A Look At Barrick Gold’s Strategy For Adapting To The Prevailing Subdued Gold Pricing Environment

November 26th, 2014 by Trefis Team

Gold prices have fallen considerably over the last year and a half. The Federal Reserve announced its plans to wind down its quantitative easing (QE) program in June of last year. Gold prices have fallen around 13% since then and are currently trading at levels of around $1,200 per ounce. [1] Gold mining companies such as Barrick Gold Corporation (NYSE:ABX) have needed to adapt to an environment of subdued gold prices. Measures taken have included reductions in operating costs and capital expenditures, the disposal of non-core assets and enhancing exposure to other commodities. In this article, we will take a closer look at Barrick’s strategy to operate competitively in a subdued gold pricing environment.

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Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Fed’s QE program. The tapering of QE implied strengthening U.S. economic growth. Gold is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and led to a fall in prices of the metal. As per the World Gold Council, investment demand for gold fell from 1,623 tons in 2012 to 893 tons in 2013. [2] This led to a fall in overall gold demand and prices.

Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. [3] However, the exact timing of an interest rate hike is contingent upon the pace of economic recovery and jobs growth in the U.S. [4] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

Portfolio Optimization

With gold prices expected to remain subdued in the near-term, Barrick has divested non-core assets in order to lower its average production costs. Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. [5] These include the sales of the Darlot, Granny Smith, Lawlers, Plutonic and Kanowna mines in Australia, the Tulawaka mine in Tanzania, the Marigold mine in Nevada, and the closure of the Pierina mine in Peru. Further, the company recently sold a 10% equity stake in African Barrick Gold. [6]  Lastly, the company also sold off its oil and gas business, namely Barrick Energy in 2013. The combined proceeds of these asset sales total approximately $1 billion. ((Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website))

The focus of the company’s portfolio optimization efforts has been getting rid of high-cost mines. This is reflected in the All-in Sustaining Cost (AISC) metric for these mines. The AISC metric includes the total cash cost, sustaining capital expenditures, general and administrative costs, minesite exploration and evaluation costs, mine development expenditures and environmental rehabilitation costs. It provides a comprehensive view of costs required to sustain a company’s current mining operations. In 2013, the AISC figures for the Australia Pacific mines segment, African Barrick Gold, and Pierina stood at $994 per ounce, $1,362 per ounce, and $1,349 per ounce respectively. [7] The reportable segment of North American mines, which included the Marigold mine, reported an AISC of $1,235 per ounce in 2013. [7] All of these figures are higher than the company-wide AISC of $915 per ounce for Barrick’s gold mining operations in 2013. [7] The sales of these assets helped lower Barrick’s AISC for its gold mining operations from $1,014 per ounce in 2012 to $915 per ounce in 2013. [7]

Focus on Core Assets

The Cortez and Goldstrike mines in Nevada, the Pueblo Viejo mine in the Dominican Republic, the Lagunas Norte mine in Peru, and the Veladero mine in Argentina are Barrick’s core, low-cost mines. These mines collectively had an AISC of $668 per ounce in 2013, as compared to $915 per ounce for all of Barrick’s gold mines. [7] These mines will collectively account for over 60% of Barrick’s gold production in 2014. ((Barrick’s Gold 2013 40-F, SEC))

Apart from the construction of a Carbon In Leach (CIL) plant at its Bulyanhulu mine in Africa, the company’s minesite expansion capital expenditure for 2014 is focused on its core assets. The construction of the Goldstrike Thiosulfate Technology project, and feasibility and development expenditures related to the Cortez Hills Lower Zone expansion, which will extend the life of the Cortez mine by around 7 years, are the major components of its minesite expansion capital expenditure plan in 2014. ((Barrick’s Gold 2013 40-F, SEC)) This indicates that the emphasis for Barrick lies on its core assets going forward.

Enhancing Exposure to Copper

In addition to the company’s focus on its low-cost, core gold mines, Barrick has also taken steps to increase its exposure to copper. Copper sales accounted for only around 13% of the company’s revenues in 2013. [7] Barrick announced the setting up of a joint venture with Saudi Arabia’s Ma’aden to develop the Jabal Sayid copper project. [8] The mine will commence production in 2015 and will produce between 100-130 million pounds of copper at full capacity. [8] This will significantly boost Barrick’s copper production, which is expected to range between 440-460 million pounds in 2014. [9]

An increase in Barrick’s exposure to copper will reduce some of the risks of volatility in gold prices over the short and medium term. Copper is an industrial metal with diverse applications in industry, particularly in the manufacturing, power and infrastructure sectors. The demand for copper is positively correlated with macroeconomic cycles. On the other hand, gold is often used as a hedge against economic uncertainty. Usually, investment demand for gold and gold prices are negatively correlated with macroeconomic cycles. Thus, increasing its exposure to copper may provide some protection to Barrick against volatility in gold prices over the short and medium term. However, over the long term, gold prices will largely be influenced by increasing jewelry demand for gold from emerging economies and will be less prone to fluctuations in investment demand for the commodity. Jewelry demand constitutes the bulk of the overall demand for gold. [2]

Reductions in Capital Expenditure

The company expects its capital expenditure to range between $2.2-2.5 billion in 2014. [9] This is much lower when compared to its capital expenditure for 2013, which stood at $5.37 billion. [10] The reduction in Barrick’s capital spending resulted from the suspension of the Pascua Lama project due to legal and regulatory issues and reductions in the company’s sustained capital expenditure. The reduction in capital expenditure will significantly boost cash flows.

The Road Ahead

Going forward, Barrick Gold’s prospects will to a large extent be determined by what trajectory gold prices take. However, after its portfolio optimization, capital expenditure reduction, and business diversification efforts, the company is better prepared to deal with a scenario of lower gold prices. With the U.S. economy strengthening, the upside for gold prices is limited in the near term. Thus, Barrick is well-placed to deal with such a scenario.

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Notes:
  1. Gold Price Chart, Kitco [↩]
  2. Gold Demand Trends, World Gold Council [↩] [↩]
  3. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters [↩]
  4. Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal [↩]
  5. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website [↩]
  6. Barrick Completes Partial Divestment Of African Barrick Gold Plc Holding, Barick Gold News Release [↩]
  7. Barrick’s Gold 2013 40-F, SEC [↩] [↩] [↩] [↩] [↩] [↩]
  8. Barrick Partners with Ma’aden to Form Jabal Sayid Joint Venture, Barrick Gold News Release [↩] [↩]
  9. Barrick Gold’s Q3 2014 Earnings Release, Barrick Gold Website [↩] [↩]
  10. Barrick’s Gold 2013 40-F, SEC [↩]