Will Barrick Gold Corporation's Unique Strategy Pay Off?

What do you typically expect to hear from a gold miner? The common story is increasing production, lowering costs, and spending money on new projects. Well, Barrick Gold's (NYSE: ABX  ) case is the exact opposite.

The company is expecting at least a 10% reduction in production, a rise in all-in sustaining costs, and an almost 50% cut in capital expenditures. Oddly enough, this could be good news for shareholders.

Reality check
Not surprisingly, Barrick Gold recorded another $2.82 billion in impairment charges when it reported its fourth quarter results. As a reminder, this was just a follow-up to $8.7 billion of impairment charges that were recorded in the second quarter of 2013.

Just as then, the main source of these charges was the troubled Pascua-Lama project. Barrick has also decided to use $1,100 per ounce as the gold price assumption to calculate its gold reserves. As a result, year-end 2013 gold reserves were 104 million ounces, 26% lower than last year.

However, the reduction in Barrick's reserves was predictable. The real surprise came from Kinross Gold (NYSE: KGC  ) , which implemented a fully loaded costing methodology for estimating year-end reserves. This move resulted in a whopping 33% reduction in reserves estimates. In recent years, Kinross Gold used a conservative assumption of $1200 gold price, which is below current levels, so such reserve cut was totally unexpected.

For Barrick, the change in assumptions means that the company is going to focus on the most profitable ounces. In the current price environment, this is the right thing to do.

Pascua-Lama fate
Most of the 50% reduction in capital expenditures for 2014 is attributed for the decision to suspend Pascua-Lama project. Barrick plans to spend $300 million for suspension activities this year, while it spent $2 billion on the project in 2013.

In my view, Pascua-Lama, which has nearly 18 million ounces of proven and probable gold reserves, will ultimately have to be restarted. There was too much money spent on the project to give up at this point. The decision to suspend Pascua-Lama is based partly on low gold prices and partly on permitting difficulties on the Chilean side.

During the earnings call, Barrick stated that care and maintenance expenses for the project after 2014 would average between $120 million and $180 million per year. The company had a $4.2 billion operating cash flow in 2013, so it can afford such expenses to hold on to a key project.

Costs will go up but stay healthy
Barrick reported that its all-in sustaining costs for the fourth quarter were $899 per ounce. The company expects 2014 all-in sustaining costs in the range of $920-$980 per ounce, as the core mines transition to lower grades. In comparison, another major miner Goldcorp (NYSE: GG  )  recently reported that fourth quarter all-in sustaining costs were $810 per ounce, but it expects 2014 costs in the range of $950-$1,000 per ounce.

Both Barrick's and Goldcorp's costs are comfortably below the current gold price. For Barrick, the possible upside in gold prices may help to additionally de-lever its balance sheet. The company recently made a significant equity offering, increasing the total number of shares by 16%, but still has $12.9 billion of debt on its balance sheet. Interest expense is projected to be between $800 million and $820 million this year, which is a heavy drag on profitability.

Bottom line
Barrick's recent quarterly report showed that the company is becoming increasingly realistic in developing its strategy. Investors should not pay too much attention to impairment charges and reserves changes, as they reflect the facts that were already known – lower gold prices and Pascua-Lama troubles.

Barrick remains one of the lowest-cost miners, and this is a fact that cannot be ignored. However, there's still much to be done to lower the debt and get the Pascua-Lama project going.

Invest in growth
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

 


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2014, at 4:21 PM, tchams wrote:

    They should not consider sunk costs in their decision to continue or give up on Pascua-Lama, only the potential future earnings. That was one of the first things one would learn in cost accounting and sunk costs are also one of the first things that most if not all people want to consider in their decision making process. That being said, it is hard to ignore the cost that have been incurred for Pascua-Lama.

    Thanks for the article.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2839621, ~/Articles/ArticleHandler.aspx, 10/21/2014 11:56:56 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement