Leading gold miner Barrick Gold (NYSE:GOLD) is in the second year of a mission to become debt-free within a decade. It is a bold goal considering that the company ended 2014 with $13.1 billion of debt. To jump-start that goal, the company unloaded several non-core assets last year, which pushed debt below $10 billion. The company continued to take a methodical approach in 2016, with an aim to trim another $2 billion in debt from the balance sheet.
The company recently achieved that goal after completing a $650 million cash tender offer for some of its outstanding notes. However, what's noteworthy about the accomplishment is that the company did not sell assets this year. Instead, it benefited from cost reductions, as well as higher gold prices, to generate enough free cash flow to hit the target. That is a big win for the company because it means that future asset sales and free cash flow generation could accelerate its ability to become debt-free.
Digging into what drove this success
Aside from reducing debt by $2 billion this year, another of Barrick Gold's 2016 priorities was to position the company so it could generate free cash flow at a gold price of $1,000 per ounce. To do so, the company needed to drive down operating costs as well as keeping a lid on capex.
It made steady progress in both areas this year. In fact, the company is on target to generate free cash flow at gold prices less than $1,000 per ounce this year. Driving this success is the fact that cost of sales are down 7% while all-in sustaining costs declined 16% thanks to last year's sales of higher cost mines as well as the company's ability to operate more efficiently.
Meanwhile, the company is raising the bar on capital allocation by setting a goal that new projects must meet a 15% return hurdle rate at a $1,200 gold price before the company will sanction an investment. This standard should curb capital spending on marginal projects. Because of that, it will generate more free cash flow for other uses, including debt reduction.
These new standards have enabled the company to produce free cash flow for six straight quarters, including $674 million last quarter. That result brought the company's year-to-date total to $1.13 billion, which got it more than half way to its debt-reduction target. Because the gold miner already had $2.6 billion of cash on the balance sheet thanks to prior asset sales and free cash flow generation, it was able to pay off enough debt to hit its 2016 goal without having to sell any more assets.
Another big win on the way?
The completion of the company's recent debt repurchases pushed total debt down to $8 billion, with roughly $5 billion of that amount not due until after 2032. Because so much of its debt is long term, Barrick does not need to rush. That is why its medium-term goal is to reduce debt below $5 billion before it turns its attention to those longer-dated debt maturities.
The company has already launched its next step by initiating the process to sell its stake in an Australian joint venture, which it co-owns with Newmont Mining (NYSE:NEM). While Newmont Mining expressed interest in purchasing Barrick's stake, the partners could not agree on a valuation. Because of that, Barrick Gold put the asset on the market, which analysts thought would lead to a sale in the range of $600 million to $1 billion. However, according to reports, it has received a bid of $1.3 billion for the asset thanks in part to rising gold prices. If a deal gets done at that valuation, it could help Barrick Gold take another significant step toward hitting its medium-term debt reduction goal.
Barrick Gold started this year with a goal to trim another $2 billion of debt from its balance sheet. Given the size of that target, investors expected that the company would need to sell non-core assets. However, Barrick's ability to push costs lower than anticipated enabled it to capture the upside of rising gold prices this year, leading to a nice windfall of free cash flow. That represented a big win for the company because future assets sales will put it even closer to its ultimate goal to become debt-free.