Wednesday, April 27, 2016

Barrick Gold - New Business Model At Work

Yesterday Barrick Gold released its 1Q 2016 report. Barrick is one of the world's biggest miners so its results are closely tracked by the precious metals analysts. 
In this post I want to discuss a few issues, that, in my opinion, are crucial to understand this company.

First of all - production. 

In 1Q 2016 Barrick produced 1,280 thousand ounces of gold, 7.9% less than in 1Q 2015. Some people could comment that the company is shrinking but it is not the case. The table below shows Barrick's gold production per asset class:

As the table shows, the company's core mines (Cortez, Goldstrike, Pueblo Viejo, Lagunas Norte and Veladero) produced more gold in 1Q 2016 than in 1Q 2015 (900 thousand vs. 802 thousand ounces). 

Then, non-core mines (Turquoise Ridge, Porgera, Kalgoolrie, Acacia, Hemlo and Golden Sunlight) delivered, more or less, the same amount of gold. 

Lastly, divested / closed mines delivered much lower amount of gold but these assets, as their class name suggests, are out of consideration.

So I would say that in 1Q 2016 Barrick delivered more gold than a year ago. 

Did you know? Although Barrick is a very large miner, its production is founded on only three mines: 

In 1Q 2016 these three flagship mines, Cortez, Goldstrike and Pueblo Viejo, accounted for 74% of total attributable production, delivered by the company's core assets. 

Production costs

Since 2013 the company management has been able to decrease production costs from $1,037 to $972 per ounce of gold in 1Q 2016. The chart below shows production costs from a historical perspective. It is easy to spot that since 2014 the company's production costs have levelled off at around $965 per ounce of gold: 

Note: accounting costs are defined as mine operating costs + exploration and evaluation costs + corporate administration + project development expense + other costs)

Cash margin

Since 2014, despite a bear market in gold, Barrick was able to deliver stable cash margins. As the chart below shows, the company is generating around $300 - $330 in cash on each ounce of gold sold:

What is more, keeping in mind that in 1Q 2016 Barrick was producing gold at cash cost of $873 per ounce, it means that the price of gold would have to go down by around 30%, compared to today's price of $1,250 per ounce, to make Barrick cash flow negative. Simply put, Barrick is a relatively safe company.


This safety is also supported by the fact that since the end of 2012 Barrick has reduced its debt level from $13.9 billion to $9.1 billion at the end of 1Q 2016. 
According to the company, at the end of this year the debt level should be reduced to just $8.0 billion (slide 10 of the company's presentation). 

Financial and operating results

The table below shows basic financial and operating measures:

There are two issues I would like to comment:

  • despite the fact that in 1Q 2016 the company was selling its gold at lower prices than in 1Q 2015, both margins (gross margin and cash margin) were higher than in the previous year
  • in 1Q 2016 Barrick delivered free cash flow of $181 million (in 1Q 2015 the company burnt cash)

What next?

This year Barrick plans to deliver 5.0 - 5.5 million ounces of gold. In 2017 it should deliver a comparable amount of gold but in 2018 production is supposed to go down to just 4.85 million ounces. 

Well, comparing two charts (Barrick accounting costs and the forecast below) it looks like the company changed its business model from:

high production / high costs profile


lower production / lower costs and lower debt profile

In my opinion, it is a much safer model.

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