Gold Mining Giant Barrick (ABX) Shrinks Spending To Beat Poor Gold Markets

 @natrudy on September 12 2013 2:54 PM
Super Pit, gold mine in Australia run by Barrick Gold and Newmont Mining
Super Pit, gold mine in Australia run by Barrick Gold and Newmont Mining David Gray/Reuters

Barrick Gold Corp. (TSE:ABX), the world’s largest gold miner, promised investors on Thursday that it would become more lean, agile and profitable, as it deals with a delayed Chilean gold mine and poor earnings in the latest quarter.

“If we get smaller, so be it,” said Barrick CEO Jamie Sokalsky at a Toronto mining conference. “We just want to be more profitable, and make more money… Returns will drive production, not the other way around.”

The company confirmed a gradual closure of its Peruvian Pierina mine, which holds 0.5 million ounces of gold, after a review announced last month. It also sold three Australian mines in late August, following a move in July to shrink its portfolio by selling its Barrick Energy unit. Sokalsky touted these moves as strategic slimming to reassure investors.

“We’re prepared to make tough decisions,” said the CEO. “We’re making them and we’re going to make some more.”

Barrick already cut $2 billion in capital spending in the first half of this year, and it has no plans for new mines, he added.

Despite these promises, analysts cite Barrick’s bloated $15.8 billion of debt as a key burden, outsizing the debt of its rivals and putting it in greater danger if gold prices plunge further in what has been a tumultuous year for the gold market.

Sokalsky noted that debt service costs came to $100/oz, as part of total production costs of about $950/oz. Barrick's total production expenses are significantly less than its peers', who may pay up to $1,200/oz to extract gold.

Barrick is not alone among gold miners struggling against high capital and production costs in an uncertain gold market. The gold mining industry as a whole needs to rein in spending, which has ballooned over the past decade, Citigroup Inc. (NYSE:C) analysts have noted, without much return to shareholders.

Sokalsky added that even if the company closed all but its five largest mines, which produce two-thirds of its output, it could still cover corporate expenses and generate profits while maintaining Barrick’s status as the world’s biggest gold producer.

“Those five mines can absolutely generate a huge amount of operating cash flow and income, and more than offset any admin and other costs, so we’d definitely be profitable,” he told investors.

In its latest quarter, the company suffered a disastrous $5.1 billion loss thanks to regulatory hurdles delaying its Chilean Pascua Lama project.

Sokalsky said that Pascua Lama could open by mid-2016, a delay of about 18 months. He acknowledged that costs would pile up because of the longer timeframe but said he’d update investors with financials at the next quarterly earnings.

Barrick’s spun-off subsidiary, African Barrick Gold PLC (LON:ABG), is also closer to completing an ongoing operational review. African Barrick’s chief operating officer recently quit, just weeks after a new CEO was fired, the Financial Times reported on Wednesday.

Global gold companies have faced impairments equal to about half of their total market capitalization since 2000, wrote Citi analysts in a research note on Monday.

“Economic value destruction is common, and unlikely to change going forward in our opinion,” wrote the analysts. “We maintain our bearish view on the sector.”

Barrick owned 27 mines as of early August, according to Bloomberg.

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