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Peter Munk on Resource Nationalism and the Changing Global Paradigm

Comments by Jorge Daniel Taillant

Center for Human Rights and Environment (CEDHA)

jdtaillant@gmail.com

“Please understand” … pleaded Peter Munk several times to shareholders gathered in Toronto on April 24th for Barrick’s annual shareholder meeting (AGM) as he laid out the reasons why Barrick Gold has lost nearly three-fourths of its company value, why projects are being closed due to environmental contamination, and why all of a sudden gold, and Barrick Gold stock in particular, doesn’t look so attractive. The speech is a revelation of what really drives the gold mining industry and one of the most controversial industry leaders in particular.

In his hour-long monologue, Peter Munk described the salient attributes of the world’s largest gold miner, not holding back punches or even self criticism for the industry slump, although he did dish out a fair share of the blame to third parties, particularly host governments, for Barrick’s woes.

Munk described how over the course of the last decade, a “perfect storm” brewed over the mining industry. In the midst of exceptional and record profits, optimismreigned over gold prices.“We were the unquestionable global leaders… but there was something wrong”, said Munk to an audience eager to hear about the roadmapfor Barrick’s future, especially now that the company is not only facing a collapsing sector, but falling gold prices and serious environmental issues at some of its flagship projects.

This bore little resemblance toMunk’s radiant speech on the sector from the previous year. He has clearly shifted gears.Now Barrick Gold’s founder and perennial leader, who speaks of Barrick as “my company”, the Board of Directors and Executive Management as “my Board” and “my Executives”, refers to a “changing paradigm.” New circumstances include governments that don’t necessarily follow the rule of law, but rather govern to maximize rent and are known to arbitrarily change the rules of the game for multi-billion dollar investments that take time and are “difficult to walk away from”.

Munk was clearly referring to Pascua Lama, the multi-billion dollar gold project on the Argentine-Chilean border that has become a constant headache for Barrick Gold. The project isriddled with environmental problems and unpredicted and escalating costs, and suffered as a result of the collapse of the financing scheme Barrick hoped to build with subsidized public money from EDC (Canada) and EXIM bank (USA). Today, the mine remains closed in Chile for failure to comply with environmental regulations. Barrick’s legal appeals have had no influence on the Chilean authorities.

A year ago today, Munk boasted that the fundamentals were brilliant. Barrick was on the verge oflaunching two of the most spectacularly unique gold mines, Pascua Lama in Argentina/Chile and Pueblo Viejo in the Dominican Republic. Both projects would be characterized by exceptional production, long life, and some of the lowest average operating costs per ounce.This year though, Munk was reduced to asking, “What can I say to you? …The fundamentals today could not be more different than they were a mere twelve months ago. Our two mines are both in trouble”. (AGM Speech: Minutes 43:00-44:00).

At both Pascua Lama and Pueblo Viejo, Barrick has run into significantproblems. Munk attributed this togrowing resource nationalism, which he referred to numerous times throughout his speech. He says it’s aglobal phenomenonand the underlying characteristic of the new mining paradigm.

He posed the following hypothetical situation to the audience: “You’re the new president of a small Latin American country… You have two choices, keep on taxing the people… or go after that big multinational huge global corporation with billions of dollars of assets. … This is totally understandable, it is the essence of this enormously rapidly growing resource nationalism… It is the ultimate threat to the very lifeline of the mining industry, which ultimately will cause an enormous spike in commodity prices. (Minutes 46:00 – 47:00)

Munk recounted conversations with presidents he visited with other Board Members. These heads of state often representnewly elected governments in lesser developed countries, and are eager for cash. The status quo is shaken up when the governments, which often need money to pay for short-term budgetary necessities, demand a change to contractual terms established withlarge law-abiding multinationals. He pointed to leaders such as Hugo Chavez of Venezuela and Evo Morales of Bolivia … suggesting that “there’s a whole slew of new modern populist leaders that may not follow the rule of law as we expect them to do”. (Minute 48:00)

While never explicitly stated, it was clear that his critiques were not so much about Chavez and Morales, but rather referred to his frustration with Argentina. Munk made several passing commentsaimed at President Kirchner, who he referred to as “Ms. Kirchner”, stating that she practically begged him to come invest in Argentina’s most remote areas to create jobs and economic progress. However, the tables have changed in Argentina. Pascua Lama, a project originally estimated to cost US$ 3.5 billion is now billed at over US$8 billion and is still growing. This is despite the fact that the project has not been able to get off the ground as scheduled, and a likely start date is still not set.

The macro-economic game has fundamentally changed for mining in Argentina over the course of the last year. Today, Barrick Gold is struggling to deal with the new macro-economic policy that obliges Barrick to handle cash transactions in Argentine banks instead of utilizing tax free havens around the world. Argentina’s new tax law for the mining sector specifically requires mineral transactions to flow through local banks, which meanslosing 50% of the dollar value with a parallel official exchange rate. Once funds are deposited in Argentina, companies are not allowed to wire money abroad. They can mine gold,they just can’t take the money they make from it away!All of a sudden, in the “new paradigm”, Pascua Lama isn’t so attractive anymore!

The problem, Munksays, is that the Pascua Lamas of the world are big and expensive projects, and once money has been spent onmine construction for 25 projects all over the world, it becomes hard to adapt to achanged paradigm. Pascua Lama is 80% constructed. “Unfortunately when you commit to build a mine, a unique mine … at 4,500 meters up on the mountain, Pascua Lama … did we know then that this move will penalize us and will suck us in more and more and will come with billions of additional costs ….and once you’re there half way, it’s very difficult to walk away” (Minute: 56:00).

Both Munk and Barrick’s CEO Jamie Sokalsky have repeated that Barrick will not continue to plow money into Pascua Lama if the short term prospects for the project fail to materialize. Is this a warning to Chile and Argentina to get their act together and give a green light to Barrick once and for all, or else they’ll pull out? Or is Munk simply pandering to shareholders to ease worries that this megamineis turning out to be a big white elephant, and may be scrapped to cut losses in the new economic scenario? Perhaps, Pascua Lama could fall victim to Barrick’s new motto, “Disciplined, Profitable Production”.

Obviously frustrated with the changed legal circumstances, which hecited as part of the new paradigm, Munkreferencedthe rule of lawnumerous times. He explained the problems large mining operations face with fickle governments who change their policy according to budgetary needs. In Canada, on the other hand, touted Munk in a very noticeable Hungarian accent, the rules are followed. However,this is not the norm around the world, complained Munk, “many of those governments, as much as we respect them and we’re all part of the United Nations, don’t have the same perception of the rule of law as we do in Canada” (Minute 1:06).

Ironically, the venting and frustration over host government rule-bending quickly vanished when Munk came to the issue of executive pay. There, Munk pointed to the impressive CV of new Co-Chairman John Thorton, former Goldman Sachs chief,as a justification for a whopping US$11.9 million pay package from the gold giant to have Thortontake over Barrick, which has dropped in value by nearly 75% since its recent market peak. In Barrick’s case, said Munk to the AGM meeting audience, “Please understand that rules are reinforced by exceptions (Minute 1:14)… [and a few minutes later he repeated] we are totally respectful of the rules, we will not deviate from the rules, but sometimes those rules get reinforced and strengthened by the exceptions” (Minute 1:15). In other words, we will deviate from the rules if necessary for the bottom line!

Munk continued recounting the changing rules of the game for large mining ventures and recognized that perhaps the industry was covering up many weaknesses in the recent run up of gold prices. Munk’s comment reflects what we are seeing in many countries: a race to the bottom of sorts in terms of investment risk and environmental sustainability. Today many mining investments are haunted by thepast recent shortcuts taken to get operations moving and take advantage of high mineral prices. He admitted, “there is a limit to this bonanza that covered up all kinds of mistakes and flaws” (Minute 45:00).

And yet again and again he returned to the attack on mining projects represented by this new paradigm and the new context for mining investments, brought about by (according to Munk) unfair host government policies. “One company after another stopped mining activity… You’re getting endangered by the time you finish your mine they take it away from you, or give you punitive taxation…Miners are increasingly squeezed after they’ve been conned, attracted incentivized, to come in because a country that has a huge gold, copper or silver deposit, can be sitting on it, [but] without a 5 or 6 billion US dollar investment, that gold does not produce tax revenues or jobs”(Minute 48:00).

 

He then shifted his attention to the growing complication of expanding environmental regulatory issues, and again pointed to “nationalism, resource nationalism, new governments, punitive governments, more aggressive regulatory systems, driven by a whole cadre of trained and highly competent lawyers mostly from the USA, [who] create lawsuits… they follow the American paradigm. They extract and put more and more pressure on governments, they naturally react to it so that the environmental regime gets bigger”(Minute: 50:00).

Environmental issues, which Munk referredto as “environmental weapons” (Minute 53:00), include those that led to the recent total closure of the Pascua Lama project in Chile. The closure was justified by evidence of the contamination of glaciers and high mountain wetland systems, as well as the presence of heavy metals in waterways, resulting from Barrick’s preparatory work at Pascua Lama. He blamed American lawyers for building lawsuits and bringing on new environmental regulations, explaining that“what’s happening is, that this enormously altered public perception of environmental concern, NGOs, human rights, water quality, air quality, etc.etc.etc.…. put one on top of the other [create problems for the investments]… How do governments react? [They] impose five more regulations. There are libraries of reports for every little aspect when you’re building a mine.”

Munk pleaded over and over again to shareholders to“Please understand that these are entirely new unique problems. The industry has changed” (Minute 53:00). He continued, saying that “The new global paradigm based on resource nationalism is making the industry far more difficult…Every miner in the last six months shut down major mines, because of the paradigm shift”, however,  “Barrick will not give up … Barrick still will be under the new paradigm … Barrick still will be a global leader, a Canadian icon. Barrick will reemerge again” (Minutes: 1:00-2:00)

In his closing comments, Peter Munk reached out to the essence of what sustains the gold industry. Companies mine, process and sell gold not for social or economic development, not for social progress and not for the benefit of the needy or the poor communities in the countries where Barrick Gold is invested (targets which come up as objectives in Barrick’s sustainability rhetoric).Instead, Munk underlined the real reason he and his company are in the gold business:

“Gold, in contrast to all other commodities is driven entirely by the comfort level of people with money globally … that’s what gold is all about” (Minute 1:17) … “We print more money to make us feel better”. (Minute 1:19) … “Jewelry does not take up 200,000 tons of gold per year. What takes up 200,000 tons of gold is the uncertainty of people who control money trying to protect their wealth” (Minute 1:18).

For more information:

Jorge Daniel Taillant

jdtaillant@gmail.com

+54 9 351 507 8376

Watch the entire presentation, including speeches by Barrick CEO Jamie Sokalsky and Peter Munk:

http://www.gowebcasting.com/events/barrick/2013/04/24/2013-annual-meeting-of-shareholders/play/stream/7102  (Munk begins his speech at Minute: 40)