Barrick ‘all but assured’ to meet debt target, Canaccord says

VANCOUVER — Barrick Gold (TSX: ABX; NYSE: ABX) appears on track to achieve a US$3-billion debt reduction target this year after a few key asset sales, a streaming agreement and a commitment to cutting capital spending across the board. According to analysts from Canaccord Genuity, however, the company still has a “key area of opportunity” in regards to reining in operating expenditures by adjusting mining methods and planning.

Barrick reported second-quarter production of 1.45 million oz. gold at all-in sustaining costs of US$895 per oz. The company registered a net loss of US1¢ per share and adjusted earnings of US5¢ per share during the quarter. Operating and free cash flow were US$525 million and US$26 million.

The company instituted a new “capital allocation framework” wherein it cut capital costs and deferred spending to maximize free cash flow. Barrick aims to reduce its company-wide spending by US$2 billion by the end of 2016.

“We’re starting to see momentum building behind the strategy we outlined earlier this year. Underpinning our operating and financial performance has been a cultural shift to reclaim the best of Barrick’s original qualities: agility, efficiency, determination and accountability,” co-president Kelvin Dushnisky commented during a conference call.

“We are focused on strengthening our mine plants, reducing spending and improving productivity to maximize free cash flow from our operations,” he added.

Barrick has repaid US$250 million of debt so far this year from its cash balance. When combined with US$2.5 billion of sales agreements announced to date, that figure represents 90% of the company’s debt-reduction target. Barrick recently closed the US$550-million cash divestment of its Cowal gold mine to Australia’s Evolution Mining (ASX: CAH), and vended half  of its Zaldivar copper mine to Chile’s Antofagasta (LSE: ANTO) for US$1 billion.

The new Zaldivar partnership follows the US$298-million cash sale of a half interest in Barrick’s Porgera gold mine in Papua New Guinea to China’s Zijin Mining.

Barrick announced a new streaming agreement with Royal Gold (TSX: RGL; NASDAQ: RGLD) at its Pueblo Viejo gold mine in the Dominican Republic, where it holds a 60% stake alongside joint-venture partner Goldcorp (TSX: G; NYSE: GG).

Barrick will receive an upfront cash payment of US$610 million, plus ongoing payments for gold and silver. In return, Royal Gold agrees to buy 7.5% of Barrick’s share of production at Pueblo Viejo up to 990,000 oz. gold, and 3.8% of gold produced thereafter. The innovative payment structure is tied to spot prices rather than being fixed in advance.

Barrick will receive ongoing cash payments from Royal Gold equivalent to 30% of the prevailing spot prices for the first 550,000 oz. gold and 23.1 million oz. silver delivered. The remaining payments will then double to 60% of prevailing spot prices for each subsequent ounce delivered.

“Our streaming agreement crystallizes immediate value from Pueblo Viejo in a volatile metal price environment,” Dushnisky commented. “It will strengthen our balance sheet in the short term while preserving material exposure to higher gold and silver prices in the future.”

Barrick started shopping another six of its assets: the Bald Mountain heap-leach mine in northeastern Nevada; a 50% stake in the Round Mountain mine operated by partner Kinross Gold (TSX: K; NYSE: KGC); the Golden Sunlight mine in southwestern Montana; the Ruby Hill operation near Eureka, Nev.; and the advanced-stage Spring Valley and Hilltop projects in Nevada.

According to Canaccord analysts Tony Lesiak and Peter Bures, the combined asset package could net Barrick between US$550 million and US$650 million, with Kinross being a “strong candidate” to buy some of the Nevada projects, since it has US$1 billion in cash on its balance sheet and a need to “dilute its exposure to Russia.”

Canaccord also wagers Barrick is “pulling the plug” on its Pascua Lama development in Chile, where it has battled regulators over permit issues. The company confirmed it was selling equipment at Pascua, which Lesiak and Bures assume “will be netted against closure costs and potential environmental fines.”

Meanwhile, Barrick has identified what it calls “value realization” initiatives at Pueblo Viejo and its powerhouse Lagunas Norte open-pit mine in north-central Peru.

“Lagunas Norte has been an outstanding mine for us since it began operations in 2005, and our plan contemplates adding a grinding flotation autoclave processing circuit to treat refractory material,” co-president James Gowans elaborated. “At Pueblo Viejo, we’ve identified some key opportunities that have the potential to add substantial value. These include expanding the tailing storage capacity in order to extend the mine life, and modifications to our fuel and power supply.”

The company completed a preliminary economic assessment at Lagunas Norte that extends the mine life through at least 2027 by processing refractory material below the current oxide pit. The US$500-million expansion could add up to 2 million oz. gold to Lagunas Norte’s reserves, though full details of the study were not released at press time. Barrick also says the tailings expansion at Pueblo Viejo could incorporate 6 million oz. more gold into its mine plan.

“Barrick’s net debt reduction pledge is all but assured in our view, after the recent [Pueblo Viejo] streaming deal and planned further non-core divestitures in the U.S.,” Lesiak and Bures wrote in an Aug. 7 research note. “The key area of opportunity remains [operating expenditures, mining methods and mine planning]. We also note that reserve life remains at risk given the sustaining capital and exploration deferrals.”

Dushnisky explained that the steps Barrick has taken to streamline operations has resulted in “all its mines” being free-cash flow positive at US$1,100 per oz. gold. In light of the recent drop in bullion prices, however, the company is also stress testing its assets at price levels down to US$900 per oz.

“We don’t expect gold to reach [that level], but if it does, we know what we need to do,” Dushnisky continued. “This may involve partial or full suspensions of non-core mines, further headcount reductions and raising cut-off grades or processing higher grade stockpiles at our operations.”

Barrick dropped its full-year production guidance slightly after the asset sales, and expects to crank out between 6.1 million and 6.4 million oz. gold at all-in sustaining costs ranging from US$840 to US$880 per oz.

The company’s five “core mines” in the Americas — Cortez, Lagunas Norte, Veladero, Goldstrike and Pueblo Viejo — could account for 60% of total production this year at all-in sustaining costs ranging from US$700 to US$750 per oz.

“We’ll continue to optimize our portfolio, and this is not only about reducing debt. Ultimately, we want a portfolio focused on high-quality gold assets and growth projects in our core regions in the Americas,” Dushnisky said.

Barrick has traded within a 52-week window of $8.60 to $21.14, and closed at $9.24 per share at press time. The company has 1.2 billion shares outstanding for a $10.7-billion market capitalization, and had US$2.1 billion
of cash, plus US$4 billion available on an undrawn credit facility at the end of June.

Assuming Barrick meets its US$3-billion debt reduction target, it will still have US$9.2 billion in long-term debt.