Investors call for board changes at Barrick Gold
One fund manager says the company is 'materially undervalued.'
In a recent 78-page report, Mike Morris of Indianapolis-based Two Fish Management is calling for at least two of Barrick’s five non-CEO, non-independent directors to step down, and for the miner to tie executive compensation to return on invested capital, production growth per share, and reserve growth per share.
"The board’s misaligned incentive compensation structure has been tied primarily to 'growth' metrics as opposed to capital adjusted metrics," says the report.
Capital allocation and operational execution issues, he says, have left Barrick "materially undervalued." Although Barrick shares closed at $20.66 on Wednesday and have fallen more than 40% so far this year, Two Fish says Barrick’s intrinsic value is somewhere around $40 to $50 per share, based on comparable publicly traded gold mining assets.
Earlier this week, the Wall Street Journal reported that around 10 European-based shareholders are set to send Barrick’s board of directors a letter to push for faster changes. The Journal also reports investors are pressuring the company to speed up the exit of Barrick founder and chairman Peter Munk (pictured).
For its part, Barrick said it is "working to strengthen its governance practices," and looking to add new independent directors to its board, the Canadian Press reported earlier this week, and says that it expects progress on these initiatives before the end of 2013.
In its second-quarter results, Barrick reported an $8.7 billion write-down, driven by declines in metal prices and its embattled Pascua-Lama project in South America.
The miner also cut its quarterly dividend from $.20 to $.05 in August, which Two Fish's Morris says is "inconsistent with Barrick’s stated focus on returns to shareholders." The report also has suggestions for the miner over the longer term; saying Barrick should refocus its portfolio on North and South America and spin off its African, Australia Pacific and Global Copper business segments.
"'New Barrick,' consisting solely of North and South American regional business units, would represent a streamlined operating company while retaining the vast majority of Barrick’s gold production, reserves, resources, and cash flow generation,” says the report. Barrick’s North American business unit alone, it says, has greater annual production and lower costs than all of Goldcorp (GG).
Speaking at the Bloomberg Canada Economic Summit earlier this year, Barrick president and chief executive officer Jamie Sokalsky said divesting smaller, higher-cost assets and focusing on a suite of long-life, low-cost assets could be a better investment proposition.
"For Barrick, if we became smaller but made more money and we’re more valuable, that’s absolutely something that we would do," he said.
Barrick has been busy selling certain assets this year, announcing the sale of three Australian mines to Gold Fields (GFI) for $300 million last month, and divesting Barrick Energy in July.
In a recent newsletter for the BlackRock Gold & General Fund, Richard Wingfield, a member of the firm’s natural resources team, said that in terms of cost-cutting, most miners are starting with the "easy wins," taking out items such as exploration spending.
But the greater benefit, he says, will come from re-evaluating long-term mine plans in order to optimize profitability.
“Mining fewer, more profitable ounces can be more value-accretive than chasing volume without considering cash returns. It is frustrating that it has taken gold price falls and even larger share price falls to force such discipline onto gold company management," he said.
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