Will Barrick Gold's New Executive Compensation Changes Please Shareholders?

Barrick Gold shareholders confidence should improve, as the new compensation scheme makes management a long-term owner of the company.

Vladimir Zernov
Vladimir Zernov
Apr 2, 2014 at 9:02AM
Energy, Materials, and Utilities

Barrick Gold (NYSE:GOLD) has long been criticized for excessive executive pay while the company was showing sub-par performance. The company grew bigger and bigger, and sacrificed quality for quantity. The prolonged drop in gold prices highlighted the weakness of such a strategy, and Barrick Gold started to respond to the new reality. The new executive compensation plan is another step to rearrange the business and provide more value to shareholders. Will it work?

Long-term performance is prioritized
The new compensation scheme prioritizes long-term performance, as the biggest part of the compensation will be given to executives in the form of Barrick's common shares when they retire or leave the company. Executive performance will be measured once a year against a long-term scorecard with eight performance measures. Importantly, the shares for the compensation plan will be bought on the open market, thus avoiding dilution for other shareholders.

In my view, this is a good measure to prevent management from taking excessive debt and spending too much money on gigantic projects like Pascua-Lama. Now, Pascua-Lama is stalled as permit problems and mounting costs have put project economics under question. The mine followed the example of Newmont Mining's (NYSE:NEM) Conga project in Peru, which has been stalled since 2011 amid environmental protests. Barrick's Pascua-Lama and Newmont's Conga are vivid examples of underestimating risks in a period of gold price upside.

Long-term debt remains a problem
Despite the recent equity issue, which helped Barrick reduce its obligations, the long-term debt is still high at $12.9 billion. The company is unlikely to issue more equity after it diluted its shares by 16% in late 2013. This means that the company's cash flows must exceed its spending in order to further reduce its debt position.

Although Barrick is one of the cost leaders along with Goldcorp (NYSE:GG), the downside in gold prices significantly affects company's cash flows. Barrick has recently made several steps to extract value from its non-core operations. These steps included the sale of part of its African Barrick stake and the divestiture of Kanowna in Australia. Together, the gross proceeds of those sales account for $263 million.

This process is likely to continue. Five core mines are estimated to bring 60% of Barrick' production at all-in sustaining costs of $750-$800 per ounce in 2014. In comparison, Barrick estimates that its total all-in sustaining costs will be $920-$980 this year. The easiest way to bring total costs further down is to sell underperforming assets.

Unlike Goldcorp, which has just $1.5 billion of long-term debt, Barrick Gold has to take additional measures to bring its debt down. The divestment of higher-cost mines fits easily into this strategy. Yes, Barrick's production numbers will decline, but the quality of the portfolio will improve.

Bottom line
Barrick Gold is on the right track. The new compensation scheme looks good for shareholder interests, as management becomes a long-term owner of the company. Thus, there will be less impulsive movements and more long-term planning. As Barrick Gold transforms into a leaner company, its performance should improve. However, this will take significant time, and the company has a lot of work to accomplish. The debt remains a problem, and Pascua-Lama's fate is under question. Low gold prices also pressure the company's cash flows. That said, there's little a new compensation plan could do in the near term, but it is a wise move in the long run.