Barrick Continues To Make Smart Moves In Response To Subdued Gold Pricing Environement

November 13th, 2015 by Trefis Team

Barrick Gold Corporation (NYSE:ABX) continues to make the right moves in order to adapt to an environment of subdued gold prices, with the announcement of the sale of the company’s interests in a number of high-cost gold mines. [1] Barrick announced the sale of some of its high-cost mines located in Nevada, including the fully owned Bald Mountain and Ruby Hill mines as well as the company’s 50% and 70% stakes in the Round Mountain mine and the Spring Valley project, respectively. [1] The $720 million that Barrick will realize through these asset sales will largely be used to reduce the company’s outstanding debt. [1] In addition, the sale of these high-cost assets will enable the company to operate more competitively in a subdued gold pricing environment.

Decline in Gold Prices

Gold prices have declined on average over the course of the last couple of years. London PM Fix gold prices, which averaged $1,266 per ounce in 2014, have averaged $1,173 per ounce so far this year, around 7% lower. [2]

Gold Prices in 2015, Source: Kitco

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The decline in gold prices has largely been due to the fading attractiveness of gold as an investment, driven by improving economic conditions and concerns over an interest rate hike by the Fed. Gold as an investment is generally considered a safe haven asset and investments are primarily made with the purpose of hedging against economic uncertainty and inflation. The investment demand for gold tends to decrease with an improvement in economic conditions. In addition, since gold as an investment does not offer any returns besides capital gains, with an increase in interest rates investors tend to shift towards interest-bearing assets. Fears over an interest rate hike reduced the investment demand for gold, resulting in a decline in prices of the metal over the past year. With the Fed keeping interest rates unchanged at its September meeting, gold prices have recovered somewhat, as illustrated by the chart shown above. Going forward, changes in the Fed’s stance pertaining to the trajectory of interest rates are likely to materially impact gold prices.

Lowering Costs and Debt

In response to the decline in gold prices over the past couple of years, Barrick Gold has taken a number of steps to reduce its operating costs and shore up its balance sheet. This latest sale of high-cost mining assets in Nevada is a continuation of Barrick’s efforts to adapt to the environment of low gold prices. The latest mines sold by Barrick are reported as part of the company’s Other Gold Mines segment, which reported an AISC of $958 per ounce in the first nine months of 2015, as compared to $866 per ounce for the company as a whole. [3] The AISC metric is a comprehensive measure of the costs required to sustain a company’s ongoing mining operations. As indicated by the AISC figures, the sale of these high cost mines will lower the company’s average operating costs.

In addition to reducing the company’s operating costs, these asset sales are also a part of Barrick Gold’s efforts to reduce its debt. Through a combination of asset sales, a joint venture agreement, and a streaming agreement, Barrick has raised around $3.2 billion in 2015. [1] The company intends to use the proceeds of these transactions to lower its outstanding debt by $3 billion. [4] These measures taken together will ensure that Barrick Gold can continue to operate profitably even if gold prices fall further. The company is thus well poised to weather the impact of short-term fluctuations in gold prices caused by changing expectations of an interest rate hike.

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Notes:
  1. Barrick Announces Sale of Non-Core Assets for $720 Million, Barrick Gold News Release [↩] [↩] [↩] [↩]
  2. Historical Gold Prices, Kitco [↩]
  3. Barrick Gold’s Q3 2015 Earnings Release, SEC [↩]
  4. Barrick Gold’s Q3 2015 Earnings Call Transcript, Seeking Alpha [↩]