Barrick Gold Q2 Earnings Review: Cost Rationalization And Debt Reduction Continue In Response To Weak Gold Prices

August 7th, 2015 by Trefis Team

Barrick Gold Corporation (NYSE:ABX) released its second quarter results on August 5 and conducted a conference call with analysts the next day. [1] As expected, the decline in gold prices over the last twelve months negatively impacted the company’s results. However, Barrick’s ongoing efforts to reduce operating costs partially offset the impact of weak gold prices on earnings. The company’s adjusted net earnings declined by nearly 62% year-over-year to $60 million in Q2 2015. [2] The key takeaway from the earnings conference call was the management’s intention to continue to reduce operating costs as the company battles a subdued gold pricing environment. As a result of the company’s cost reduction initiatives, the management remains confident about operating profitably even if gold prices fall to levels of $900 per ounce. [3]

Falling Gold Prices

Barrick’s average realized gold price declined 8% year-over-year to $1,190 per ounce in Q2 2015. [2] Gold prices have fallen over the course of the last twelve months, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program and expectations of an interest rate hike. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy has reduced the investment demand for gold, leading to a fall in prices of the metal. With economic growth recovering, the Fed wound down QE last year. With the economy strengthening further, the Fed is expected to raise interest rates sometime in 2015. Whereas the exact timing of an interest rate hike is unclear, a rate hike is likely to lead to a decline in gold prices, as investors shift towards higher yielding assets. The downward trajectory of gold prices, so far this year, is illustrated in the chart shown below.

Gold Prices in 2015, Source: Kitco

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Cost Rationalization And Debt Reduction

In response to declining gold prices, Barrick has divested a number of high-cost gold mines over the past two years. The company continued to divest high cost gold mines this year, announcing the sale of the Cowal gold mine and a 50% stake in the Porgera gold mine. [4] In addition, the company is targeting a $2 billion reduction in spending by 2016 through a combination of reduction in operating expenses, capital spending, and corporate overhead. [2] These initiatives include a reduction in capital expenditure for 2015 to $1.6-1.9 billion, which is around 20% lower than in 2014. [2]

As a result of Barrick’s cost reduction initiatives, the company lowered its 2015 all-in sustaining costs (AISC) guidance for its gold mining operations to $840-$880 per ounce. [2] The AISC metric includes operating costs, sustaining capital expenditures, selling, general, and administrative costs, mine site exploration and evaluation costs, mine development expenditures, and environmental rehabilitation costs. It provides a comprehensive view of costs related to the company’s ongoing mining operations. Barrick’s 2015 AISC guidance compares favorably with the company’s AISCs for 2014 and 2013, which stood at $864 per ounce and $915 per ounce, respectively. [5]

Barrick has also made serious headway as far as its debt reduction target for 2015 is concerned. The company had already repaid $250 million in debt in the first half of the year. ((Barrick Gold’s Q2 2015 Earnings Call Transcript, Seeking Alpha)) Further, in addition to the asset divestments mentioned previously in the article, the company also announced the sale of a 50% stake in the Zaldivar copper mine earlier on in the year. ((Barrick Announces Sale of 50 Percent of Zaldívar Mine, Formation of New Partnership with Antofagasta Plc, Barrick Gold News Release)) Along with the Q2 earnings release, the company also announced the signing of a precious metals streaming agreement with Royal Gold for a portion of the gold and silver produced from the company’s Pueblo Viejo mine. [6] As a cumulative result of these steps, the company has already secured close to 90% of its debt reduction target for 2015. [3]

As a result of asset divestments, the company has lowered its production guidance for 2015 to 6.1-6.4 million ounces, from its previous guidance of 6.2-6.6 million ounces. [2] However, asset divestments and the company’s cost rationalization efforts have helped lower Barrick’s cost structure and have positioned the company to operate competitively even if gold prices fall further. Given the impending interest rate hike, these actions will stand the company in good stead for the rest of 2015 and beyond.

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Notes:
  1. Second Quarter 2015 Results Release on August 5, Barrick Gold Website [↩]
  2. Barrick Gold Q2 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩]
  3. Barrick Gold’s Q2 2015 Earnings Call Transcript, Seeking Alpha [↩] [↩]
  4. Barrick Announces Sale of 50 Percent of Zaldívar Mine, Formation of New Partnership with Antofagasta Plc, Barrick Gold News Release [↩]
  5. Barrick Gold’s Q4 2014 Earnings Presentation, Barrick Gold Website [↩]
  6. Barrick Announces Streaming Agreement With Royal Gold, Barrick Gold News Release [↩]