Barrick Gold Focuses On Low-Cost Mines In Subdued Gold Pricing Environment

Barrick Gold Corporation (NYSE:ABX) is the world’s largest gold producer. Its mining operations have a wide geographical spread, spanning North and South America, Australia Pacific and Africa. However, the company has significantly reduced its portfolio of mines over the last year. With gold prices having corrected significantly over the last year or so, Barrick has looked to reduce its costs of production. A major part of its cost reduction strategy involves selling off high-cost assets, and focusing on its low-cost gold mines. In this article we will take a closer look at Barrick’s efforts to remain competitive in an environment of relatively low gold prices.

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Gold Prices

Gold prices have corrected significantly over the last year. These have been reacting to cues regarding Quantitative Easing (QE) tapering by the Federal Reserve. London PM Fix gold prices have fallen from average levels of $1,650 per ounce in Q1 2013 to $1,300 per ounce in Q1 2014. ^[1]

The Fed’s stance in its recent Federal Open Markets Committee (FOMC) meeting gave gold prices a boost. With the Fed lowering its growth forecast for the U.S. economy from 2.9% to 2.2% in 2014, and with inflation expected to remain below its target rate for the next few years, interest rates are expected to remain low for some time. ^[2] A hike in interest rates usually results in a fall in gold prices as investors shift to higher-yielding assets. However, with risks of an interest rate hike having cooled off in the near-term, gold prices have appreciated slightly, after falling to levels of $1,250 per ounce in the early part of June. ((Gold Price Chart, Kitco))

However, the Fed’s outlook on the U.S. economy remains positive, and it is gradually tapering its bond buying program. The expected strengthening of the U.S. economy will limit the upside for gold prices.  

Portfolio Optimization

With gold prices expected to remain subdued in the near-term, Barrick has divested non-core assets in order to lower its average production costs. Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. ^[3] These include the sales of the Darlot, Granny Smith, Lawlers, Plutonic and Kanowna mines in Australia, the Tulawaka mine in Tanzania, the Marigold mine in Nevada and the closure of the Pierina mine in Peru. Further, the company recently sold a 10% equity stake in African Barrick Gold. ^[4] Lastly, the company also sold off its oil and gas business, namely Barrick Energy in 2013. The combined proceeds of these assets sales total approximately $1 billion. ((Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website))

The focus of the company’s portfolio optimization efforts has been getting rid of high-cost mines. This is reflected in the All-in Sustaining Cost (AISC) metric for these mines. The AISC metric includes the total cash cost, sustaining capital expenditures, general and administrative costs, minesite exploration and evaluation costs, mine development expenditures and environmental rehabilitation costs. It provides a comprehensive view of costs related to a company’s current mining operations. In 2013, the AISC figures for the Australia Pacific mines segment, African Barrick Gold and Pierina stood at $994 per ounce, $1,362 per ounce and $1,349 per ounce respectively. The reportable segment of North American mines, which includes the Marigold mine, reported an AISC of $1,235 per ounce. All of these figures are higher than the company-wide AISC of $915 per ounce for Barrick’s gold mining operations. The sales of these assets helped lower Barrick’s AISC for its gold mining operations from $1,014 per ounce in 2012 to $915 per ounce in 2013. ^[5]

Focus On Core Assets

The Cortez and Goldstrike mines in Nevada, the Pueblo Viejo mine in the Dominican Republic, the Lagunas Norte mine in Peru and the Veladero mine in Argentina are Barrick’s core, low-cost mines. These mines collectively had an AISC of $668 per ounce in 2013, as compared to $915 per ounce for all of Barrick’s gold mines. These mines will collectively account for over 60% of Barrick’s gold production in 2014. ((Barrick’s Gold 2013 40-F, SEC))

Apart from the construction of a Carbon In Leach (CIL) plant at its Bulyanhulu mine in Africa, the company’s minesite expansion capital expenditure for 2014 is focused on its core assets. The construction of the Goldstrike Thiosulfate Technology project, and feasibility and development expenditures related to the Cortez Hills Lower Zone expansion, which will extend the life of the Cortez mine by around 7 years, are the major components of its minesite expansion capital expenditure in 2014. ((Barrick’s Gold 2013 40-F, SEC)) This indicates that the emphasis for Barrick lies on its core assets going forward.

Other Cost Reduction Efforts And The Road Ahead

The company expects capital expenditure for 2014 of around $2.4-2.7 billion. ((Barrick’s Gold 2013 40-F, SEC)) This is nearly 50% lower than its capital expenditure in 2013, mainly due to suspension of the Pascua Lama project due to legal and regulatory issues. In addition, the company is targeting $500 million in cost savings for 2014. ^[6] If the company is able to achieve these targets, it will significantly boost cash flows.

One potential avenue for Barrick to reduce costs, is a merger with Newmont Mining. Merger talks between the two countries have broken off. However, there are benefits for both companies from such a merger and it cannot be completely ruled out. Both companies produce over 35% of their gold from Nevada and a merger could potentially generate around $1 billion in cost synergies. ^[7] You can read more about the benefits of a Barrick-Newmont merger in one of our previous articles. ^[8]

Going forward, Barrick Gold’s prospects will to a large extent be determined by what trajectory gold prices take. However, after its portfolio optimization efforts, the company is better prepared to deal with a scenario of lower gold prices. With the U.S. economy strengthening, the upside for gold prices is limited. Thus, Barrick is well-placed to deal with such a scenario.

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1. Gold Price Chart, Kitco [↩]
2. Economic Activity Has Rebounded, Says Federal Reserve, Financial Times [↩]
3. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website [↩]
4. Barrick Completes Partial Divestment Of African Barrick Gold Plc Holding, Barick Gold News Release [↩]
5. Barrick’s Gold 2013 40-F, SEC [↩]
6. Barrick Gold’s Q1 2014 Earnings Presentation, Barrick Gold Website [↩]
7. Barrick Gold Chief Hails Benefits of Newmont Merger, Financial Times [↩]
8. Why A Barrick-Newmont Merger Makes Sense, Trefis [↩]