Barrick heads ‘back to the future,’ but writedowns persist

VANCOUVER — Much of the rhetoric in Barrick Gold’s (TSX: ABX; NYSE: ABX) recent marketing drive has involved getting back to its roots and rediscovering the “lean and nimble” business model that led to the company’s initial success. A big part of that is driving down debt and achieving a strong balance sheet, but recent results reveal that Barrick still has a long way to go.

On Feb. 18 the company tabled its full-year results for 2014, wherein management focused on a 15% drop in all-in sustaining costs and annual gold production of 6.25 million oz. gold. All-in sustaining costs for the year came in at US$864 per oz.

Barrick’s financial results, however, don’t paint such a pretty picture. The company recorded a fourth-quarter net loss of US$2.9 billion, or $2.45 per share, reflecting the impact of US$2.8 billion in after-tax impairment charges primarily related to the Lumwana mine in Zambia and the Cerro Casale project in Chile. For the full year, Barrick reported a net loss of US$2.9 billion, or $2.50 per share, due to US$3.4 billion in annual after-tax impairment charges.

“You may have been reading that we’ve been talking a lot about Barrick going ‘back to the future.’ We’re determined to return Barrick to the model and mindset that enabled it to grow from a tiny start-up to the leading gold company in the world in 20 years,” chairman John Thornton outlined during a conference call.

“So what is Barrick’s core DNA?,” he asked. “ The company’s purpose is the generation of wealth through responsible mining, wealth for our owners, wealth for our people and wealth for the countries and communities with which we partner. This purpose, in turn, contains within it our core value: partnership.”

And in order to create that wealth Barrick is going to have to remain committed to a few tenets. The company needs to keep overall production costs in line at its five cornerstone mines in the Americas, which cranked out 60% of its production in 2014 at all-in sustaining costs of US$716 per oz. Barrick has worked hard to shed poor investments and non-core mines over the past 18 months, but the company is still sitting on US$10.4 billion in net debt.

The company is aiming to cut that number by a minimum of US$3 billion in 2015, and Thornton added that it will “defer, cancel or sell” projects that cannot clear a hurdle defined by a 15% return on invested capital. Barrick has also decreased its corporate over-head to become a more efficient operator. The company reduced its head office by nearly 50% and eliminated all management layers between its Toronto headquarters and mine sites.

Barrick expects to realize US$30 million in general and administrative and overhead savings in 2015, which would increase to US$70 million in annualized savings in 2016.

“Our current level of debt is higher than we’d like and we intend to reduce it significantly through a combination of positive free cash flow, disciplined non-core asset sales, joint ventures and strategic partnerships,” co-president Kelvin Dushnisky commented. “We have implemented a lean, decentralized operating model, and existing mines will have to compete for capital. Those that are unable to meet our capital allocation objectives will be sold.”

Thornton elaborated on Barrick’s capital allocation strategy when he indicated that the company will be primarily gold focused moving forward. Over the past few years Barrick has waded into the copper space, and produced 436 million lb. of the red metal in 2014 at cash costs of US$1.78 per lb. The company’s copper aspirations were impacted when the Zambian government imposed a 20% gross royalty rate, which forced Barrick to shutter Lumwana in mid-December.

Barrick also entered into a joint venture agreement with Ma’aden, the Saudi Arabian state mining company, to advance the Jabal Sayid project, which is expected to begin shipping copper in early 2016.

“First and foremost our focus is gold. We have no plans to diversify into other metals and we have no plans to add to our existing copper position. Going forward we’ll focus our investments in our core regions, this means high-quality, long-life assets in attractive jurisdictions,” Thornton explained, specifically citing synergies within the company’s current portfolio in Nevada.

“Capital will go only to high-quality assets in the right places that are capable of delivering on our expected rates of return over the course of the metal price cycle. This will get Barrick’s flywheel turning again by producing the level of cash flow required to reinvest in growth,” he continued.

The burdens of heavy writedowns notwithstanding, Barrick’s fourth quarter results were actually quite promising. The company reported adjusted net earnings of US$174 million, or US15¢ per share, which beat a consensus analyst estimate of US14¢ per share.

The company finished in a strong liquidity position — with a US$4-billion undrawn credit facility, plus US$2.7 billion in cash at the end of 2014 — and has less than US$1 billion in debt due over the next three years.

Moving forward Barrick expects to produce 6.2 million to 6.6 million oz. gold this year, while annual production is expected to exceed 6 million oz. in 2016 and 2017. All-in sustaining costs are estimated to range from US$860 to US$895 per oz., and Barrick expects to generate positive free cash flow this year at current gold prices.

The company had hoped to generate production growth from its Pascua-Lama development in Chile, but the project remains in socio-political limbo. 

“One thing you can expect to see from us is probably being a little more active and judicious in terms of managing the portfolio,” Dushnisky said. “In the past we have probably held onto assets too long and we’d prefer to be a little more active rather than waiting till every last drop is squeezed. It’s going to be a matter of making sure that we’ve got the best assets in the portfolio.”

BMO Capital Markets analyst David Haughton kept his US$14 per share price target on Barrick along with a “market perform” rating, and noted that the heavy debt load continues to weigh on the company’s valuation. BMO Research noted that Barrick’s fourth quarter earnings per share came in ahead of its 10¢ prediction, while cash costs were slightly higher than a US$607 per oz. estimate.

“Barrick provided some new insight on the strategic direction for the company. However, further detail and successful execution is necessary to improve confidence in the plan,” Haughton wrote on Feb. 19.

Barrick has traded within a 52-week window of $11.67 to $23.78, and jumped 6% on its annual results before closing at $16.03 per share at press time. 

The company has 1.2 billion shares outstanding for a $19-billion market capitalization.