In 2012, Barrick Gold, the world’s biggest gold producer, hired John Thornton. He did not have any experience overseeing a gold mining company, but Barrick gave Thornton a $17 million pay package, which included an $11.9 million signing bonus. Despite his lack of gold mining experience, Thornton had worked at the highest levels of Wall Street as president of Goldman Sachs and had a well-deserved reputation for being particularly well connected in China. Thornton was seen by Barrick’s board as the right successor to take over from Peter Munk, Barrick’s founder.
“It is indeed out great fortune that John has reached a point in his spectacular career at the same time when our need for someone of his exceptional qualifications, credentials and experience also reached a decision point,” Munk wrote in Barrick’s 2012 annual report. “Over the past year, John and I have been working in lock-step,” Munk added. “We remain convinced that Barrick is on the cusp of a new era, poised to deliver the shareholder returns that will again define us.”
But instead Barrick Gold has been hammered in an era of ever weakening gold prices and Thornton, who took over as executive chairman in April 2014, has presided over what increasingly looks like a corporate fiasco.
Shares of Barrick Gold started the week by plunging 15.7% after gold suddenly sold off in a major way to $1,100 an ounce. It was hard to say exactly why gold tumbled but many gold bugs pointed to China, which on Friday disclosed that its gold reserves increased far less since 2009 than many market players had expected. With Thornton at the helm, Barrick was supposed to be getting good news from China, but so far Barrick’s stock has tumbled by 57% since Thornton has been in charge—and recently hit a 24-year low.
Barrick’s problems were not made by Thornton. With the price of gold soaring as high as $1,900 an ounce in 2011 and Munk leading the way, Barrick launched big and expensive debt-fueled deals. It bought Equinox Minerals for $7.6 billion in cash for its copper mine in Zambia that resulted in a $3.8 billion write down. Barrick also spent some $5 billion to develop Pascua-Lama, a gold project along the Chile-Argentine border that has been suspended because of legal and environmental issues. As the price of gold plunged those mistakes have put Barrick in a debt-laden bind.
To clean up the mess, Munk turned to Thornton and made him Barrick’s most senior executive—the company doesn’t have a CEO. A well-known deal maker who spent two decades at Goldman Sachs, Thornton made important inroads for Goldman Sachs in China when he was chairman of the investment bank’s Asia unit, as former Goldman CEO Henry Paulson makes clear in a recent book he wrote about China. Thornton was seen as a potential successor to Paulson, but quit Goldman in 2003, perhaps because he realized Lloyd Blankfein had emerged as a likely successor. Thornton became a co-chairman of the Brookings Institution in Washington, but also continued to focus on China as director of the global leadership program at Tsinghua University and with a role at the China Investment Corp., a big-time sovereign wealth fund.
China had become a major player in developing and financing gold and other mining projects--and the feeling at Barrick was that Thornton’s connections in China could help the Toronto-based company form partnerships and conduct deals with Chinese companies that would help Barrick surmount some big obstacles.
The biggest issue for Barrick is net debt, which peaked at $13 billion. Since coming to Barrick, Thornton has dabbled in different ideas about how to turn around the gold miner. At one point he thought diversifying into other commodities like copper might make sense, but eventually he decided to focus on gold. He tried to get Barrick to do a supermerger with another big gold mining company, Newmont Mines, but the merger talks failed. In the end, Thornton decided to sell assets and, naturally, he looked to China.
With Barrick’s net debt at $10.4 billion at the start of the year, Thornton boldly announced the company would reduce debt by $3 billion in 2015. He struck a deal to sell a 50% stake in a Papua New Guinea mine for $298 million to Zijin Mining. Barrick and the Chinese company also said they would try to find ways to partner on other projects. Thornton also agreed to sell an Australian mine to Evolution Mining for $550 million.
But with commodities prices tumbling, it is becoming increasingly unclear to investors what Thornton will need to do to reach his $3 billion debt reduction goal and whether a major partnership with China could solve some of its problems, like maybe Pascua-Lama. The company has reportedly also put up for sale part of its Chilean copper mine, which could be sold to BHP Billiton. The discounts on any further assets Barrick seeks to sell can only be increasing in this market and any sale will only further erode the company’s cash flow.
With mine maintenance capital expenditures already reduced, Thornton might also need to raise more capital by issuing equity. Shareholders were already frustrated by Thornton’s continually lavish pay packages. He was paid $12.9 million last year even as the company's stock plunged, a compensation package that shareholders overwhelmingly rejected in a non-binding vote in late April. Shares of Barrick fell again on Wednesday by 1% as the price of the yellow metal drifted down to $1,087 an ounce.
