In a move to reduce its indebtedness, Barrick Gold (NYSE:GOLD) recently launched a $3 billion public equity offering. This offering will dilute the shares of existing stockholders and increase the number of outstanding shares by 16%. Are the benefits of a lower debt level worth it?
Big debt weighs on Barrick
Barrick Gold amassed as much as $14.6 billion of debt on its balance sheet. The offering will lower the debt by 20%, and you can expect a similar effect on Barrick's interest expense. It's worth noticing that at current gold prices Barrick is profitable due to healthy costs.
Barrick is the lowest-cost producer among comparable peers. Barrick's all-in sustaining costs were $916 per ounce in the third quarter. Goldcorp (NYSE:GG) managed to lower its costs to $992 per ounce, while Newmont's (NYSE:NEM) costs reached $993 per ounce.
The difference is more pronounced when we look at companies' yearly guidance. Barrick expects all-in sustaining costs to be in the $900-$975 range. Newmont, which had higher costs in the first half of this year, plans to achieve costs of $1,100-$1,200 per ounce. Goldcorp expects costs to average $1,050-$1,100 per ounce. As we can see, Barrick is in a better position than Newmont or Goldcorp from the cost point of view, and was not forced to make the offering.
More cost-cutting and possible dividend suspension
Despite the fact that Barrick Gold's costs are significantly below current gold prices, the company looks worried. Barrick cut its capital expenditures by 21%, suspended its biggest Pascua-Lama project and offered additional stock.
The company is targeting $500 million additional savings in 2014 under its cost-reduction program. The Pascua-Lama decision reduced 2014 capital expenditures guidance by $1 billion. The company will eliminate as much as 1,850 full-time positions by the end of the year. Eighty-five percent of this program is already complete.
The strategy is to cut costs as much as possible. I think that shareholders must be worried about their dividend, because the elimination of the dividend is the next logical step. After the share offering, the total number of outstanding shares will grow to 1.16 billion.
In the second quarter of this year, Barrick decided to reduce its dividend to $0.05 per share. Given the new number of shares, the dividend will cost $232 million in 2014. In my opinion, if gold prices continue to fall, Barrick will suspend the dividend.
Will share offerings achieve success?
Here's another problem. The share offering price is $18.35. However, Barrick shares traded lower than this throughout the week when the offering was announced. Barrick is a highly liquid stock, so investors could choose to purchase shares on the market rather than via offering.
Barrick needed positive news to push the price of its stock higher. This is why it signaled that the company's founder Peter Munk is likely to step down from the position of Chairman. Munk, which founded Barrick back in 1983, is blamed for Barrick's underperformance and for excessive executive compensation.
Barrick will be able to sell the shares at the offering, although it might take a little longer than the company expected. However, the share dilution will continue to pressure the stock. The benefits that shareholders get in exchange for the dilution are unclear.
The offering will lower the debt, but the debt will remain high at $11.7 billion. Interest expense did not cause much disruption for Barrick's finances. The move looks rushed, as if the board felt the need to do something and decided to make a share offering.
All in all, I seriously doubt the long-term benefits of a 16% share dilution. In my opinion, the 20% debt reduction was not worth it.