Barrick Gold Q4 2015 Earnings Review: Cost Reduction Initiatives Partially Offset Impact Of Decline In Gold Prices On Results

February 19th, 2016 by Trefis Team

Barrick Gold Corporation (NYSE:ABX) released its fourth quarter results on February 17 and conducted a conference call with analysts the next day. [1] As expected, the decline in gold prices over the course of 2015 negatively impacted the company’s results. However, Barrick’s ongoing cost reduction and productivity enhancement initiatives helped partially offset the impact of weak gold prices on the company’s earnings. Barrick’s adjusted EBITDA, which excludes the impact of one-time non-cash items such as impairments on earnings, stood at $722 million in Q4 2015, as compared to $755 million in the corresponding period last year. [2] The key message from the management in the earnings conference call was Barrick’s continued focus on cost and debt reduction, which would enable the company to operate competitively in a lower gold pricing environment. [1]

Decline in Gold Prices

Barrick’s average realized price for gold sales declined roughly 8% year-over-year to $1,105 per ounce in Q4 2015, mirroring the decline in gold prices over the course of 2015, as illustrated by the chart shown below. [2]

Gold Prices in 2015, Source: Kitco

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Gold prices fell over the course of 2015 mainly due to concerns over an interest rate hike by the Fed. Precious metals such as gold are generally considered safe haven assets from an investment point of view, with investments primarily made with the purpose of hedging against economic uncertainty and inflation. The investment demand for gold reduces with an improvement in economic conditions. Moreover, since gold does not offer any returns besides capital gains, investors tend to shift towards interest-bearing assets with an increase in interest rates. Concerns over an interest rate hike, which finally materialized in December, dampened gold prices in Q4 2015.

Gold Prices in 2016, Source: Kitco

Recent concerns over the strength of global economic growth have driven up gold prices, as illustrated by the chart shown above. The Fed has also taken a more dovish stance with respect to interest rates hikes, reducing chances of a sharp increase in interest rates. [3] Changing perceptions about the strength of the global economy may continue to cause short term fluctuations in gold prices.

Emphasis on Cost and Debt Reduction

Barrick managed to partially offset the impact of top line headwinds on results by lowering its operating costs. A combination of cost reduction and productivity improvement initiatives, and the sale of high-cost mines, helped the company lower its all-in sustaining costs (AISC) by 21% year-over-year to $733 per ounce in Q4 2015. [4] The AISC metric captures all the costs required to sustain a company’s ongoing mining operations. The company’s AISC for the full year 2015 stood at $831 per ounce, which is at the lower end of its guidance. [1] Besides lowering its AISC, Barrick also achieved its target to reduce outstanding debt by $3 billion in 2015. [1]

Given the uncertain outlook for gold prices, the company management stressed that cost reduction will remain a major area of emphasis going forward. The management is targeting a reduction in the company-wide AISC metric from $831 per ounce in 2015 to $725-775 per ounce in 2018. [4] Furthermore, with the company’s credit rating still under threat, the company has set itself a debt reduction target of at least $2 billion for 2016, following on from its $3 billion target for 2015. [1] These measures will ensure that the company is well placed to weather a downward movement in gold prices from current levels.

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Notes:
  1. Barrick Gold’s Q4 2015 Earnings Call Transcript, Seeking Alpha [↩] [↩] [↩] [↩] [↩]
  2. Barrick Gold’s Q4 2015 Earnings Release, SEC [↩] [↩]
  3. Weaker Dollar Spurs Rise in Gold Prices, Wall Street Journal [↩]
  4. Barrick Gold Q4 2015 Earnings Presentation, Barrick Gold Website [↩] [↩]