GMS: Between fund managers and miners, much value left on the floor, says Barrick’s Mark Bristow

The global gold mining industry is generally caught between a rock and a hard place when it comes to the disconnect between fund managers and the business of producing sustainable metal and delivering margins. It leaves much value unrealized for owners, Barrick Gold (TSX: ABX; NYSE: GOLD) said during The Northern Miner’s recent Q4 Global Mining Symposium.

Speaking to Anthony Vaccaro, president of The Northern Miner Group during a keynote session, Bristow said fund managers’ ambition to gain more relevance often meant shareholders didn’t get the best value from the opportunities at hand.

“My critique is that actually through the behaviour of many fund managers, we keep forcing the gold industry into a trading platform and not developing long-term value,” said Bristow.

Since the merger of Randgold Resources and Barrick took place early in 2019, it sparked off a wave of consolidation at the top. In coming out of 2018 and his engagement with Barrick, the deal was followed by the joint venture in Nevada with Newmont (TSX: NGT; NYSE: NEM), Newmont’s acquisition of Goldcorp, and again, Barrick’s acquisition of Acacia Mining. This was followed by the Endeavour Mining (TSX: EDV; LSE: EDV) consolidation in West Africa, and subsequently the Kirkland Lake Gold (TSX: KL; NYSE: KL; ASX: KLA) acquisition of Detour Gold. “Those were all great deals. And they were at the right time of the market, and they delivered value,” said Bristow.

However, according to him, many deals were left on the table despite significant interest to consolidate the industry, and it was a good time to do it. The timing was near the bottom of the market.

“The single-asset companies should be wrapped up because then you can invest on the back of that investment. And fixing broken assets in an industry where the average life of mine is ten to 15 years — right  now it’s under ten — makes it more difficult, and it makes it more difficult to consolidate the industry. And so then the fund managers want to have that control,” said Bristow.

“I think that’s unhealthy because the capital under management in these big public funds is looking for more and more relevance. So, the Newmont deal and the Barrick transaction that consolidated into big organizations created and attracted significant alternate investors,” said Bristow.

Barrick today has an exciting opportunity in front of it because, like Randgold back in the last bull market, it used the time to tidy up the portfolio and focus on value and a horizon that is beyond that of the general industry.

“We did everything we said we would do. We migrated the ownership and accountability of the mines to the mine management. We moved the ownership of the ore body and its planning responsibility there. We had to change the management teams to real business people supported by competent technical experts,” said Bristow.

“We’re now starting to talk more about the greenfields opportunities in front of us. For the last three years, we talked about how we extend our life of mines; now, we’re talking about how we build on top of that platform.

“I think the latest round of consolidations, it’s near the top of the market whichever way you look at it. But when you look at the margins, the industry doesn’t keep these margins all the time.

“If we had worked together as management and as fund managers, because we were in the same canoe, we could have created more value,” said Bristow.

He is not convinced the lessons from the past cycle have been wholly taken to heart by the current industry leaders.

“Coming out of this bull market in the future — that’s always the test— will we be better, be more valuable than we were going in? I think the jury’s out on that. I think we could have done the job better. While we did it a lot better than the last cycle, there’s still more to do,” said Bristow.

In a constantly changing world, Bristow underlined how management needed to improve, attract more competent technical people, and invest in the industry’s future, starting with heavy investment in young talent, not only in exploration.

Meanwhile, in the wake of Covid-driven global supply chain bottlenecks and rising input cost profiles, Bristow is convinced inflation is here to stay, specifically in the gold industry.

“Some of the points around and cost increase in the industry gets confused with deteriorating grade. In mining, your revenue is your orebody,” said Bristow.

The gold industry has not replaced the gold it has mined since the turn of the century. In the past 20 years, it’s averaged about 50% of replacement of the total ounces mined, according to the long-time mining executive.

“We’ve got two legs to inflation: Inflation drives the gold price because you devalue money. And then, there are the input costs of your operations. As managers, we should be all about cost control, efficiencies, automation and investing to take our industry into the future. Since 2019, Barrick has taken out hundreds of millions of dollars of costs,” said Bristow.

“When you look at the demands for new ways to generate cleaner energy, there should also be opportunities to improve one’s efficiencies. Likewise, when you look at automation, it doesn’t take jobs away. It just produces higher-quality jobs.”

Covid has contributed to the de-globalization of the global economy, hindering the industry from acting in a global sense to the challenges of our times. “If we’re going to behave in any way close to what we did in managing Covid, we’re in for a hard time,” said Bristow.

According to him, whenever the world gets to these major inflection points, whether in 1987, 1999 or 2008, these significant corrections are the drivers that encourage people to add more gold into their portfolios as a hedge against risk.

“You must have your mandatory 5% in your investment portfolio in the form of some sort of gold, whether it’s physical or equity, and Barrick is going to be part of that,” said Bristow.

Under Bristow’s guidance, Barrick has reorganized its portfolio around so-called tier-one assets.

“We now look for more than 5 million ounces, and we want bigger assets because you get bigger value, but it’s harder to get those IRRs up into 20%,” says Bristow.

The new Barrick has set the IRR investment filter initially at 15%. The rigid definition is 500,000 ounces a year for more than ten years, supported by a defined inventory, be it reserves or resources, and at the lower half of the all-in sustaining cost curve.

Bristow estimates there only to be about 14 such assets globally, of which Barrick controls six. “And we have a couple of assets that are 500,000-ounce producers, but they don’t make the financial cut. We don’t call them tier one, but they are big, and they’re strategic and important enough for our business at the US$1,200 per ounce gold price we use in our modelling,” said Bristow.

For context, Bristow has a standard investment filter model he and the Randgold team developed in 1997-98. It was centred around a standardized IRR of more than 20%, at a then gold price of US$450. That was before it went down to US$260.

“And we kept that for a long time. In 2007, we lifted it to US$650. And then, in 2010, we lifted it to $1,000. And we stayed there until 2019. We test our long-term gold price against an input model,” said Bristow.

With the Barrick deal, the input model had changed again. Management felt it was appropriate to lift the long-term gold price from US$1,000 to US$1,200. It implemented the new long-term price in the first round of reserve definition at the end of 2019 and kept it at the same level since.

“It’s a good discipline. And sure, there are inflation pressures now on the input costs, and we’ll manage that. But right now, we see that that discipline keeps the quality of our assets, and it forces you to find them because you can’t buy them,” said Bristow.

“And of course, now and then, there is an opportunity to grow through M&A. But discipline prevents you from destroying value in times when the market is baying for deals.”

Watch the full interview here: