Brain Drain at Barrick Gold

Less than two weeks after the world's largest gold miner, Barrick Gold (NYSE: ABX  ) , jolted the industry with news of a boardroom shakeup, it was thrown into turmoil again as two directors abruptly resigned in protest over continued corporate governance concerns.

Although not alone in doing so, Barrick was one of the most high-profile practitioners of a growth-at-any-cost policy that paid little heed to the quality of the assets being bought in a bid to dominate the industry. The miner vastly overpaid for acquisitions and, amid the collapse in gold prices, had to write down its value, leading to a significant underperformance of its stock, compared to both the price of gold, and the AMEX Gold Miners Index.

ABX Chart

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For example, in 2011, it beat out Chinese miner Minmetals Resources with a controversial $7.7 billion bid for copper miner Equinox Minerals, only to admit the following year that it overpaid for the acquisition, and wrote down the purchase by $4.2 billion. Barrick also watched as the cost of developing its Pascua-Lama gold and copper project in Chile spiraled out of control and, after sinking more than $4 billion into its development, the company still needed to spend twice as much to complete it. Barrick ended up taking a huge $5.1 billion write down on the project this year, and indefinitely suspended work there. It also just announced layoffs of some 1,500 workers.

From hedging policies a few years back that caused $5.6 billion in write downs, to asset sales such as Barrick Energy that forced it to take a $500 million loss, the miner's choices have been questionable. Tangible net worth fell from $12 billion at the end of December last year to $6.4 billion in September. While that's still well above the consolidated tangible net worth of $3 billion that it's required to maintain in accordance with a key financial covenant in its $4 billion credit facility, Barrick's margin of safety has been significantly eroded.

Pascua-Lama project. Source: Barrick Gold, Scotia Mining Conference presentation, December 2013

So, when Barrick announced earlier this month that company founder Peter Munk would retire following the annual shareholders meeting this May, with his co-chairman John Thornton becoming sole chairman, it gave investors renewed hope that the gold miner would be putting its governance issues behind it. Because, in addition to Munk's retirement, it also announced that four new independent directors would stand for election to the board, raising the number of independent directors from seven of 13 to 10 of 14.

Mining executives have seen their hold on the C-suite keys slip through their fingers. Earlier this year, miner Anglo American ousted its CEO over delays and cost overruns at its various projects, Newmont Mining's CEO stepped down in March, and last year, Kinross Gold dumped its CEO after seven years at the helm. Some two dozen mining executives, in fact, including those at Rio Tinto and Vale, have lost their jobs over the past year or so. Of course, Barrick also booted its own top executive, Aaron Regent, last year.

Despite the Barrick boardroom shakeup, two independent directors, Donald Carty and Robert Franklin, both of whom joined the board after Barrick bought Placer Dome in 2006, abruptly resigned yesterday amid questions that the four new nominees were handpicked by Munk, and thus not  independent of his influence.

The upheaval shows there is still turmoil in the boardroom, and Barrick Gold, although it's lost half its value this year compared to gold losing but 25% of its own, may not have found a bottom yet.

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