Barrick Gold (NYSE:GOLD) recently reported Q3 earnings. Reporting earnings per share -- adjusted for non-recurring costs -- of $0.24, the company exceeded analysts' expectations of $0.19 per share. But there's much more to a company's quarterly performance than just one number, so let's dig in and mine the report for some of the more interesting nuggets.
Spilling the beans on the spill
Following a request from the Argentine government, Barrick Gold suspended operations at its Veladero mine -- one of its five core mines -- on Sept. 15 because of process solution that spilled from the leach pad. The company resumed operations on Oct. 4, having conducted extensive water monitoring to confirm there was no environmental impact. In addition, Barrick implemented measures to help ensure that a similar event would not occur again.
Because of both the suspension of operations and adverse weather conditions, management revised Veladero's operating guidance down for 2016. Gold production at Veladero is now expected to fall between 530,000 and 580,000 ounces for fiscal 2016 -- down about 9% from the previous guidance of 580,000 to 640,000. All-in sustaining costs (AISCs) have, likewise, been affected; management now estimates AISCs to be between $800 and $870 per gold ounce at Veladero -- up from the previous range of $790 to $860 per ounce.
What's the deal with debt?
Making a concerted effort to strengthen its balance sheet, Barrick reduced its debt by approximately $3.1 billion in fiscal 2015. With a debt-reduction target of $2 billion for fiscal 2016, the company reduced it by $968 million through the first half of the year and by another $461 million during the third quarter.
Planning to dip into both some of the $2.65 billion in cash it has on hand and some of the operating cash flow it generates in the fourth quarter, Barrick is confident it will achieve its debt-reduction target for the year.
With current outstanding debt of $8.5 billion, the company is looking to further strengthen its balance sheet, setting in a medium-term goal of reducing its debt to below $5 billion. Acknowledging the company's success in improving its balance sheet, Moody's and S&P both upgraded their outlooks on Barrick's credit rating.
In the third quarter, Barrick announced that it will be partnering with Cisco Systems (NASDAQ:CSCO) in an attempt to "drive the digital reinvention of [its] business."
Of the $100 million earmarked for digital projects in 2016 and 2017, management has budgeted $50 million to be used in the first wave of digital projects at its Cortez mine in Nevada. But Cortez won't be alone in making use of the new technology. Further demonstrating its commitment to the safety and security of Veladero, Barrick will make the Argentine mine a trial site for digital technology that will improve upon its environmental and water monitoring activities.
Identifying the intended benefits of digitizing its enterprise, management claims that it will help "us grow our cash flow per share by enhancing productivity and efficiency at our mines, and improving decision-making and performance across our business." It's not just mines currently producing gold, where Barrick sees an opportunity for digitization. It is also working to apply the digital technologies to help streamline the permitting process.
Going with the flow
Besides debt reduction, Barrick achieved another of its other priorities: free cash flow growth. Generating more in the third quarter -- $674 million -- than the first two quarters of fiscal 2016 combined, Barrick has generated $1.13 billion in free cash flow through the first nine months of 2016. Perhaps this in and of itself doesn't mean much, so let's compare it with the two previous years: In fiscal 2014, it reported negative-$136 million; in fiscal 2015, it reported $471 million.
The company's ability to grow its free cash flow speaks to how well it has able to rein in spending. For the first nine months of fiscal 2015, Barrick reported $2.1 billion in operational cash flow, while it reported a comparable $1.9 billion for the same period in 2016. The difference between the two years reflects how well Barrick has been able to control capital expenditures. Whereas Barrick reported $1.4 billion in capex through the first nine months of 2015, it reported only $800 million for the same period in 2016.
The lowdown on low costs
Earlier this year, during an investor presentation in February, management targeted AISCs to fall between $775 and $825 per gold ounce for fiscal 2016.
For the third consecutive quarter, management revised this range, providing improved costs guidance. It's now forecasting AISCs to fall between $740 and $775 per gold ounce.
Largely attributing the reduction in costs to "a positive change in [its] sales mix as a result of the divestment of [its] high-cost mine sites," Barrick reported AISCs of $704 per gold ounce for Q3. The higher proportion of sales coming from lower-cost operations didn't just positively affect Q3, it's benefited the first half of the year as well. In fact, through the first nine months of fiscal 2016, Barrick's AISC equal $730 per gold ounce -- a 15.7% improvement over the $866 it reported for the same period in fiscal 2015.
Continuing to execute its debt-reduction strategy and commitment to free cash flow growth are just two of the reasons Barrick -- and its investors -- could consider the third quarter a success. It also demonstrates why the company is one of the more compelling opportunities for those looking to make some green from companies producing gold.