Cool, calm and calculated

In choosing David Garofalo as its new CEO last year, Goldcorp’s board decided its problems not only needed rapid change, but someone who could deliver it with discipline
By John Greenwood

Big strides: “It’s not a shell game,” says David Garofalo. “We’re not deferring development, we’re not deferring stripping, we’re not making short-term decisions”

David Garofalo isn’t the type to get easily excited. Just back from Davos, the annual schmooze-fest in the Alps for movers and shakers of the world, the chief executive of Vancouver-based Goldcorp Inc. (TSX:G) encountered a big change at the event. Normally, the talk is all high-level economics and geopolitical strategy but this year attendees could talk about nothing but Donald Trump, the newly elected U.S. president now in the process of upending the global order. “There was a lot of trepidation about his presidency, and a lot of discussion about that, in almost every context,” says Garofalo, in a telephone interview from Goldcorp’s home office.

But as far as Garofalo is concerned the rise of Trump is nothing to get flustered about. For him, the outspoken populist is just something he can’t control—a distraction. His focus is on Goldcorp operations and how he can fix them.

A slim, square-jawed man, Garofalo is what you might call a numbers guy. He approaches the job in front of him like an equation to be solved.

“We are trying to build a sustainable senior company,” he says. “What we’re trying to do is to focus on projects that are geologically scalable and that will afford us opportunities to scale up the operation through brownfield expansion. That will also enable us to realize economies of scale and to drive down our cost structure to the lowest quartile globally. We are going to be able to sustain ourselves in the ups and downs of the cycle, and generate very strong rates of return.”

The same day Garofalo was in Davos, Goldcorp executives were at an investor conference in Toronto, rolling out the company’s new path forward. Scheduled just prior to Garofalo’s first anniversary as CEO, the Jan. 16 event was a coming out party of sorts; the first time the company had revealed the full playbook for the company under Garofalo’s leadership.

It’s a plan with some ambitious objectives. Dubbed “20/20/20,” it calls for Goldcorp to hike production by 20%, boost reserves by 20% and reduce costs by 20%, all within the next five years. Garofalo has already made considerable strides since replacing former CEO Chuck Jeannes. Less than three months after he took the helm, the company unveiled a string of deals, notably the $520-million acquisition of Kaminak Gold Corp., with its promising Coffee gold project in the Yukon. Meanwhile, it has been streamlining its workforce, stripping out layers of management and downsizing teams of consultants. Mine managers, many newly hired, have been given more authority to run their operations as they see fit, including developing new resources.

The moves are anything but cosmetic. “It’s not a shell game,” says Garofalo. “We’re not deferring development, we’re not deferring stripping [and] we’re not making short-term decisions.”

But he has his work cut out for him. Goldcorp was in rough shape when he took over at the end of February last year. Just days before the changeover, the company announced a whopping US$4.2-billion loss for 2015, plus a dividend cut—anathema for investors. The loss was driven by a US$4.9-billion writedown related to a downward adjustment on future gold price assumptions. Admittedly, the troubles partly sprang from languishing gold prices that had been on a down escalator since mid-2012, but the situation was exacerbated by management’s failure to bring costs into line with the new gold price reality. Moody’s Investor Services responded by downgrading the gold miner to its lowest investment grade and giving it a negative rating.

If Goldcorp was a ship, it would have been afloat but listing dangerously to one side.

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Now, with Garofalo’s one-year coming out behind him, investors are starting to grade his performance. It’s a mixed report card. On the basis of share price alone, it’s been a disappointment (see charts). In the days before the release of Goldcorp’s fiscal 2016 results in mid-February, shares were up about 6% year over year. But in that same period, the S&P/TSX Global Gold Index gained more than 28%. However, on the basis of restructuring work that’s been done and the changes in strategy, most analysts like what they’re seeing. Desjardins Capital Markets named Goldcorp its top large-cap pick for 2017, while in a recent research note, BMO Capital Markets analyst Andrew Kaip said, investors “have a higher level of confidence that the new management team understands their respective business units and are focused on executing on strategy.”

IN TERMS OF GAROFALO’S achievements, landing the job in the first place was a major victory. He’d just spent six years at Hudbay Minerals Inc. (TSX:HBM)—his first gig as a president and CEO—and his successful track record in turning around a company that had had four CEOs in the two years prior to his arrival was well known. But the two companies are hardly comparable. Hudbay is a scrappy medium-sized miner with a market value of $2.7 billion. Goldcorp, Canada’s second-largest gold miner is in a whole different league. It’s seven times bigger, with a market value of $19 billion. Given its size and impressive set of assets, Goldcorp’s board of directors surely had their pick of the mining world’s top CEO candidates. But instead of going with someone with experience from a comparably sized outfit, they bet on Garofalo.

On one level, it was a gamble. But Garofalo also fits the profile of a major gold company CEO, circa 2017. A chartered accountant by training, he spent two decades at Agnico Eagle Mines Ltd. (TSX:AEM), including several years as CFO, before joining Hudbay. His financial and executive acumen was frequently recognized: in different years, he was named Canada’s CFO of the Year by Financial Executives International, Top Gun CFO by Brendan Woods International and twice chosen as Best Investor Relations CFO by Investor Relations magazine.

That profile stands in stark contrast to the typical mining chief executives of old—larger than life characters that built their companies by acquisition, blockbuster bets that either left their companies bigger and richer or forced them from the field of play. In their day, mining, especially gold mining, was a volatile business. It was all about growth; costs were a secondary issue.

That era ended abruptly in the early part of this decade as sky-high gold prices dropped and angry investors, fed up with what they saw as the industry’s capacity for squandering capital, began dumping their shares. Barrick Gold Corp. (TSX:ABX), Newmont Mining Corp. (NYSE:NEM) and just about all the other the majors watched in horror as market values plummeted. Barrick suffered the indignity of two failed say-on-pay votes—first in 2013 and again in 2015—as shareholders expressed their anger over what many perceived as excessive and undeserved executive and board chair compensation.

It wasn’t that investors soured entirely on gold, but that they were also increasingly opting for exchange traded funds that held physical gold rather than the miners themselves. The move to ETFs was a further blow for many gold miners owing to the massive debts they had accumulated back in the bull market days. With their shares in a rut, their finances were squeezed, leaving little room to make their debt payments. Barrick, Newmont and many other industry heavyweights took the necessary action. They sold off assets, cut costs and worked hard to fix their balance sheets. When bullion finally reversed course and took flight in early 2016, they immediately benefitted.

That was not the case with Goldcorp. Ironically, the company’s current troubles stem from the fact that things never got so bad that it was forced to revamp its operations. Only when its recently languishing rivals started to pull ahead did the company jump into action. That’s when the board hired Garofalo to take the helm.

Chuck Jeannes, the previous Goldcorp chief executive, ran the company for seven years, building it from a medium-sized miner—the predecessor company was Glamis Gold—to one of the biggest gold producers in the world. A lawyer by training, he acknowledged that as an industry, gold miners had failed to provide investors with a decent return on their money. But he also espoused the view that the world was in the throes of “peak gold,” that most of the yellow metal had been mined and that global production was about to go into retreat, driving up prices which would solve the industry’s problem with debt.

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A key sign that Garofalo is different lies in the goal he has set for Goldcorp. Perhaps most notably, he doesn’t want Goldcorp to keep on getting bigger and bigger. He believes that gold companies have an optimum size, a kind of sweet spot where efficiencies are maximized (see table). For Goldcorp, he says, that means three to four million ounces of gold a year. Anything bigger or smaller, and the company’s ability to manage its operations with maximum efficiency declines, resulting in lower profits and unhappy shareholders. “That’s the optimum size,” he says. “It’s very difficult to go beyond that, I would argue.”

True to his accounting origins, Garofalo has brought a tight financial focus. That’s evident in his aggressive 20/20/20 plan to produce more gold at a lower cost while boosting reserves. While he’s happy to support initiatives that boost the bottom line, he won’t accept growth at any cost. He’s not about to engage in a mad scramble to get bigger in hopes that rising gold prices will shed a rosier light on shaky deals. “If gold mining’s not a volume proposition, it has to be a margin proposition,” is how he put it in an interview last year.

That view is also very much in line with what the other gold majors are saying these days. For example, Catherine Raw, a former mining fund manager with BlackRock who was appointed Barrick CFO last March, told a TD Securities mining investor conference in January that a key goal for her as CFO is to “grow cash flow” in any gold-price environment. While Barrick has successfully cut debt and overhead expenses, her job is to change its cost structure permanently. “We’re only at the beginning of that journey.”

ONE OF THE CLEAREST STAMPS Garofalo has put on Goldcorp to date are the changes in executive personnel and mine management structure, all of it aimed at improving its portfolio of assets and maximizing their value.

Speaking at an institutional investor conference in Whistler in January, for example, he revealed that Goldcorp had replaced seven out of its eight mine managers in a bid to ensure operations were run by “businessmen who understood the principles of net present value growth.” Simply put, he wants executives who understand the concept of value from a market perspective rather than people who would simply chase after gold ounces at any cost.

If he has a model of what he’s trying to achieve in this regard, that would be Colorado-based Newmont Mining, the world’s second-largest gold producer by volume after Barrick. Newmont recently emerged from a painful restructuring and is now benefitting from soaring bullion prices. Hoping to cash in on Newmont’s lessons, Garofalo has moved a number of former Newmont managers into top roles at Goldcorp. That includes Todd White whose appointment as chief operating officer was announced Dec. 16. White joined Goldcorp in 2014 after a stint as Newmont’s senior vice-president for South America. Wade Bristol, senior vice-president for Canada, is another Newmont veteran. As is Goldcorp’s executive vice-president and chief financial officer, Russell Ball, who was appointed to his position last March. Before joining Goldcorp, Ball served as chief financial officer for Newmont. Speaking at the same conference as Barrick’s Raw, Ball said Goldcorp is “two to three years” behind Newmont and Barrick on cost cutting. While those companies were restructuring, Ball said, Goldcorp was still in growth mode. “We are now laser focused on costs.”

Not all of Garofalo’s new team is from Newmont. Paul Harbridge, senior vice-president of exploration, joined Goldcorp from Randgold Resources Ltd. last August. Given that his boss believes one of the biggest threats to the industry is declining reserves, Harbridge will play a key role in helping Garofalo realize his goals. Not that Goldcorp’s priority is finding new mines, per se. Garofalo calls that process “a lottery.” His solution is to leave it to junior exploration companies with the seat-of-the-pants entrepreneurial skills needed to find new mines. Once test results prove that a junior’s discovery is economic, Goldcorp can sweep in and buy it.

Pay dirt: Brent Bergeron, Goldcorp's executive vice-president corporate affairs and sustainability (right), inspects core samples at the Yukon Coffee project, bought in 2016

The company’s Coffee project in the Yukon, acquired back in May, is a good example. Coffee is considered a major deposit, with probable reserves of about 2.2 million ounces. Development has already started and it’s anticipated the operation will go into production in 2022.

Shortly after the deal was announced, Goldcorp announced another transaction, this time to sell several properties in Mexico, including its Los Filos mine, netting proceeds roughly the same as what it paid for Coffee.

Critics might call this a zero-sum game but Garofalo has an explanation that ties in with his strategy. Sure, production volumes won’t change much in the short term, but the new mine is just at the beginning of its life whereas the Mexican operations are nearing the end of theirs. This is the sort of thinking that warms the hearts of investors.

At present, Goldcorp has 12 operating mines and five under development including Coffee. Penasquito, in Mexico, the biggest operation, produced 860,000 ounces of gold in 2015, generating about $1.7 billion of revenue. Cerro Negro, in Argentina, is a newly completed mine that produced more than half a million ounces in 2015. During its development, the company struggled with costs under the country’s former government, but with a pro-business administration, it is already on better financial footing.

“Goldcorp shows a very attractive production profile going forward,” said Desjardins Capital Markets analyst Michael Parkin in a January note to clients. He also noted the company’s 20/20/20 platform, calling the plan to increase production by 20% while reducing costs by the same amount something “which many senior peers cannot demonstrate.”

But it’s hardly clear sailing when the goals Garofalo has set lie well in the future. That’s the nature of the industry, of course. But it means investors are going to have to be willing to stomach more upfront expenses and potential cost overruns as the company brings the rest of its problems in line. The situation was highlighted at a recent investor presentation in Toronto, when the company revealed such problems at a number of mines, including Penasquito, where Goldcorp is planning to spend significantly on a “stripping campaign.” BMO’s Kaip said in his note on the event that this news seemed “to catch investors by surprise.” He also peppered his remarks with references to runaway costs, including one headline that read: “Capex Here, Capex There, Capex Everywhere.”

Based on the initial reaction, investors looking for better news were pleased with what they saw in the company’s yearend results, released in mid-February. Shares immediately moved higher after Goldcorp posted a strong fourth quarter, with net earnings of $101 million, or 12 cents per share, beating the consensus estimate of 9 cents per share. Per-ounce production costs fell to $747 from $977 a year earlier.

In a statement, Garofalo highlighted the aim of last year’s restructuring “to substantially grow the NAV [net asset value] per share of our company.” It’s a mantra he’ll be repeating throughout 2017.

Photography: Jimmy Jeong (David Garofalo; slider); Goldcorp.

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