A small, U.S. hedge fund wants to break up Canadian mining giant Barrick Gold, saying its collection of mining assets is spread out over too broad of a geographic area, which has led to a disappointing shareholder return.
Mike Morris, co-founder of Two Fish Management, which is exposed to Barrick Gold through its options holdings, has written to Barrick CEO Jamie Sokalsky and other board members recommending that the North and South American assets of the mining company be split from the African and Australian Pacific holdings.
"Each distinct business unit has unique political environments, geologies, operating costs, reserve profiles, profitability, capital intensities and growth prospects," he says in the letter.
Barrick Gold's stock has fallen by nearly 50 per cent in the past year, as the gold mining company took massive writedowns and cut its dividend. The price of gold has been falling, but in addition, Barrick's gold production per share fell 28 per cent from 2003 to 2012, Morris said.
"I would argue based on the empirical track record of the past 10 years it’s had significant, consistent under performance....against their gold-mining peers, against S&P, against gold bullion," Morris said in an interview with CBC's The Lang O'Leary Exchange.
Two Fish Management has released a 78-page presentation detailing exactly what the Toronto-based company is doing wrong and what it should do to dig itself out of its hole.
Its key recommendations include:
- Refocus the Barrick portfolio on North and South America.
- Spin off or sell African Barrick, Australia Pacific and Global Copper business segments.
- Sell non-core assets such as Donlin Gold & Kabanga Nickel.
- Appoint new board members including at least one mining engineer and geologist.
- Revise executive compensation to reflect return on invested capital and shareholder returns.
His presentation estimated that a revamped Barrick, consisting solely of the North American and South American operations, could trade at $40 to $50 a share. Today, Barrick Gold is trading at $19.85.
Morris argues markets are not seeing the intrinsic value of Barrick's assets because the operations are geographically diverse and lack focus.
"Costs industry-wide have been accelerating faster than the price of bullion, so that’s a problem with marginal miners but with Barrick, in North America and South America, they have probably the best, most productive gold mines in the world," Morris said.
"So you have these world-class assets in North and South America that are obscured by these higher-cost regions in Australia and Africa and also a copper mine business that is barely profitable in Africa."
The company is putting too much of its operating cash back into capital acquisitions, rather than rewarding shareholders, he said.
Morris wants Barrick to abandon gold bullion ownership and refocus on operating its gold mines.
In response, Barrick sent CBC News an email statement saying it is consider changes to compensation practices as well as addition of new independent board members in progress, both as a result of criticism it faced at its last AGM.
It also said it has cut its capital spending and costs will trend down in the most recent quarter.
Barrick has already sold its energy business and three Australian mines as it refocuses the business.