved. In a recent note, Bank of America Merrill Lynch, which has a “neutral” rating on the stock, noted the "medium term declining gold output profile and still substantial debt burden.” Macquarie Research has an “outperform” on Barrick. And TD Securities has a “hold.”

Mr. Thornton has brought in Chinese investors to two large mines: Pogera in Papua New Guinea (47.5-per-cent owned by Barrick and 47.5 per cent by Zijin Mining) and the high-altitude Veladero site in Argentina, a 50-50 joint venture with Shandong Gold. Shandong has been invited to evaluate the Pascua-Lama site, which was mothballed after the hideous cost overrun that had so enraged Mr. Munk. Mr. Thornton says there is "an almost-100-per-cent” chance the Chinese will get involved in Barrick’s broken projects in Tanzania, which are run through its 64-per-cent ownership of Acacia Mining PLC (formerly African Barrick). The Acacia mines have never paid a dime of income tax to the Tanzanian government, Mr. Thornton says, and the government, which has banned the export of gold concentrates, wants a new deal.

Mr. Thornton says the Chinese bring capital, technical expertise and – above all – political connections in Africa and parts of Latin America that Canadian and American mining companies simply can’t match. "From Barrick’s point of view, it’s one thing to be a Canadian company. It’s another to have China as your partner,” he says. "What we’re doing is so much bigger than Barrick. We need financial and political risk mitigation. If I know one thing, I know this is right. We have the thinnest talent in the most difficult areas and we can’t develop all these projects alone.”

He is also exploring the idea of forming a copper company with Chinese miners – copper being Barrick’s second-most important product; the company produced 413 million pounds of it last year.

Is Barrick selling itself to China by stealth? "No,” he says. "But we’d rather own 50 per cent of 100 rather than 100 per cent of zero. That’s what we’re talking about.”