It’s been two years since, at the age of 39, Randall Oliphant took over as president and CEO at Barrick Gold. He was stepping into jobs filled in the past by a pair of corporate heavyweights–the late Bob Smith (who was president and COO) and Peter Munk (who was CEO, and who continues to be chairman of the company). Oliphant did not falter, but has led Barrick into two years of record-breaking production, trimmed costs, and improved earnings and cash flow, while expanding the number of operations and the geographic reach of the company.
CMJ interviewed Oliphant in his Toronto office in late March. If he sounds like an accountant, that’s because he is, which is not surprising in a company so focused on the bottom line and financial discipline.
CMJ: The company has grown rapidly in its 17-year history (since Barrick Resources Corp. acquired Camflo Mines Ltd.). What production level and cash costs do you envision five or 10 years from now?
Oliphant: We don’t have specific production or cost targets. Our targets are more oriented to earnings and cash flow.
From 1983 to the late 1990s, the gold industry was a growth industry, and the focus was more on top-line revenue growth. Since then, it has become a no-growth industry. Frankly, gold shares haven’t performed very well, in part because of a lack of growth and in part because of the performance of gold itself.
Our focus is on trying to continually improve our return on equity, to improve our earnings, and improve our cash flow. The components that go into that are operating costs, which we have reduced by a third over the course of the past four years, and we’re very proud of that. We’ve increased our production to record levels last year, which has given us growth in unit volumes. And our revenues have continued to be strong, largely due to our hedge position.
We know that we can sell our gold for more than anybody else in the industry, and produce it for less than anybody else in the industry, so those two will lead to us generating the largest margin per ounce. Then if we can grow the ounces, that will lead to the increases in earnings and cash flow, which are our targets.
To put it in perspective, Pierina mine produces gold for US$40 per ounce [total cash costs]. If we sell it this year for US$340, we’ll generate $300 an ounce in cash flow, whereas other mines, if they’re only clearing $50 an ounce, would have to produce six times as much gold.
Of all the gold companies in the world, Barrick has the largest generalist shareholder base who invest in a company because they think that it’s a good business, not purely for exposure to the price of a commodity. Of all the companies in the S&P 500 (of which we’re a member), Barrick is number 30 on the list, in terms of margin (which is income as a percentage of revenue), and we’re the only basic materials company in that category. Our peers on the list are the companies that are regarded as being more progressive and having better long-term fundamentals, like Dell and largely the real high-tech-oriented companies, not the flash-in-the-pan guys.
That enables us to not only attract a generalist shareholder base but our company is looking increasingly attractive to value investors, who look at the fact that our mines last year generated $500 million in free cash flow. Our market value at US$6 billion is a pretty attractive rate of return. Actually, the business is lower risk than most of the others that they follow, because we can predict what our production will be for the next 10 or 15 years, we can predict our costs over that period, and through our hedging program we can lock in not only high prices but high margins, which in this time of uncertainty has become more attractive to investors.
CMJ: Is it likely that Barrick will amalgamate with another major gold firm, or would you prefer smaller acquisitions?
Oliphant: We’re closely examining both, and our criteria are transactions that would create the most value. We enjoy the smaller company acquisitions, as we did with Sutton [Resources Ltd.]. The people there who had brought it to the stage of having some reserves and being ready for development, didn’t feel that they could carry it forward. They wanted to see the company in hands that would enable the [Bulyanhulu] project to be optimized and financed. This has been for both Barrick and Sutton a wonderful transaction where now we have a mine built and operating. That perhaps wouldn’t have happened without the financial strength of Barrick, but also without the diligence and hard work of the people at Sutton who assembled the land and found the gold. So we saw this as being a very complementary thing.
We continually look at the large company mergers. We think that ultimately our industry will have to consolidate in order to have market values that are more attractive and more competitive with the broader marketplace. That will enable us to take advantage of more opportunities because a lot of what we’re doing in our industry is in places that are more politically risky than where our roots were. We therefore need some scale in order to be able to absorb those risks in a prudent way. To date we haven’t found a merger candidate that would enable us to improve our earnings and cash flow on a per share basis, so we haven’t done anything. At the same time we spend more time working on this than we ever have in the past.
We believe Barrick is in the best position to be able to consolidate this industry. Having said that, we don’t feel that we need consolidation to the same extent as anybody else does. We believe it will be good for the industry. It will increase the discipline. It will mean that mines that aren’t generating returns either won’t be built or will be shut down, which will lead to a healthier industry longer term.
CMJ: To get involved in South Africa, would Barrick need to be larger?
Oliphant: It could be South Africa; it could be Russia; it could be Indonesia. We’re very aware of the magnitude of some of the deposits in these places, but we don’t want to fundamentally change the risk profile that people have invested in when they bought Barrick. We think that we’ve got a good balance now with operations in Canada, the United States, Peru and Tanzania, and then ultimately when we build Pascua and Veladero between Chile and Argentina. We can absorb more political risk, but we don’t want to fundamentally change the character of the company.
CMJ: In what other ways might Barrick grow, such as into research?
Oliphant: We are closely examining those avenues. The standard gold mining business doesn’t offer the growth that it did in the past, so we have to find a different way to create value. We’re examining what skills we have within our company that would be relevant to either other industries or to people outside our company. We are in the early days of this exploration, but I think it could be a significant driver of value in the years to come. This is what virtually every successful company (despite its industry) has done over time. Look at General Electric or any of the others that have capitalized on their competencies and their markets and their customers to figure out additional ways to grow their enterprises.