I find the story below very timely. with all this talk about juniors folks are forgetting about the issues that the majors face. personally i see a good fit between low risk smaller deposit juniors and the majors right now. lets just partner up and start mining.

What are the implications of Aaron Regent's sudden departure from top gold miner Barrick for the CEOs of the other gold majors? Will it mean a rethinking of new mine investment policies?

Author: Lawrence Williams
Posted: Wednesday , 13 Jun 2012

LONDON (Mineweb) -

The fall of Aaron Regent as CEO of world No. 1 gold miner, Barrick Gold last week highlights the unenviable task facing top management of a major mining company these days - and of gold company CEOs in particular.

Barrick, like the other gold majors, is having a tough time maintaining, or increasing, its gold production as to do so nowadays requires what might be considered increasing risk taking requiring developing massive mining projects in increasingly hostile geographical, technical and political environments to replace depletion in existing mining operations. The old adage ‘gold is where you find it' has never been more apposite than it is today.

Regent's removal from the Barrick CEO position was, as noted by Dorothy Kosich in her excellent article on the departure here on Mineweb - see Was Regent the heavy or the fall-guy for Barrick's missteps? because the company's founder, and patriarch, 84-year old Peter Munk, considered that Barrick's share price performance disappointed, particularly in relation to the price of bullion over the period Regent was in charge. However it is possibly difficult to see what Regent could have done which would have helped - indeed Barrick's share price performance was better over the period that Regent was guiding the company than virtually all of the other major gold miners. Does this put other gold miner CEOs heads on the block? To the extent that none of these companies have an individual like Munk as chairman with the virtually autocratic power to personally overthrow management, perhaps not, but it can't be making any of them sleep any easier!

We have certainly seen cases recently of highly respected chief executives who had built up very successful companies being pushed out by their boards looking for a change in direction - think Bob Quartermain at Silver Standard and Joe Conway at Iamgold as two recent examples (both of whom have seemingly successfully taken on new challenges with Pretium and Primero respectively) - and such a move seldom seems to see any immediate benefits from any resultant change in direction for their original employers. One can't be sure Barrick will do any better under new leadership - much will depend on how it can improve market perceptions and attitudes, but overall success, or lack of it, may depend on timing and the performance of the gold price as much as anything. Many analysts have been pushing the seemingly apparent advantages of investing in gold stocks over bullion to their followers and if this message eventually gets through then new leadership could be seen to benefit accordingly. Luck in timing plays an important role here.

But again, will Barrick now set about doing some things differently? The costs of developing the large mega projects have been soaring to the detriment of free cash flow (which takes capital expenditures into account as an ongoing cost and has to impact seriously on dividend policy). But if company policy overall is to drive production ever higher it is difficult to see how this can be managed without following this kind of path. Regent's predecessor as CEO, the late Greg Wilkins, used to highlight the principle of working only in less risky environments, but even so Regent inherited a project pipeline which included major deposits which don't really meet these criteria - notably Reko Diq in Pakistan - and even Pascua Lama which may not pose security risks, but where environmental factors, seemingly now overcome, are still an important concern.

But as goes Barrick, so go most of the other gold majors, all of which will have some projects in hand which appear to be very risky in one way or another - politically, environmentally, technologically or in security terms. To invest in these kinds of projects will always have been a full board decision - but ultimately it could be the CEO who carries the can if things don't work out financially as planned - or in terms of share price performance.

So what next for the gold major? Are we going to see a sea change in type of project acquisition and development? Perhaps a move towards smaller higher grade mines which don't carry the financial risk of the mega project? But if this were to happen global gold output would almost certainly go back into decline, while at the moment it is edging upwards largely through the huge impact of some of these massive ultra low grade operations.

Will we see greater movement into co-product operations? Most of the majors are already producing important amounts of copper as there has already been a move into gold/copper porphyries, while Goldcorp's massive Penasquito operation in Mexico is basically a silver and base metals mine with substantial by product gold output. The decision to take this on through the takeover of Glamis Gold seems to have been one of the key factors responsible for the falling out between Goldcorp management and former company CEO Rob McEwen, who was opposed to the dilution, as he then saw it, of the gold proportion of Goldcorp's assets. ‘Pure gold' companies always used to carry a stock market premium - this is looking less true today, perhaps because of the dilution of gold's importance in bottom line profits for the majors- even if this is, in reality, only fairly marginal.

So, will Regent's ousting perhaps see some across the board rethinking of development policies by any of the other majors? Some of the comments in Dorothy Kosich's article noted above by some very astute observers of the sector might at least give these companies food for thought as all will have prospects in their own project pipelines which raise some of these issues. Should the companies reduce economic risk to the possible detriment of long term production volumes? Should they be looking at greater numbers of smaller projects. The junior gold sector market has been decimated in the recent stock market fallout so there are plenty of smaller very promising projects which could be picked up on the cheap. The problem is that the big companies aren't really geared up to manage smaller operations and may find them hard to digest because applying big company management thinking to smaller projects may increase costs to the extent the potential profitability is no longer there.

There look likely to be some big strategy discussions ahead at board level within the gold majors, no doubt intensified by the implications of the manner of Regent's departure from the leadership of Barrick, but it is hard to see any major changes in direction occurring so long as maintaining, or increasing, gold output remains their principal raison d'etre. Failing a big gold price increase, ever rising development and construction costs are going to continue to keep net cash flows tight and dividend raising opportunities muted.

iPad Version: Picture - Barrick Gold Corporation President and CEO Aaron Regent speaks during the annual general meeting of shareholders in Toronto: REUTERS/Mike Cassese