Barrick Gold Corp. (ABX) plans to either sell, close or curb production at 12 of 27 mines as the world’s largest gold producer tries to bolster profitability after reporting the industry’s biggest write-off.
Barrick wrote down $8.7 billion of the value of global assets, slashed its dividend by 75 percent and cut 30 percent of corporate-office staff, the Toronto-based miner said yesterday in its second-quarter earnings statement.
Chief Executive Officer Jamie Sokalsky is attempting to restore profit margins after gold tumbled 22 percent this year and had its steepest quarterly drop in London in more than nine decades. Operations from Peru to Papua New Guinea that have costs higher than $1,000 an ounce will undergo mine-plan adjustments or be closed or sold, Sokalsky said. The 12 mines under review account for about 25 percent of Barrick’s output.
“If you have a number of assets that aren’t making money at a certain gold price, then you have to deal with them, and that does mean less production,” Sokalsky said yesterday in an interview at the company’s headquarters.
Sokalsky’s stance that every mine must be profitable at lower gold prices is positive for the company, said Kerry Smith, a Toronto-based analyst at Haywood Securities Inc. who rates the shares a buy.
“The guys at the corporate level are saying, You know what, we want these mines to make money and if they’re not we’re going to do something, we’re going to shut them down,” Smith said yesterday in a telephone interview. “They’re making the hard decisions and they’re doing what needs to be done.”
Sokalsky’s efforts are starting to pay off. Production costs declined year-over-year and beat analysts’ estimates. Barrick reduced its capital spending budget by about $1 billion and also cut its forecasts for costs this year.
Barrick rose 2.3 percent to C$17.86 at 9:52 a.m. in Toronto. The stock is still down 49 percent this year, compared with a 40 percent decline in the 49-company S&P/TSX Global Gold Sector Index. The stock has 17 holds, 11 buys and one sell, according to analysts’ recommendations compiled by Bloomberg.
Gold, which rose for 12 consecutive years, slipped into a bear market in April. Prices may average $1,358 an ounce next year and decline to $1,335 in 2015, according to the average of analysts’ estimates compiled by Bloomberg.
Sokalsky says gold prices are bound to rise.
‘Forming a Base’
“We’re forming a base here that the fundamentals can now build on to ultimately get the price moving back up,” he said. “Maybe not in the short term but over time I think we can start to trend back up. I think the fundamentals are still there for that.”
Valuations for gold-mining companies also probably “can’t get much lower,” Sokalsky said. Even after gold’s decline, producers are trading near their cheapest relative to the metal in at least 29 years, according to data compiled by Bloomberg.
“I’m a buyer of gold-mining companies because they’re dirt cheap,” Ned Goodman, CEO of Toronto-based holding company Dundee Corp. (DC/A), said in an interview at Bloomberg’s Toronto office yesterday. Barrick is “the largest producer in the world, they have a very low cost of production, and they’re really under new management.”
Since taking over as CEO in June 2012, Sokalsky’s mantra has been a focus on returns and free cash flow. Returns will drive production, not the other way around, he repeated yesterday.
Barrick said it has abandoned a production target of 8 million ounces a year by 2016 because of a delay at its Pascua-Lama project in the Andes, expected mine-plan changes and potential asset sales.
While some of the company’s mines operate at higher costs, 57 percent of Barrick’s gold output comes from five mines with production costs less than $700 an ounce and another 18 percent is produced at a cost below $1,000, Sokalsky said on an earnings call yesterday, referring to slides posted on Barrick’s website.
“Our core assets are very, very strong,” he said in the interview. “I’m very optimistic about what our underlying business can do in this environment.”
Output cuts are most likely to come from the 12 mines that have forecast all-in sustaining costs this year above $1,000 an ounce. The company is reworking mine plans at several operations including Bald Mountain in Nevada and Hemlo in Canada, to focus on the most profitable ounces.
It’s also evaluating options for the Porgera mine in Papua New Guinea and will optimize mine plans or sell some Australian mines. At Pierina in Peru, the company’s assessing options to close the mine, it said yesterday.
Barrick also would consider taking on a partner to help finance its delayed Pascua-Lama project on the border of Chile and Argentina, Sokalsky said. While there have been conceptual discussions in the past, there are no talks currently, he said.
The company said it expects increased capital costs for Pascua-Lama. Construction on the Chilean side has been halted since April, after a court accepted an injunction filed by indigenous communities and the country’s environmental regulator later ordered work to protect water supplies before the project can restart.
Barrick, which raised the cost estimate for the mine twice last year, to as much as $8.5 billion, said June 30 it now expects first production from the mine in mid-2016, compared with a previous target of the second half of 2014.
While Sokalsky is taking steps to adjust Barrick’s portfolio, the company remains burdened by high debt, and capital spending will remain high for several years while Pascua-Lama is built, said Greg Barnes, a Toronto-based analyst at TD Securities Inc. The company’s net debt as of June 30 was $13.4 billion.
“If the gold price takes another step lower to the sub-$1,200 per ounce range, concerns about liquidity are likely to resurface,” Barnes said in a note today.
Barrick posted a second-quarter net loss of $8.56 billion, or $8.55 a share, compared with net income of $787 million, or 79 cents, a year earlier, the Toronto-based company said yesterday. Profit excluding impairments and other one-time items was 66 cents a share, ahead of the 56-cent average of 17 estimates compiled by Bloomberg. The miner also reduced its quarterly dividend to 5 cents a share from 20 cents to improve liquidity.
Barrick isn’t the only producer making adjustments in response to lower gold prices. Kinross Gold Corp. (K), Canada’s largest producer by revenue after Barrick and Goldcorp Inc. (G), said July 31 it has reduced its capital and exploration budgets, closed an office in Vancouver and reduced staff at its Toronto head offices by 7 percent this year.
Yamana Gold Inc. (YRI), Canada’s fourth-largest gold miner, also cut production forecasts because of efforts to reduce costs.
While Barrick and its competitors have been talking about improving margins for some time after years of rising costs, the changes are starting to gain momentum, Smith said.
“Everybody has a sense of urgency, it’s not just Barrick,” Haywood’s Smith said. “The gold price tanking gave people a lot more urgency in terms of we’ve got to get this done, we’ve got to get it done now.”
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