African Barrick Gold (ABG), in which the parent company Barrick Gold (NYSE:ABX) holds a 74% stake, declared its fourth quarter and annual production figures for 2013. The company reported lower quarterly production year-over-year but higher year-over-year production on an annual basis. The all-in sustaining cost per ounce came down significantly, down by 30% from the previous year. 
The results show that the company’s turnaround plans are working in an environment of low gold prices. African Barrick Gold’s costs are among the highest in Barrick’s portfolio which drags down the company’s performance as a whole. Barrick has been attempting to sell this division for a long time now but in absence of a suitable offer in terms of valuation, it has chosen to focus on improving the operating performance of the division. The latest results may improve Barrick’s chances of finding a suitable buyer for the division.
Profits Will Be Down Despite Lower Costs
While African Barrick Gold has given out only operating results till now, looking at the production, cost and average realized prices we can safely deduce that profits will decrease in absolute terms. The all-in sustaining cost per ounce has decreased by 17% year-over-year from $1,584 to $1,362 but the average realized prices have come down from $1,668 per ounce to $1,379 per ounce. Therefore, profit margin per ounce has decreased from $84 per ounce to $17 per ounce. The all-in sustaining cost figure includes not just the operating cash cost but also sustaining capital expenditures, general and administrative costs, mine site exploration and evaluation costs and environmental rehabilitation costs. Therefore, it includes all expenses associated with a gold miner’s operations. 
While sales have increased from 2012, the increase is far from enough to compensate for lower margins. The company sold 609.2 million ounces in 2012 and 649.7 million ounces in 2013.
Will Improvement In Results Increase Prospects For Sale?
Barrick Gold has been constantly stressing in 2013 that it intends to sell all assets that have an all-in sustaining cost of greater than $1,000 per ounce. The cost of production at its African assets is among the highest in the company’s portfolio.
Barrick attempted to sell the African division last year but couldn’t come to an agreement on price. Prospective buyers cite poor operating efficiency and difficult operating conditions due to security issues and power problems to justify offering a lower price. Therefore, in order to unlock the full value of these assets Barrick embarked on a turnaround plan last year. The core focus of the exercise is to drive free cash flow generation commensurate with the size and quality of its asset base. ((Why Did China Gold Walk Away From The African Barrick Gold Deal?, Trefis))
The specific initiatives that have been undertaken to achieve this goal are operating cost reductions, measures to discipline capital spending, the simplification of its organizational structure, corporate overhead cost reductions, and the ability to deliver mine planning. In a nutshell, these initiatives seek to find ways to reduce energy and maintenance costs, optimize spending on new and existing projects for maximum return, and come up with the right mix of local and international employees to meet production targets while reducing labor costs.
Looking at the annual results, it seems that the initiatives taken by Barrick have been working. However, it has no control over external factors which have driven down gold prices in global markets, thus affecting margins. The pessimistic outlook for gold in 2014 also makes us doubtful that any buyers are going to be interested in ABG. The best that Barrick can do is to sustain improvements in cost reduction and hope that the global pricing environment gets better in a couple of year. Without the two occurring simultaneously, we doubt that Barrick will be able to sell ABG in the foreseeable future.
We have a price estimate for Barrick Gold of $15, which represents 20% downside to the market price.Notes:
- African Barrick Gold reports fourth quarter production results, African Barrick Gold Press Release [↩]
- Barrick Gold 2013 40-F, SEC [↩]