Image Image source: Getty Images.
One certainty about the future is that it's cloaked in uncertainty. Nevertheless, Barrick Gold's (ABX +2.21%) management has graciously provided investors with a few peeks behind the cloak.
Divulging details on the dividend
Barrick Gold, like many in the mining industry, has been cautious about its capital allocation since the start of a steep drop in gold prices in 2013. Unlike Kinross Gold (KGC +2.09%), which suspended its dividend altogether in 2013, Barrick Gold has continued to return cash to shareholders, albeit the dividend amount has dropped more than 83% over the past five years.
During the company's most-recent conference call, one analyst questioned if management has considered increasing its dividend. Acknowledging that management aspires to "return Barrick to being a robust dividend payer," Kelvin Dushnisky, the company's president and director, suggested that shareholders will most likely have to wait a little longer.
Dushnisky and the rest of management believe that, currently, it would be a more prudent allocation of capital to reduce the company's debt. Having paid down nearly $1 billion in debt during the first half of 2016, the company is halfway toward achieving its $2 billion debt reduction target for 2016.
More than one hand on the wheel
Of management's many goals, growing free cash flow is at the top of the list. Whereas the company reported negative free cash flow from 2012 through 2014, it has successfully righted the ship and booked five consecutive quarters of positive free cash flow. Excluding $610 million in proceeds from a transaction at Pueblo Viejo, which it used for debt repayment, the company reported $471 million in free cash flow for 2015. Apparently, the company is poised to continue its achievement; it reported $455 million in the first half of 2016 alone.
According to Dushnisky, the company is focused on a comprehensive approach to growing free cash flow: "What we are now trying to do at Barrick is systematically tackle all of the drivers of free cash flow together. Understanding, for example, that there are trade-offs between those different drivers."
The rise in gold prices over the past year is just one of many factors management recognizes as a factor contributing to free cash flow growth. Resulting in a reduction of annualized financing cost payments by about $185 million, the company's aggressive debt repayment strategy has been another driver of growth. In addition, management reported that a change in sales mix paired with higher production coming from lower-costs mines have been strong factors contributing to free-cash-flow growth.
Projecting on a paused project
One of Barrick Gold's greatest risk factors is its ability to sustain operations at its various mines. Management, for example, suspended operations at its Pascua-Lama mine in 2013.
Straddling the Chile-Argentinian border, Pascua-Lama lies about 10 kilometers from Barrick Gold's Veladero mine. Image source: Barrick Gold Corporate Presentation.
This isn't as simple -- or inexpensive -- as flipping a switch to turn off the lights. Management expects to incur approximately $80 million to $100 million in costs for 2016 to maintain regulatory and environmental compliance at the site.
This may be changing soon, though. When asked about rumblings in the press about operations resuming, Dushnisky said he and management have been considering resuming operations at the site:
And so we don't want to get ahead of ourselves, but the thinking is if we could restart Pascua-Lama as a stage concept, kind of minimize capital upfront, generate cash flow and move forward on that basis, it would be interesting and something that we want to explore.
Dushnisky indicated that the company is considering a new approach to activities -- beginning underground -- at the site. The first step, though, is to complete an optimization study, which management would then present to the board. According to Dushnisky, by the end of the year, management will have a better idea of when it could report to the board.
The takeaway
Management's prudent decision to reduce the company's debt, though it may come to the chagrin of those looking for a growing dividend, has already been a success, yielding an annualized interest savings of approximately $50 million since the start of 2016. Investors should look for commentary at the end of the year regarding the dividend and debt-reduction strategy. Ideally, the company would be able to contemporaneously execute both -- returning cash to shareholders and paying down debt. Investors should also keep an eye on the other points of interest: free cash flow growth and whether it's in line with management's strategy, and whether the company is proceeding with resuming operations at Pascua-Lama -- two signs that the company is poised for continued success.
