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Barrick Hitting The Right Notes

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Barrick Hitting The Right Notes
Barrick's Goldstrike mine in Nevada Barrick's Goldstrike mine in Nevada

Barrick Gold started 2015 as one of the most indebted gold majors in the world, with $13 billion in debt. The company vowed to slash that number by $3 billion before the end of the year -- and they did it.

The road to this goal was paved with reduced management headcounts, cancelling projects that were unprofitable in a lower gold price environment, and selling any asset that did not fit with their downsizing goal of just a few high-yielding core assets.

That hard-won $3 billion reduction is just the beginning, vowed Barrick President Kelvin Dushnisky. He announced a goal of another $2 billion in debt repayments for 2016. Other non-core assets are likely candidates for sale, and investments in technology to bring down the all-in sustaining costs in its mines figure into his plans.

Smaller, But Better

Barrick set 2016 gold production estimates at 5 to 5.5 million ounces. 2015 production was 6.12 million ounces. The reduction in output is a result of selling some higher-cost gold operations. The company's goal is to invest and enhance its low-cost mining operations, to lower the total cost of production. Current plans are to limit production to approximately a half dozen mines in the Western Hemisphere that can operate at a profit at $1000 gold. Those mines have expenses that are 31% less than the rest of Barrick's gold mines. The goal for the lowest all-in cost per ounce meant that those other mines had to be sold.

Taking Their Medicine

Barrick's Turquoise Ridge gold mine in Nevada Barrick's Turquoise Ridge gold mine in Nevada

Part of those sales were four mines in Nevada for $720 million in cash. In another deal, it sold a 50% stake in its Papua New Guinea gold mine to Chinese mining giant Zijin for $298 million in cash, and one of its Australian gold mines for $550 million. Entire levels of management have been done away with in a move to reduce overhead and streamline operations.

Recalculating the company's budget around $1000 gold has meant Barrick has had to make $3 billion in impairments, partly due to writing off two troubled mining projects in Latin America.

Are Things Better For Barrick?

Barrick's hard decisions over the last year to reduce its debt load are nowhere near done. Plans going forward are for debt to be under $5 billion, with a long-term goal of being debt-free. This week, the company announced that it would buy back up to $750 million of its outstanding debt in order to improve its balance sheet.

Barrick's Cortez gold mine in Nevada Barrick's Cortez gold mine in Nevada

The measures already taken have caught the eye of investors. Barrick's stock price is up over 50% so far this year, and higher gold prices have meant the the company actually paid out a dividend. (It was only 2¢, but it's the thought that counts.) The company felt brave enough after last year's cost cutting to host their first investors day in five years. Barrick Chairman John Thorton told attendees that the company would be looking to add to its core assets, at the right price. “We will, over time, prove to you that we are not only discerning sellers. … We will demonstrate that we are also discerning buyers, capable of consistently creating per-share value for our owners,” he said.

$2 billion in expansion plans announced for three gold mines in Nevada and one in Peru show that Barrick is not ignoring its future while wrestling down debt loads. $1 billion is slated for its Goldrush property, which will have an estimated all-in sustaining cost of a very attractive $665/oz. The company plans to sink another shaft at its Turquoise Ridge operations, to the tune of $325 million, and spend $153 million on its Cortez mine.

In Peru, a processing facility at the Lagunas Norte mine are among the enhancements planned in a $640 million overhaul.

Barrick's Lagunas Norte gold mine in Peru Barrick's Lagunas Norte gold mine in Peru

Market analyst Barry Allan notes that Barrick stock has been doing so well, that he no longer sees it as under-valued. "ABX is once again getting it right, and delivering shareholder returns.”  He also approves of the company's turnaround strategy so far, noting  “ABX has made good strides in solving an over-leveraged balance sheet and halting the development of questionable projects of low-return. The attention has shifted to getting the best from its core mines, which operating results have shown to be a good strategy.”

While still carrying a debt load that is larger than many of its competitors, its position is better that it looks. In a February 2016 report, it notes "Barrick has less than $250 million in debt due before 2018, and about $5 billion, or half of our outstanding debt of $10.0 billion, does not mature until after 2032."

Investors apparently believe that Barrick is on the right track. Barrick's stock began 2016 at $7.38 a share. As of March 15, it was up to $14.19, an increase of 140% from its September low of $5.91.

Gold's rally in the first two months of 2016 is giving miners some breathing space. Barrick, for one, has learned its lessons from the three-year downturn, and isn't taking the rally for granted.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product

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