LONDON, UNITED KINGDOM — Mark Bristow, officially installed as president and CEO of Barrick Gold (TSX: ABX; NYSE: GOLD) on New Year’s Day, sat down with The Northern Miner for a fireside chat at The Northern Miner’s Canadian Mining Symposium at Canada House in London, U.K., on May 22, 2019, to talk about his vision for the company and the gold mining industry more broadly since Barrick’ blockbuster merger with Randgold Resources — the smaller, African-focused gold miner he founded and led until the merger.
The Northern Miner: You’ve been a critic of the gold mining industry for many years. You said it was undisciplined and there was poor return on invested capital, but Randgold Resources was always an outlier. You always focused on the geology; it was always about the orebody. And your guiding principle was that an orebody had to have at least 3 million ounces of gold and an internal rate of return of 20% at a long term gold price of US$1,000 an ounce. Now that you’re heading up the bigger company, Barrick Gold, with assets all over the world and its own challenges. How do you see that going forward? Do you have your different strategic filters at Barrick than you did at Randgold?
Mark Bristow: We’ve introduced as part of this transaction (the idea of) tier one assets — which is effectively around the top 10 assets in the world.
When you look at a 15% return at a US$1,200 per oz. gold price, a lot of people in this industry don’t know what it takes to make a 15% return.
Because if you have a 7 million oz.-plus gold deposit that produces 400,000 oz. a year, and you have to invest US$2 billion to bring it to account to reach 15% return, you’ve got to have US$570 per oz. all-in-sustaining cost.
So to get up to 20% when you’ve got very big assets is difficult, but it’s still a discipline and anyone who can deliver 15% real returns — after tax for Canadians, because you always use before tax numbers — it’s a world class asset and we need more of those.
And the principle of any mining is, your revenue is in your orebody. If you start with a high quality orebody, it doesn’t have to be high grade; it can be lower grade in a pit with no strip ratio.
But if it’s a high quality orebody, you’ll always end up with a better return.
If you start with a really underwhelming orebody, you’re never going to make any money. You’re going to do what the industry is very good at: You’re going to do really reasonably well in the peaks of the cyclical market and you’re going to go bust in the trough.
The point is that you can’t get there if you don’t have partnerships with your various stakeholders, whether they are governments or investors, fund managers.
I’ve always said that we’re in an industry which is by its very nature looking to long-term decisions, long-term money, long-term partnerships.
But everyone that’s supporting it is driven by this obsession of instant gratification.
So you end up with a busted flush when you have that sort of combination of interests in an industry like ours.
TNM: With the merger completed, Barrick has a mix of assets. And you said recently that you’re thinking about trying to either divest at least US$1.5 billion of them. Can you give us any colour on that?
MB: Yes, I always talk about the value curve. It’s very important in mining.
The value curve is like an S. The flat, bottom part of the S is where you create value and you always create value at that part and it’s generally geology, but certainly M&A activity can create similar value if you’re disciplined and you’re opportunistic in acquiring that.
Then that vertical part of the S is where you really have the optionality, the positive optionality, whether it’s the ability to exploit the delta on the gold price or more importantly you have geological potential that you can continue to add your returns and that’s the driver.
That’s the difference between return on capital and internal rate of return (IRR), is that can you constantly replace the ounces you mine after spending the capital.
Then you’ve got the flat part of the S, which is not a bad place to be, but there you only get the gold delta. Our view as a tier-one company focused on high quality assets, is that although there’s value in that part of the S curve, we don’t want to have assets there, because they require much more attention. It’s like a factory.
So it’s better to put them in the hands of people who are going to put the effort in, to make sure that you are absolutely optimum and it’s a production, operational side of things. So that for us is a non-core area — I mean, apart from the closing assets for which have liabilities and we have to manage them, our collection of inventory sitting up at the top part of that S curve, is still very profitable. But it makes sense for us to bring it to account.
And again, we want to bring them to account with the cooperation of our host countries and not just sell them to anybody who walks past, because we plan to be there in the next decades and all our assets sit in world-class geological addresses, so you don’t want to burn your license to operate.
TNM: You said that the first quarter went really well and you are going to produce between 5.1 and 5.7 million oz. gold this year and do that for the next five years. How are you going to maintain that pace, given that it’s harder and harder to find better grade deposits?
MB: It was a fantastic quarter. The excitement that drove me and convinced Barrack executive chairman John Thornton, was this strategy of collecting the majority of the top-tier assets in the industry in one organization.
We at Randgold brought two, Barrick had three and another one in the form of Goldrush, or in fact two, Turquoise Ridge and Goldrush, and then Veladero, which has the chance to get there. With Nevada, we have four in, with the Nevada joint venture we now have four because we’ve moved Turquoise Ridge into tier one with the combination of Twin Creeks.
So we’re going to end up with more than half of the top 10 assets in the world.
And you combine that with great people, with Barrick undoubtedly having the best leadership team in the industry. They’re all young, they’re all in their 40s and younger — which is abnormal in this industry — and our mining engineers are in their 30s.
You need that if you want to do automation because 50-year old engineers just … like me, I’m scared of automation, but my son is not.
And so when you combine the best assets with great people, there’s not much to do to deliver quality returns because it comes naturally.
You see the first sign of that in quarter one, but there are a lot of costs in there as we cleaned up the organization. I’ve got no doubt in the fullness of this year, you’ll see the real benefits coming of the reshaping of the organization and the focus on delivering profitability, high quality.
John Thornton, when he took over in 2015, he had US$12.5 billion of debt. That’s when I first met him, and I suggested to him that if he wants to fix this, he should probably employ a few people who know how to fix it, and have done it before.
But he sweated the assets, unlike most of the mining industry would tend to just listen to the investment bankers and issue paper. He sweated the debt down and didn’t issue a lot of paper, and he sold some assets at a very good price.
Barrick became driven by high-grading effectively, and looking at the top line and cash flow.
What happens then is that you become lazy on the efficiency side because it’s easy just to go, and Barrick’s got great assets so it’s easy to do that.
What I’ve done is I’ve moved the focus of management down to the orebody and optimized the orebody. What do you do then is you focus on costs. You keep the margin — the margin take is the same because in a grade-focused mine, you lose sight of the cost.
It’s just another phase of mining and that’s what we’re doing and we’re comfortable we’ll get to the same margin. Then you extend the life and that impacts the IRR and the return on your investment and so the whole thing works.
TNM: Can we talk about the joint venture a bit more in Nevada? You’ve talked about maybe re-planning some of the mines to optimize them.
MB: You know, a part of that move from high-grade or top-line focus to orebody focus is re-planning, and that comes with geotechnical geology.
So all the mines in the Barrick — legacy Barrick — have now got new managers, new general managers, all of them. Some of them we’ve just rearranged to give people a new chance. Some of them are new completely, some of them are promotions.
All the mines now have mineral resource managers, and we have planning and we have geotechnical engineers because that’s the way you optimize an orebody.
Nevada has been renowned for bad rock conditions, but it’s also variable. What we’ve found is Nevada has generally focused on the lowest risk, and so has designed the mines for the worst possible rock conditions, whereas they are variable.
So if you’d go in and model properly — we’re coming from deep-level mines in South Africa, that’s where we all grew up, we understand that — then you can change the mining method.
Randgold Resources CEO Mark Bristow (centre) underground in the early 2010s in the Yalea gold mine, part of the Loulo-Gounkoto gold-mining complex in western Mali. Credit: Randgold Resources.
Where the rock stands up and it’s silicified, for example as it is in many parts of Nevada, you can do long-haul open stoping — which changes the whole cost of mining.
That’s what we’re busy doing and we’re going to do the same at Newmont.
So there’s a lot of opportunity, a lot of excitement and a great career for young engineers who get involved in that sort of thing.
TNM: What’s a reasonable target for return on equity at Barrick over the next couple of years? I think in the first quarter it was about 2%.
MB: I don’t do that because, in fact very few people in the mining industry actually know how to calculate that. Because my focus is IRR, Internal Real Rate of Return — long-term return based on your capital.
And I’ll tell you why: Once you commit to building a mine, you’ve fixed the capital. Therefore people who say, “Oh, the gold price is going down, I’m going to cut capital,” — that’s illogical.
You’ve got to have a long-term plan with a long-term gold price and you’ve got to make sure that your capital is appropriately invested against the orebody.
And if you do all that and you’ve got a high-quality or body, you will deliver the returns.
I’ll give you an example. Randgold uses 20% and US$1,000 gold. Well, it actually uses a model gold price based on input costs. And we didn’t make 20% return because you can’t, because mining comes with risks, particularly in Africa and it’s a 3 million oz. (filter). At Kibali it’s effectively 15%, but at US$1,000, because you screw up, and the gold price goes up and down.
But over time, because the gold price goes higher than a thousand and it’s never gotten below a thousand — which would suggest maybe we should move it up a bit — you actually do achieve the 20% long-term return and we have. At Tongon, we’ve definitely done that. At Gounkoto, we have. Loulo, we’re short of. Kibali, we’re running at, and we run it always back to the original investment, we are running at about 15%.
TNM: You had some news out yesterday about Tanzania. Do you want to talk about that?
MB: I can’t talk about that unfortunately. I’m under the careful and beady watch of the U.K. Takeover Panel. And I have a chaperone in the audience that is making sure that I don’t go off beast, and he’ll be very pleased to have that.
TNM: Since we’re Canada-focused today, Barrick seems a little light on Canadian assets. Does that matter?
MB: Yes. For me there are two things. I modeled Randgold Resources on the original Barrick way back in the startup with Bob Smith and Peter Munk, and the whole concept of building an alternative to South Africa when the rest of the world sanctioned South African mining. And it was all about returns.
Canada has been an icon of entrepreneurship in the mining industry, but it’s running the risk of becoming irrelevant because it’s built on promotion and short-termism, and I believe it needs a reinvention just like our industry does.
When I went to Hemlo, what shocked me and the whole of Canada is that a young engineer is going to university and they don’t get a crack in the mining industry. We need to change that.
And I say “we” as Canadians, being sort of quasi.
Also when you saw the sort of hysterics around the Barrick-Randgold merger, I don’t think that’s appropriate for a global leader in mining — which it still is by the way.
When you look at Canada and its mining history and Barrick, it’s underinvested in Canada. What’s interesting is that, I think Canada — like we’ve seen in Australia — can still deliver great deposits if they changed focus from prospecting to exploration.
I’m excited about some of the opportunities. We’ve got a dedicated team focused on generating new opportunities in Canada. I don’t think there’s any reason for us to back off from that strategy.
TNM: What do you think Barrick is going to look like in the next 5 or 10 years, and the gold industry in general?
MB: My view is that Barrick will probably be one of the few that have delivered on their plans.
The industry is in decline. We’ve got ourselves into a really tight spot because we haven’t invested in exploration and our future.
Now when you look at the average life of mine, it’s less than the time it takes to discover and develop a world-class asset. The supply side of our industry is very tight. The demand side … and I disagree with some of the talk presenters here today, in that gold is an inelastic industry just like everything else.
When we overdid the hedging and dumped twice as much gold into the market that we were actually producing, the gold price went to US$255 an ounce. We stopped doing it, and it started going up. The Chinese started buying gold, and it went even further.
Then all we did is we took lower and lower grades and produced more and more gold and we put a roof, a ceiling on the gold price and we’ve driven it down since then to a point now where we are staring at tightening in the market.
This world has never been more chaotic economically than it is today. And we’ve seen central banks particularly, and people don’t want to have to transact through New York anymore and that controls any transaction in the world.
People are searching for alternate reserve currencies and gold will play a natural role in that, as it has done since the beginning of time.
So, I’m very bullish about the gold market and I intend to have a business with a large margin to benefit on that. I think the industry is going to be great.
The Northern Miner senior writer Trish Saywell and Barrick Gold president and CEO Mark Bristow approach the stage at the Canadian MIning Symposium. Photo credit: Martina lang for The Northern Miner.
The consolidation we’ve seen in the last while is important, and we’ve got to become relevant.
All our investors get more and more money with more and more challenges to try to invest them in our industry and have some sort of relevant exposure in their portfolio.
We have to be bigger, and we have to be more focused on returns if we’re going to attract investment in our industry. I think we’ll see that, as everyone has recognized it’s important to work towards maintaining our relevance.
I would then add, Canada has a huge role to play on it. It’s got the best mineral diplomacy network in the world, and it influences emerging markets. It’s got so much to offer the industry. We just need courage and commitment to continue to do that.
TNM: Apart from Barrick, are there any other mining companies that you would invest in?
MB: Look, if I was going to invest in a mining company, I’d buy it.
TNM: Do you think it’s important that a mining company be led by a geologist or a a mining engineer? If you look at the success stories, there’s Ross Beaty who is a geologist, there’s Lukas Lundin, and of course some would argue that Barrick in its heyday, historically was under the guidance of Bob Smith, who was a mining engineer.
MB: Yeah. The important thing is you’ve got to be hard-assed with a long-term vision, and usually that comes with being an engineer of some sort.
But it’s very important that any decent mining company should have geologists and mining engineers at the top of their organization.
What I would advise against is you don’t want too many of those in the board, because this is the confusion in the industry. We confuse ourselves and we get old mining engineers with antiquated views in a board setting trying to tell young, agile engineers how to run the mines in a modern world.
More and more as we’ve messed up in our industry, fund managers — who have never by the way run mines — keep telling us how to organize our industry.
But what we need is top, visionary, disciplined global business people overseeing us as managers and in our board.
You should be long on mining expertise in the company. And if you don’t do what you say you’re going to do repeatedly, then you shouldn’t be running these companies.
That’s the point about our industry, is that we’ve got to get more real.
I’ve come upon this whole debate about employment and remuneration and that. We want to run, you know, billion-dollar, multi-billion dollar companies and I see all this squabble over 10 million or 5 million.
We want the best leaders in this industry to take control of our companies and deliver massive returns, and we should pay them for that.
And we should give young people the opportunity to aspire, to be up there with the best, to create wealth for our shareholders and themselves.
If we do that and liberate ourselves, and be more accountable, we will do better.
— For the full interview, listen to episode 140 of The Northern Miner Podcast:
This story first appeared at The Northern Miner
(By Trish Saywell)
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