The Year 2016 In Review: Barrick Gold Well Positioned To Deal With Lower Gold Prices As A Result Of Cost And Debt Reduction Efforts

December 28th, 2016 by Trefis Team

The year 2016 witnessed a recovery in average gold prices, after three consecutive years of decline. However, Barrick Gold continued to focus on cost and debt reduction over the course of the year, mirroring its strategy over the previous years of declining prices. With gold prices expected to decline again next year, Barrick’s efforts to reduce operating costs and debt will stand the company in good stead going forward.

Gold Prices in 2016

Gold Prices Trajectory 2016

(Source: Kitco)

Gold prices stood at levels below $1100 per ounce at the start of the year, after declining towards the end of 2015 leading up to the Fed’s interest rate hike in December of last year. [1] Gold is considered a safe-haven asset from an investment point of view, with investments in the yellow metal primarily made to hedge against macroeconomic uncertainty. Moreover, since gold as an investment offers only capital gains in terms of returns, an increase in interest rates tends to lower the attractiveness of gold as an investment compared to interest-linked securities.

Gold prices rose from the subdued levels of January over the course of the first half of 2016 as a result of concerns over global economic growth. In addition, the uncertainty created in the wake of the unexpected outcome of the UK’s June 23 EU referendum drove prices over $1350 per ounce in subsequent weeks. [1] However, rising expectations of an increase in interest rates by the Federal Reserve amid strengthening U.S. economic growth weighed on gold prices towards the end of the year. In addition to raising interest rates  in December, the Fed indicated that rising U.S. economic growth and inflation next year could prompt further rate hikes. [2]

Ongoing Cost Reduction Efforts

Despite the increase in average gold prices over the course of 2016, Barrick Gold continued to take steps to lower its operating costs, continuing efforts initiated in previous years in response to a decline in gold prices. Besides the sale of the company’s interests in high-cost, non-core assets such as the Bald Mountain and Round Mountain mines in Nevada, a series of operational improvements allowed the company to lower its all-in sustaining cost (AISC) metric. [3] The following table illustrates Barrick’s progress in reducing AISC, which is a comprehensive measure of all the costs required to sustain ongoing mining operations.

Decline in AISC

Debt Reduction

Barrick Gold continued its focus on debt reduction in 2016, setting itself a debt reduction target of $2 billion for the year. [4] Using the proceeds of non-core asset sales and operating cash flows, the company was well on its way to achieving its debt reduction target at the end of Q3, as illustrated below.

Decline in Net Debt

With more manageable debt, the company is well placed to deal with a downturn in gold prices going forward.

The Road Ahead

With more rate hikes from the Fed and higher U.S. economic growth expected next year, gold prices are expected to remain subdued in 2017. With lower average gold prices expected in 2017, Barrick Gold’s efforts to lower operating costs and debt throughout this year have been well timed. The company is now well placed to deal with a downturn in prices.

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Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:
  1. Historical Gold Prices, Kitco [↩] [↩]
  2. Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017, Wall Street Journal [↩]
  3. Barrick Completes Sale of Non-Core Assets in Nevada to Kinross for $610 Million, Barrick Gold News Release [↩]
  4. Barrick Gold’s Q3 2016 Earnings Call Transcript, Seeking Alpha [↩]