Barrick Gold: What Now?
Barrick Gold (ABX) has reported a much anticipated quarter. In this column we review the highlights of the company’s performance, its strategic framework, as well as 2018 projections.
2017 key results
In 2017, Barrick generated operating cash flow of $2.07 billion, and free cash flow of $669 million. Cost of sales applicable to gold of $794 per ounce declined slightly compared to 2016, while all-in sustaining costs rose by approximately three percent to $750 per ounce, reflecting a planned increase in minesite sustaining capital expenditures. Gold cash cost fell by 3.7 percent, driven by a favorable sales mix, and the ongoing impact of initiatives to improve the productivity and efficiency of the company’s operations.
Lower free cash flow compared to 2016 was primarily the result of lower production and higher working capital, in part due to the temporary suspension of operations at the company’s Veladero mine in Argentina, and the concentrate export ban impacting Acacia Mining plc’s operations in Tanzania. Higher capital expenditures in 2017 also reflected planned investments in the company’s organic project pipeline, as the company invests more in the future of the company’s business.
In 2017, the company reduced the company’s total debt by $1.51 billion, or 19 percent, exceeding the company’s target of $1.45 billion. The company maintained the company’s focus on capital discipline, with total capital expenditures of $1.36 billion, near the low end of the company’s guidance range for the year.
The company is advancing a pipeline of high-confidence, organic projects with the potential to contribute more than one million ounces of annual production to Barrick, at costs well below the company’s current portfolio average. At the same time, the company returned more capital to shareholders, with a 50 percent increase in the company’s quarterly dividend, to $0.03 per share. Finally, the company forged a new strategic partnership with Shandong Gold at the Veladero mine, a landmark agreement with the potential to create significant long-term value for the company’s owners, as well as the company’s community and government partners in Argentina and beyond.
Strategic framework
Over the past three years, the company have optimized the company’s portfolio by divesting high-cost, non-core operations. The company used the proceeds of these divestments to reduce the company’s total debt by more than 50 percent, from $13.1 billion at the end of 2014, to $6.4 billion today. The company’s portfolio is now focused on high-margin, long-life gold operations and projects clustered in core districts throughout the Americas, with a materially stronger balance sheet.
The company’s overriding objective remains unchanged. The company is focused on growing free cash flow per share over the long term, which the company will do primarily in three ways. First, the company will drive industry-leading margins through operational excellence and consistent execution. Second, the company will manage the company’s portfolio and allocate capital with discipline and rigor. Third, the company will leverage top talent and the company’s distinctive partnership culture as competitive advantages.
The company’s priorities for 2018 are consistent. The company will maintain the company’s focus on maximizing free cash flow and seek to build a business that can generate positive free cash flow at a gold price of $1,000 per ounce, on a sustainable basis. The company will drive operational excellence through a continuous cycle of optimization, pushing the company’s mines to achieve greater levels of efficiency and productivity, while working to mitigate increasing costs associated with more complex ore types and a shift to more underground mining. This will be aided by investments in digital technology and innovation, which will allow us to identify and accelerate further operational improvements across the company’s portfolio. The company will maintain a sharp focus on capital discipline while further strengthening the balance sheet. The company will continue to optimize and advance the company’s organic project pipeline. And finally, the company will focus on attracting top talent to Barrick and developing the company’s people to achieve their full potential in the Company’s decentralized operating model.
2018 projections
All investment decisions are driven by the company’s primary objective of growing free cash flow over the long term, not ounces. The company’s production profile will adjust up or down according to what best advances this objective. All projects undergo rigorous scrutiny by the company’s Investment Committee at every stage of evaluation and development. Each project is benchmarked against a 15 percent hurdle rate using a long-term gold price of $1,200 per ounce and ranked accordingly.
In 2018, the company expect to produce 4.5-5.0 million ounces of gold, at a cost of sales applicable to gold of $810-$850 per ounce, and all-in sustaining costs4 of $765-$815 per ounce. Higher cost guidance for 2018 primarily reflects lower anticipated gold production from Barrick Nevada, Pueblo Viejo and Veladero, increased processing of higher-cost inventory, and higher costs at Acacia. The company expects first-quarter production of around one million ounces at costs that will be proportionately higher than those anticipated for the remainder of the year, largely due to lower grades at Barrick Nevada and the timing of planned maintenance at Pueblo Viejo.
Total attributable capital expenditures for 2018 are expected to be in the range of $1.40-$1.60 billion. This includes project capital expenditures of $450-$550 million, an increase of roughly $270 million compared to 2017, as the company increase investments in the future of the company’s business. Attributable mine site sustaining capital expenditures are expected to be in the range of $950 million-$1.1 billion, compared to $1.1 billion in 2017, reflecting the company’s ongoing focus on capital efficiency and discipline.
In 2018, the company expect corporate administration costs to be approximately $275 million, an increase of roughly $75 million compared to 2017. This reflects additional investments to optimize the company’s enterprise-wide processes and systems, to accelerate the implementation of digital technologies across the company’s business, and to drive step-change innovations, all of which are designed to reduce operating costs and increase productivity across the business over the long term.
Based on the company’s current asset mix, from 2019 to 2022 the company expect average annual gold production to be between 4.2-4.6 million ounces, at an average cost of sales3 of $850-$980 per ounce, and average all-in sustaining costs of $750-$875 per ounce, representing a stable base case for the company’s business. This includes contributions from feasibility level projects at Goldrush (GDRRF), Cortez Deep South, Turquoise Ridge, and Lagunas Norte—but assumes no contribution from Pascua-Lama, Donlin Gold, Cerro Casale, or Alturas.
The company’s aspiration is to have the most efficient and productive gold mines in the industry, and as such, the company have challenged ourselves to continually improve the company’s cost profile. It is equally important that the company reinvest in the future of the company’s business now, to ensure that the company generate sustainable value for the company’s owners over the long term, at the lowest possible costs.
In support of this, the company is increasing the company’s investments in organic projects and mine exploration drilling, which will strengthen the overall quality of the company’s portfolio. The company also is investing in digital systems and innovation, which the company expect will drive down costs and improve productivity over the long term.
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