From the G&M: "The magnificent world of Peter Munk"
Saturday, February 14, 1998 By Douglas Goold
"THE world is magnificent," Barrick Gold Corp. founder and chief Peter Munk said in an interview this week. "We react to a stick rapidly and beautifully. And right now the gold industry has got a stick."
There is a stick driving the industry because producers face the lowest gold prices in years, massive bearish sentiment and mine closings and consolidations. The latest was Monday's announcement that Kinross Gold Corp. had agreed to merge with debt-laden Amax Gold Inc.,
creating North America's fifth-largest gold mining company.
"Low commodity prices force producers to look for economies of scale, economies of operations," Mr. Munk said. Everyone is cutting costs, and even the South Africans, "after three generations of doing nothing, are restructuring their holding companies." Kinross and Amax "were forced to marry to rationalize their overheads;" others, inevitably, will be forced to march to the alter.
Even powerhouses such as Barrick (and arch-rival Placer Dome Inc.) have had to respond. The Toronto-based producer recently sold its half of the Quebec-based Doyon mine to joint venture partner Cambior Inc. More dramatically, last September, Barrick announced it would close half of its 10 mines and take an after-tax charge of $385-million.
At the time, gold was trading at $322 (U.S.) an ounce; it has since fallen as low as the $280s. It closed yesterday at $300.60.
"It's just so right for us," Mr. Munk commented. "We've taken a writeoff, a big one. We're now operating five less mines and our operating costs have gone from $200 an ounce to $170 and hopefully to $150 next year." The mines will be reopened when the gold price recovers.
Barrick is already beginning to bounce back, announcing quarterly earnings this week of $75-million, up 34 per cent from a year earlier.
Barrick has been an acquisitive company, most famously for its $2.2-billion (Canadian) purchase of Lac Minerals Ltd. (after a rousing takeover battle with Peggy Witte and Royal Oak, a company that is now suffering) and its $1-billion purchase of Arequipa Resources Ltd. Would it become acquisitive again?
"We had a couple of offers," Mr. Munk answered. But takeovers increase debt and can raise the average cost of production. In any event, there are "internal opportunities" presented by Lac and Arequipa, so "I am somewhat negative" on buying anything else.
Mr. Munk is bullish on the price of gold. He said his impression at the recent thinkfest in Davos, Switzerland, was that central bankers had no intention of dumping their reserves on the market. Further, demand for gold outstrips supply. Then there's all that negative sentiment.
"I bought Trizec when half of my board walked out on me because I wanted to invest a billion dollars in real estate, because they thought real estate was dead forever after the Campeau and Reichmann disasters. I am to believe that the greatest opportunities for a turnaround are when there is an almost universal feeling of pessimism by the analysts and by investors. And looking at the short position, gold is certainly at the bottom in sentiment, at least since I entered the gold business in the mid-1980s."
Mr. Munk said he would be an idiot to try to guess where the gold price will be by the end of the year. "Could we have guessed that silver, universally described as the most unwanted commodity produced by mankind, would be doubling in price when every other commodity, from nickel, copper, aluminum and gold, has dropped by a third?"
Silver, of course, has made a comeback because of a massive purchase by superinvestor Warren Buffett. It turns out that Barrick has the largest proven reserves of silver in the world. "We were ashamed of it until yesterday," Mr. Munk quipped. "It's amazing how Mr. Buffett can change your feeling of embarrassment into a feeling of pride."
Most analysts agree with Mr. Munk that though the gold price has bottomed, the consolidation of the industry will continue. Without strong partners, many producers will have trouble continuing their operations, let alone financing exploration. "My advice would be to accumulate gold shares and gold bullion, as well, into this weakness," Peter Cavelti said. The veteran head of Cavelti Capital Management, who expects a choppy year with prices in the $280-$320 range, said it's too late to sell.
While most gold investors have been treated to an ample bath, CIBC Wood Gundy's Bill Belovay says that his recommendations made in early December have returned a stunning 22 per cent. His top choices are Placer Dome , which has underperformed because of its dispute with
Crystallex International Corp., which he says is of little importance to the company; TVX Gold Inc. , which has suffered because of problems with the Kassandra project in Greece; and Dayton Mining Corp. , which is a takeover target.
Douglas Goold is Acting Editor of Report on Business. |
