by Matthew Hart
Munk managed to salvage his investment, but was burned again, this time by an oil venture that went sour when the market turned. In his telling, this was Munk’s own De Profundis, the moment that misfortune stunned him with a reversal “so quick and so brutal and so merciless.” He retreated to his home in Klosters, the Swiss resort, to lick his wounds. The year was 1982. As Munk picked through these old events in his hotel room in London, it was clear that we had reached the moment of epiphany.
Klosters, a retreat favored by Prince Charles and home to people like the banking scion Nat Rothschild, had been Munk’s refuge from business cares for years. This time, though, he thought only of business. In particular he thought about the vagaries of price, and how swiftly they could demolish any plan. He thought too of his own blunder in following the wisdom of the herd. Munk was fifty-three years old—in the prime of his life. Proud and striving, he searched for an opportunity to recoup his own and his partners’ lost millions. He wanted a business that could withstand a fluctuating price. “We needed to find a business before it became popular, a business that was so unfashionable no one wanted to get into it.” His attention turned to a resource whose price was not rising, but falling. As Munk saw it, the world’s leading supplier of this commodity, South Africa, was in a countdown to political upheaval. Best of all, the companies that mined the metal held their value even when the underlying price was falling.
“Gold, sir,” Munk declared. “Gold! It carried the highest multiples. Gold shares sell at a very high value in relation to their earnings because a gold share is perceived to be not just a share but an option or a call on gold as well. If you buy Swatch watches, if you buy Nestlé, you buy the earnings. If you buy gold shares you buy it because, hey!—this company has 2 million ounces of gold and I think that gold will go up in five years!
“We had only a few million dollars left in the kitty, not more than $20 million. I said, ‘Guys, let’s find a gold mine.’ ”
In 1983 Munk and his partners formed Barrick Resources. Most start-up gold miners aim to grow by discovery. Munk had no patience for rummaging in the bush. Barrick’s strategy would be to buy reserves, not find them. Growth would mean rapid growth. Munk built his company like Lego, snapping gold mines into place after deciding what would fit. He bought some mines for their gold and others for their people. Much nonsense has been written about Munk. In one biography he arrives for his deportation from Hungary brimming with unconcern—an anecdote that managed to be both painful and silly. Another chronicle contains a well-worn story about Munk, fresh from a dazzling performance at a shareholders meeting, stepping into an elevator, and being propositioned by a gorgeous stranger. “That’s nice,” says Munk in response to her offer to sleep with him, “but what would it do for my shareholders?” But Munk’s story is heroic anyway. He escaped death at the hands of a killing machine. He survived humiliating failures. He built the biggest gold miner in the world with a single-mindedness and speed that demand admiration.
Barrick bought its first mine in 1984, a struggling operation in northern Ontario. To renovate the mill—an essential improvement if the mine was to be profitable—the company needed to make an immediate investment of $15 million, money that Barrick did not have. In raising the money, Munk showed the financial audacity that he could bring to the service of his ambition. He offered a new type of investment, a gold trust.
Investors in the trust did not buy shares in Barrick, but in an off-the-top percentage of the mine’s future production. An “escalator” clause sweetened the deal: if the gold price rose, so did the trust’s percentage off the top. Either way, the investor would make money even if the company did not, since the trust raked off its share ahead of costs. The trust gave investors a way to hedge with gold, to place a marker on the gold price without the risk of changes in the cost of operations. Hedging would become the signature tactic of Barrick’s growth.
Barrick’s next purchase was Camflo Mines, a 50,000-ounce-a-year Quebec producer with one enormous problem: it owed the bank $100 million. The mine’s banker approved the buyout, but gave Barrick one year to pay off the entire debt. Adding to this burden were Barrick’s money-losing oil investments, still carried on the books at $30 million.
First, Munk unloaded the oil properties for $32 million. He raised a further $30 million in a private placement of Barrick stock with fifty large investors, and $53 million more by floating a second gold trust. The bank recouped its $100 million and Barrick got the gold. More importantly, the company captured in that single acquisition something it had lacked and needed—a team of top gold miners.
“Until then,” said Alan Hill, one of the executives who came to Barrick with the Camflo purchase, “Barrick didn’t even have a staff of operating personnel. They ran their mine with consultants.”
In Munk’s grand scheme, Barrick would grow into a company large enough to attract the European fund managers who had always kept a portion of their assets in gold and gold mining stocks. These funds had generally placed the gold mining share of their investment in South African mines, the industry leaders. Rising violence in the apartheid country, and public sentiment in Europe and America for disinvestment from South Africa, would, Munk thought, force fund managers to look elsewhere for their traditional gold mining investment. Munk planned to give them the opportunity to invest in a large gold company in a safe environment: the United States. As soon as Barrick acquired its new staff of mine executives, Munk sent them out to find the all-important American acquisition. “We looked at every gold mine that was for sale in North America,” said Hill. They found what they were looking for thirty-five miles southwest of Salt Lake City.
The Mercur mine had a fabulous past, but it had closed in 1913. In 1981 the gold mining division of Getty Oil bought the mine and spent $100 million trying to bring it back. In 1984 Texaco bought out Getty. Since the gold mine was not part of what Texaco wanted, they engaged bankers to look for a buyer. Alan Hill went down to Utah for a look.
Hill and his team were crunching the numbers when, in January 1985, Exxon Corporation, the oil giant, appeared with an aggressive rival bid. The Barrick team left the field to Exxon and went looking for another prospect. One month later Exxon inexplicably lost interest and pulled out. Hill went back to the Mercur, and this time found what he thought was a blunder that could hand Barrick a bargain.
At first glance he’d thought that Mercur’s reserves, enough to last eight years, were too low to support the cost of buying them. But as he looked again, Hill thought that Texaco might have overestimated the costs. Since ore is a function of cost as well as gold price, lower costs would mean that there were more reserves than Texaco had thought.
At this point, Hill recalled, Texaco cut him off from access to the mine. The company worried that its workforce would become demoralized to discover the mine was for sale. Instead, Texaco set up a data center in Denver. That’s where Hill took his second look at the numbers and found the oil company’s blunder. He did not want to tip off Texaco that it was understating its own reserves, but felt that the only way to check his calculations was to run his numbers on the oil company’s own reserve-calculation software. He labeled his lower costs “interim,” and asked Texaco to run the numbers. When they did, the reserves increased by 25 percent. Hill believed the true figure would be even higher. Munk went after the mine.
Texaco had set a minimum price of $40 million, a large sum in 1985 for a company as small as Barrick. Texaco, a multinational oil giant, was also reluctant to commit the security of its employees to such a tiny outfit. In a face-to-face with the executive in charge of the sale, Munk made the case that Barrick could run a mine and meet its obligations. He then baited his offer with a sweetener: if the gold price rose by a stipulated amount, he would pay Texaco an extra $9 million. The deal was done. “Peter Munk,” said Alan Hill, recalling these events, “could finance anything on the planet.”
For $40 million Munk got a mine that previous owners had spent $100 mi
llion improving. His experienced mine executives increased the ore flow through the mill from 3,000 tons a day to 4,000 tons, and later to 5,000 tons. In three months they reduced recovery costs per ounce of gold from $290 to $212. In less than a year Mercur’s annual production rose from 34,000 ounces to 116,000 ounces, and revenues from $13 million to $42 million. Barrick had a winner, and most importantly, had it in America.
Mercur established Barrick as a midsize gold producer with a foothold in the United States. One of Munk’s strategic pieces was in place: location. Now he needed the second piece: a big enough company to attract large investment funds. Barrick would have to find and buy a company with an important gold reserve. There was only one place for Barrick to locate such a reserve and remain in the United States: Nevada. As Hill put it, it was time to go hunting in elephant country. The elephant they found was a pitiful beast. They turned it into the most famous gold mine in the world.
THE GOLDSTRIKE MINE CAME INTO play in 1986 when a one-half owner needed cash. Alan Hill and his fellow executives flew down to size up the mine. They were not impressed. “Goldstrike was a ma-and-pa operation run on a shoestring,” one said later, “and things were slipping between the cracks.” “It was a haywire operation,” Hill agreed. The on-site managers ran the mine from a dilapidated trailer. Most of the equipment was in poor condition. The cyanide tanks for recovering the gold were behind a rented office in nearby Elko. By contrast, next door to Goldstrike lay Newmont’s booming mines. Compared to them, Goldstrike was in a pitiable state. Yet what if Goldstrike’s operators had simply failed to exploit their asset? On every side, Newmont spilled forth gold. It was easy to imagine threadbare Goldstrike missing something. A Barrick geologist wondered whether Goldstrike’s multiple shallow pits pointed to a larger reservoir below, from which the upper-level gold had come. Grasping at this possibility, in a final effort to add sparkle to the ground that it was trying to sell, Goldstrike’s owners drilled the main deposit to a depth of 1,800 feet . . . and hit a monster.
The drill intersected 391 feet of high-grade rock. There was a deeper body. But the deposit was refractory. The gold was bound up in a sulfide lattice that would make recovery difficult and expensive. Profitability is what distinguishes ore from worthless rock. High recovery costs can strip the value from a target, and economic methods can enhance it.
GOLD IS A STUBBORN ELEMENT. It sits near one end of the periodic table, among other inert elements. Chemically it does not want to leave the state that nature has put it into, and must be dragged out by the hair, often with the help of toxic chemicals. One of these chemicals is cyanide, and a common system that employs it is known as “carbon in pulp,” or CIP.
With a CIP recovery mill, the ore is trucked from the pit and piled in a storage area called the run-of-mine pad. A conveyor takes the ore and feeds it into a massive revolving drum. Inside the drum, steel balls cannon into the rock, battering it to pieces. A second ball mill smashes up whatever the first one missed. The powdered rock is mixed with water to create a slurry, and piped into the first of a series of tall leaching tanks.
In the tanks, cyanide is added to the mixture. The cyanide dissolves the tiny specks of gold from the pulverized rock. At the same time, carbon pellets are pumped into the downstream tanks and forced upstream against the flow. The carbon is charged in a way that attracts the cyanide-gold solution, which sticks to it. By the time the ore has passed through all the tanks, the carbon will have blotted up most of the gold.
Finally, the carbon pellets pass through an acid wash that strips off the gold. The cyanide goes to a tailings pond, the carbon cycles back into the process, and the “pregnant solution” of gold passes through an array of electrified metal plates wrapped in steel wool. The gold electroplates onto the steel wool. Once a week the operators pull this rig apart, sluice it out with a jet of water, and recover a fine sand of gold. They dry it in an oven overnight, then melt it and pour it into bars.
On the Carlin Trend, miners also use a cheaper method of extraction called heap leaching. The technique has added billions of dollars of value to gold miners by converting large tracts of marginal ground into ore. The practice of recovering metal by dribbling liquids onto heaps of stone is more than 500 years old, but the first use of cyanide to recover gold from a heap was at Cortez, Nevada, in 1969. Gold mining never looked back.
Cheaper than CIP, heap leaching lets operators process large tonnages of low-grade ore that otherwise would just be waste. They feed the rock through a series of crushers, then pile it into heaps hundreds of feet high. Each heap rests on an “impermeable membrane,” an industrial-grade plastic sheet. A typical large heap can cover 160 acres. A cyanide solution dribbles onto the heap through a web of perforated hoses. The cyanide percolates through the crushed ore, releasing gold and carrying it in solution down to the plastic collecting sheet. The pregnant (gold-bearing) solution runs off into pools. The liquid is then pumped through carbon to retrieve the gold.
But at Goldstrike, Barrick faced a special challenge. The new ore body was composed of sulfide ore, which is not susceptible to cyanidation. Like the chocolate in an M&M, the gold is surrounded by a hard shell. Cyanide cannot penetrate the shell of sulfide rock. There are two ways to tackle the problem. You can burn the sulfide off in an autoclave, or use specialized bacteria to chew it off.
In nature such bacteria live in places like the hot springs of Yellowstone National Park, where they have been dining on sulfur for millennia. Gold miners whet the bacteria’s appetite by mixing gold concentrate with nutrients. This mixture goes into tanks where the bacteria eat the sulfide casing, freeing the gold. This process may sound “green,” but the bacteria create heat, which must be dissipated by expensive cooling. Autoclaves are expensive too, both to build and to run, but Barrick already knew a lot about them. The Mercur property also contained sulfide deposits. “We were very comfortable with autoclaves,” said Hill. Even considering the extra expense, then, Munk could not resist the deep-ore possibilities at Goldstrike.
At first Munk’s bankers balked. If Goldstrike were so great, they asked, why hadn’t Newmont bought it? Surely with mines surrounding Goldstrike, Newmont understood the ground. Munk got the bank onside, but faced another threat to the deal: a fast-closing tactical window. The drill hole into the deep deposit had gone down in October. At the end of that year, 1986, a capital gains tax provision important to Barrick’s calculations would expire.
In Denver, lawyers for both parties worked straight through the holidays, the deadline hanging over them. They broke only for Christmas Day. On December 26 they were back at it. At the last possible moment on December 31, “and I mean minutes before midnight,” one participant recalled, the lawyers realized that Goldstrike had not properly constituted its board. The directors on hand could not execute the agreements legally. Barrick’s down payment of $10 million to seal the transaction was waiting on the table. With the minute hand on the clock almost touching twelve, Goldstrike lawyers gave Barrick verbal assurance of a quick approval as soon as they could constitute the board. The check slid across the table, and Barrick got the Goldstrike mine.
Today it is hard to imagine the struggling property that changed hands that night. One day I went to look at it with Dean Heitt. We drove up a little road along Sheep Creek, looking at the hundred-year-old stone dams of the original miners. The hillside was speckled with yellow flowers. We passed an abandoned adit and came out on a hilltop in the Tuscarora range at 7,000 feet, and there under a fresh blue sky spread the panorama of the mines—the Pete and the Carlin, North Lantern, Beast, Genesis, Goldstrike, Bootstrap. Eight million ounces of gold a year was coming out of that single swath of carved-up mountainsides. Huge, flat-topped artificial hills of tailings ranged above the pits, and miles of leaching heaps. The ocher and red of the upper strata gave way to the black pay dirt below. Mine trucks loaded with gray ore beetled out of the Goldstrike pit.
Munk paid $62 million for Goldstrike and got an Elko office hung with cob
webs, mine trucks missing doors, and problems with production. When extraction costs such as the autoclaves were factored in, Barrick had paid $300 an ounce for gold that was then selling for less than $400. According to Barrick’s in-house chronicler, Newmont watched with “cool scepticism” as the Barrick newcomers arrived. The only road to Goldstrike passed through Newmont land. Barrick staff called it the Ho Chi Minh Trail, after the wartime supply route used by North Vietnam. But Goldstrike’s new owners were on fire. They had a million-dollar drilling budget, and conviction. “We knew we’d find a lot more,” said Hill. “The previous owners had one of the best holes ever drilled. They had not had the money or the knowledge or the want to look at the sulfide ore. We were ready for anything. We were hungry.”
Three months after moving onto the property, Barrick drilled a hole that intersected 600 feet of high-grade ore. It contained 0.36 ounce of gold per ton—a result so good that they checked it twice. The next hole was even better, and still another hole recovered 450 feet at a sensational grade of 1.089 ounces a ton. “We found a great big anomaly,” said Hill, “right across [the] ore body.” They drilled to the west and found the anomaly’s extension. They started drilling holes closer together, to fill in their understanding of the size and richness of the target. Everywhere they put a drill, they hit ore. In one of the most intoxicating passages in contemporary exploration, Barrick’s geologists were finding a million ounces of gold a month. Sixteen months after the midnight signing in Denver, Goldstrike’s reserves had grown from 600,000 ounces to 15 million ounces, and with this staggering jackpot came a fresh, new, urgent challenge: finding miners, and a town to put them in.