1. Barick Gold-Summer 2021 PDF

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BARRICK GOLD: INTEGRATING ESG INTO THE (POST-MERGER) EXECUTIVE PERFORMANCE SCORECARD1 Shannon Fernandes and Nadine de Gannes wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to [email protected]. i1v2e5y5pubs Copyright © 2020 Ivey Business School Foundation

Version: 2021-01-06

Maria Nunes had 24 hours before her final-round interview with Toronto’s leading human resources consulting firm. For her interview, Nunes had been tasked with creating a new executive scorecard for Barrick Gold Corporation (Barrick). Both Barrick and the mining industry more broadly had been marked by momentous change in 2019. On January 2, 2019, Barrick and Randgold Resources (Randgold) had merged to become the largest gold mining company in the world. Following this merger, Barrick’s new executive team had communicated a financial strategy that emphasized a long-term view, with a higher priority on sustainability. The newly merged companies had appointed an Environmental & Social Oversight Committee2 and a group-level sustainability executive to support the delivery of its environmental and social goals. While both companies had previously included environmental, social, and governance metrics in executive incentive plans, different approaches had been taken. Streamlining these approaches, as well as incorporating the central tenets of Barrick’s financial strategy, was essential to designing the new executive scorecard for fiscal 2020. Drawing on media articles, investor and regulatory reports, and data on Barrick’s history, strategy, and financials, Nunes got to work. MINING INDUSTRY

The mining and minerals processing industries were critical to the Canadian economy. According to the Mining Association of Canada (MAC), the minerals sector directly and indirectly contributed CA$97 million3 (or 5 per cent) to Canada’s total nominal gross domestic product (GDP). The industry directly employed 426,000 people and indirectly employed an additional 208,000 people across Canada. These figures included over 16,500 Indigenous people, making the mining industry the largest private-sector employer of Indigenous people in Canada.4 Toronto was considered the mining finance capital of the world: the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV) listed more mining companies than any other exchange and were home to almost 50 per cent of the world’s public mining companies.5 Canada was also seen to be a mining leader at a global level. However, the MAC believed that the country had lost more ground in recent years than it had gained due to the steady outflow of innovation dollars to countries such as Australia, Germany and South Africa.6

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The mining industry also faced environmental, political, and social risks. Although Ontario was seen to be one of the safest mining jurisdictions in the world, Canadian mining companies operated globally—often in countries where the political and environmental risks had sizable financial and social implications. For example, Barrick’s Pascua-Lama project had been fined $16 million by the Chilean government in May 2013—and its appeal of the fine rejected by the Supreme Court of Chile in 2015—and its operations had been halted by the government in October 2013.8 Protesters from the Indigenous community living in surrounding areas had called for Barrick’s license to be revoked due to a risk of glacial water contamination.9 While the government did not revoke the company’s license to operate, it did require Barrick to honour its environmental commitments and work to protect the water systems. Also in 2013, week-long protests across Romania resulted in the local government’s rejection of plans by the Canadian mining firm Gabriel Resources Ltd. to create Europe’s largest open-pit gold mine in the small town of Roşia Montană.10 These incidents were part of a growing trend that saw local community demands intensifying and the relationships between governments and mining companies marked by rising hostility and zerotolerance regulatory environments.11 Alongside the social risks were the economic risks of volatility in gold prices year over year. GOLD PRICES

Although most of the gold mined or recycled was used to manufacture jewellery, gold was also used in manufacturing many everyday products, especially electronics. Gold was a highly efficient conductor of electricity and resistant to corrosion; consequently, it was used in connectors, switch and relay contacts, soldered joints, connecting wires, and connection strips and thus could be found in items such as televisions, cell phones, calculators, global positioning system (GPS) devices, laptops, and desktop computers. Gold was widely used in other areas as well, including the dental, medical, aerospace, and glass-making industries. Gold prices were affected by a plethora of factors. Because fiscal and monetary policies and the commodity and stock markets were interrelated, shifts in interest rates, the US dollar, and stock markets all affected the price of gold. Also, investors and central banks stockpiled gold in periods of economic disruption and uncertainty because gold was highly liquid and redeemable.12 As Federal Reserve Chair Ben Bernanke noted, “The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes.”13 The global financial crisis and the ensuing great recession was considered to be one such “really, really bad outcome.” From 2008 to 2012, the value of gold increased dramatically. While it initially rose modestly (2.6 per cent in 2008 and 12.8 per cent in 2009), as uncertainty regarding the US economic recovery persisted, gold prices jumped 50.6 per cent from September 2010 to September 2011. By 2012, the price increase had slowed once more and by 2013, came tumbling down to decade lows. From a peak of US$1,900 in 2011, gold fell to around US$1,200 in 2013.14 This downturn continued throughout 2014, as geopolitical tensions played a role in price fluctuations. Russia’s annexation of Crimea and rising tensions in the region, for example, contributed to a rise in gold prices in early 2014 as investors anticipated US sanctions against Russia and consequent stock market volatility.15 The increase, however, was short-lived. Macro trends— including rising interest rates, a stronger US dollar relative to other major currencies, and positive stock

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At the same time, “the global transition to a lower-carbon future represented a significant growth opportunity for Canada’s mining sector. Minerals and metals were the building blocks of lower-carbon technologies, and a 2017 World Bank Group report concluded that the increased use of wind, solar, and energy storage technologies would heighten the demand for many mining products.”7

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Because of the continuing increased strength of the US dollar and a widely held belief that interest rates would increase, making other investments more attractive, gold prices hit new lows, closing at US$1,060 by the end of 2015.17 In 2016, uncertainty in the financial markets resulted in the price of gold increasing to US$1,150 in 2016.18 Geopolitical tensions focused on North Korea and uncertainty surrounding Brexit influenced a modest increase in prices to US$1,392 by the end of 2017.19 In 2018, gold prices fluctuated around this price point and closed at US$1,282 in December. After a six-year slump, gold prices began to rise in 2019, mainly due to the US Federal Reserve’s planned interest-rate cut.20

HISTORICAL OVERVIEW

Barrick Gold Corporation was founded as Barrick Resources Corporation in 1980 by Peter Munk, an immigrant to Canada who became one of the nation’s most successful entrepreneurs and philanthropists. Munk established both the Peter Munk Cardiac Centre at Toronto General Hospital and the Munk School of Global Affairs at the University of Toronto; and founded the Munk Debates. He also earned numerous awards and honours, including becoming a Companion of the Order of Canada—the nation’s highest civilian honour.21 The company initially focused on oil and gas exploration, but repeated financial losses during its early years prompted Munk to pivot to mining precious metals, in particular, gold. By 1983, Barrick’s mission was to “dominate the gold industry by becoming North America’s largest producer, acquire established properties with sound futures, be fiscally conservative, and protect the bottom line through an aggressive hedging program.”22 The company’s decision to expand its operations through acquisitions proved successful, while its hedging program ensured financial stability. By using complex financial contracts to arrange future sales at fixed prices, Barrick was protected if prices went down and was able to sell additional reserves on the open market if prices went up. Nonetheless, even the best of strategies had little chance of weathering a market crash. Thus, when gold prices crashed in 1997, Barrick was forced to close four mines, and the company suffered a $6.8 billion fall in market value. Almost immediately, the company started navigating its recovery, delivering a record $300 million in earnings for fiscal year (FY) 1998.23 Barrick entered the 21st century as an industry leader, with Munk championing growth. On December 21, 2001, Barrick grew to be the second-largest producer in the world after it merged with Homestake.24 Barrick’s executive team also announced a shift in its mission, aiming to be the most profitable rather than the largest producer. This changed emphasis was believed to drive greater value for the company’s shareholders.25 On March 16, 2006, Barrick completed the acquisition of Placer Dome Inc. (Placer Dome) for $12.1 billion, a deal with expected synergies of $200 million a year26 that earned Barrick the rank of largest gold company in the world.27 In the years following the Placer Dome acquisition, Barrick suffered several setbacks. In 2011, seeking new strategies to improve company performance, Barrick acquired copper producer Equinox Minerals Limited (Equinox) for US$7.3 billion in order to diversify into copper.28 Some investors and market pundits felt this move failed to align with Barrick’s strategy. This belief was validated in 2013, when Barrick wrote down US$4.2 billion, suggesting that the company had significantly overpaid for Equinox.29 The year was also marred by the largest gold price crash since the late 1990s.30 The crash in turn precipitated a decline in Barrick’s share price to its lowest level since 1993.31

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market returns—resulted in gold being dumped in favour of stocks and interest-bearing bonds. Ultimately, gold closed at US$1,199 in 2014.16

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As noted earlier, the Chilean government had tasked Barrick with completing its environmental commitments for the Pascua-Lama project. Even with challenging market conditions and materially lower metal prices, Barrick planned to reduce capital expenditures for the Pascua-Lama project in Chile and Argentina by $1.5 billion to US$1.8 billion by 2014. The company also planned to drop its debt by US$3.5 billion, to around US$7.0 billion. In order to achieve this, Barrick launched a US$3.0 billion public equity offering in October 2013, with the intention of using US$2.6 billion in net proceeds to redeem or repurchase outstanding debt.33 The significant cuts in spending and reductions in debt did not take effect in the short term, and the company reported a significant net loss (around US$2.8 billion), which was largely driven by a US$778 million impairment on Cerro Casale and a US$930 million writedown on the Lumwana mine and other assets.34 By the end of 2015, Barrick had recovered considerably, recording positive free cash flow for the first time in four years. This cash influx further enabled Barrick to reduce its overall debt burden by 24 per cent.35 Overall company performance continued to improve in 2016 due to effective cost control and improved operational efficiency and productivity.36 By 2017, Barrick was able to increase dividends by 50 per cent to $0.03 per share and also established a strategic partnership in the Veladero mine in Argentina with Shandong Gold Group, despite the suspended operation that year. Barrick paid down 19 per cent of its debt and focused its portfolio on “high margin, long life gold operations”37 (see Exhibits 1 and 2). In September 2018, Barrick announced plans to merge with Randgold in a US$18.3 billion deal. The stock market responded positively to the news,38 and in November 2018, shareholders voted overwhelmingly in favour of the merger. By December 2018, Randgold had stopped trading on the London Stock Exchange and the NASDAQ, in preparation for a new Barrick listing on the TSX and New York Stock Exchange in January 2019.39 Completing its nil-premium merger with Randgold on January 1, 2019, Barrick opened for trading on January 2 with a market capitalization in excess of $23.75 billion and the largest reserve base among its gold peers. Barrick now owned five of the industry’s top 10 tier-one gold assets.40 In a joint letter to stakeholders, Executive Chairman John Thornton, and President and Chief Executive Officer (CEO) Mark Bristow (formerly CEO of Randgold), stated: With the best asset base and the strongest management team in the sector, we are well placed to be the world’s most valued gold mining business. We will do so by optimising our existing operations, pursuing new opportunities that meet strict investment criteria and developing them with disciplined efficiency. In all that we do we will be guided by a long-term strategy and clear implementation plans designed to deliver sustainable returns to our owners and real benefits to our partners, host countries, and communities.41 BARRICK’S LEADERSHIP

Barrick was known for its lean management structure and highly entrepreneurial culture. Munk had created an ownership culture with Barrick’s early leaders, enabling them to share in and take accountability for the

Authorized for use only in the course Accounting Theory at Humber College taught by Alfred Seaman from Jan 18, 2021 to Apr 30, 2021. Use outside these parameters is a copyright violation.

In 2013, Barrick made strides to slash overall costs, reducing its per-ounce cost by $100. Around 75 per cent of total production was planned to be mined at under $800, a lean expenditure considering the industry average was at $1,200 to $1,300 per ounce. Barrick then sold several of its non-core mines to shift its focus to five key mines in the Americas. These five mines were expected to generate 60 per cent of output at a cost of under $700 per ounce.32

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Aaron Regent, who served as CEO from January 2009 to June 2012, marked the beginning of his term by ending the hedging program, leading to a $6 billion write-off. To control operating costs, he cut 80 executive jobs and separated Barrick’s African assets into a separate company, publicly traded on the London Stock Exchange.43 Regent also acquired Equinox, an ill-fated move, which Munk later regretted. These major changes did not slow the decline in share price, despite a jump in gold prices.44 In a move that caught investors by surprise, Regent was replaced in June 2012 by the company’s long-time chief financial officer (CFO), Jamie Sokalsky. During the next two years, Sokalsky sold almost $1 billion worth of money-losing and non-core assets, shrinking Barrick from 27 to 19 mines globally. He was well regarded by investors for his role in steering the company through two of the most tumultuous years in its history. 45 In 2012, Munk recruited former-Golman Sachs President John Thornton to join Barrick as co-chairman, offering a $11.9 million signing bonus in addition to $9.5 million in salary. The signing bonus proved controversial due to its magnitude, yet Munk strongly defended the offer, stating, “we had to secure him” and “ secure the kind of access he could give us and the credibility he could provide us with in securing major capital.”46 Thornton, who had degrees in management, jurisprudence, and history from Yale and Oxford universities and Harvard College, respectively, and had developed the mergers and acquisitions business at Goldman Sachs International, was a professor at Beijing’s Tsinghua University—a role that gave him access to Tsinghua University graduates, including President Xi Jinping.47 Thornton co-chaired the board with Munk for two years. Upon Munk’s retirement in 2014, Thornton became the sole chairman significantly overhauling the senior executive team and discontinuing the CEO role when Sokalsky stepped down in 2014. In Sokalsky’s place, James Gowans and Kelvin Dushnisky were appointed as co-presidents.48 Gowans had previously served as the company’s chief operating officer, while Dushnisky had been head of corporate and government affairs.49 In August 2015, Gowans retired, and Dushinsky was appointed President. He held this role until 2018 when he retired. In anticipation of the merger, the company did not appoint a new president. Following the merger, Barrick’s executive committee comprised the following roles: executive chairman (John Thornton); chief executive officer (Mark Bristow); senior executive vice-president–chief financial officer;50 senior executive vice-president—Strategic Matters; chief orating officer—North America; chief operating officer—Latin America and Asia Pacific; and chief operating officer—Africa and Middle East. The three latter roles reflected the company’s decision to establish regional executive teams in each of its three geographical zones: North America; Latin America and Australia Pacific; and Africa and the Middle East.51 The committee was governed by Barrick’s board which had been reconstituted with nine directors, six of whom were appointed by Barrick and three by Randgold. Ensuring that the executive committee’s attention was focused on the company’s strategic goals relied on Barrick’s executive compensation systems and structures.52 SAY ON PAY

Shareholders had the right to vote either for or against a company’s proposed executive compensation package at the annual general meeting. This “say on pay” was one of many corporate governance remedies afforded to shareholders. Although “say-on-pay” votes were non-binding in Canada, the votes were seen as important signals of the health of a company’ governance system as well as the alignment between pay and performance. Executive compensation packages typically comprised base salary, short-term incentives,

Authorized for use only in the course Accounting Theory at Humber College taught by Alfred Seaman from Jan 18, 2021 to Apr 30, 2021. Use outside these parameters is a copyright viol...