2013年8月6日星期二

Barrick Gold setting its house in order. Lessons to be learnt


On the face of things Barrick Gold’s Q2 and H1 report looked pretty disastrous – write downs totalling over $8 billion, dividend cut by 75%, long term gold production targets deemed at risk, head office staff cut 30%.
But, in terms of a company setting its house in order perhaps they should be looked at in a very different light.  New CEO Jamie Sokalsky certainly seems to be taking the bull by the horns and if the stated remedies the company is taking are adhered to and achieved Barrick will retain its position as a highly profitable and efficient miner of gold even at current prices or, heaven forbid, even lower ones.
There have to be lessons learnt here for other gold mining companies trying to recover from the first half’s dire financial results following the decline in the gold price, as well as miners in other sectors where commodity prices have disappointed.  Talk about focussing the mind!
For a more detailed look at the specifics of Barrick’s quarterly and half year figures click on: Barrick announces $8.56B loss, excellent operational quarter
How will the company achieve a recovery?  The idea seems to be to divest itself of, suspend or close down, most or all of its higher cost operations regardless of the impact this will have on production, as well as implementing much tighter cost and capital controls on existing mines and projects. Hence the vulnerability in the long term gold output forecast.  In a statement the company noted that “For the remaining operations with expected 2013 AISC [All In Sustaining Costs] above $1,000 per ounce, we will either change mine plans, suspend, close or divest these assets to improve cash flow.”  There followed a list of specific measures which the company is taking to improve the bottom line covering some of its specific operations.  Around a quarter of Barrick’s gold mines fall into the plus $1,000 AISC bracket, including most of the company’s Australasian and African mines.  Some can be made profitable through better grade controls and by shutting uneconomic sections and reworking the mining plan, but others may be beyond redemption at current gold prices for a major miner with relatively large corporate overheads to be taken into account.
Not mentioned specifically, but perhaps indirectly, in the company’s plans was African Barrick Gold, the company’s big African gold mining arm in which it still holds 74%.  As Mineweb readers will recall, plans were well under way last year to sell off African Barrick to China National Gold Group Corporation, but negotiations fell apart a little over 6 months ago after the Chinese due diligence highlighted more of the African operations’ shortcomings than they were happy to assume – shortcomings which had become very apparent from African Barrick’s own reporting. 
African Barrick’s current three producing mines (a fourth was closed in March) are operating at nearly 50% in excess of the parent company’s $1,000 AISC target which suggests that Barrick is still looking for buyers, but in order to make the operations attractive as a whole it is going to need to continue, and make a success of, the current ongoing production review to bring costs down.  Costs have already fallen quite sharply after the closure of a fourth mine, but yet more will still need to be done to make the operations in any way attractive to a third party buyer.
See: Much better Q2 for African Barrick Gold, but....   for a more detailed picture of African Barrick’s latest results.
Indeed the same applies to virtually all of those Barrick mines which may be on the auctioneer’s block.  To make them attractive to potential buyers at a price Barrick will deem appropriate they are going to have to be seen to at least have the potential for improvement. 
No-one is going to want to pick up heavy lossmakers unless they feel that, perhaps, a smaller, more flexible approach to mine operations might cure the problems and bring them into profit.  On a mine by mine basis, cash cost reporting may actually mean something in this respect, particularly to a company with low corporate overheads.
All these moves will take time to bring to fruition.  Even so it is notable that Barrick’s Q2 costs were already beginning to come down significantly as a result of the initial implementation, a fact noted by the markets which marked Barrick shares up on the quarterly announcement despite the horrendous looking headline figures although it subsequently fell back to make a small loss on the day due to a rising dollar and falling gold price that day.
Barrick’s peers among the world’s top gold miners will be undertaking similar measures, although they may not have detailed what they are planning quite so precisely, and perhaps are reluctant to take some of the drastic medicine Barrick is proposing. 
Certainly virtually all are writing down values of existing and future operations in their books, reviewing and curtailing capital investment programmes, cutting exploration and there is a renewed emphasis on bringing unit costs down too.  To an extent this can partly be achieved by mining higher grades, which most will be doing where they have this option, although this also means that overall production may not actually fall significantly despite closures and cutbacks in forward production plans..
Barrick does have a particular problem overhanging it though – Pascua Lama.  The latest cost estimate to bring the mine on stream is somewhere around $8.5 billion of which perhaps 60% has already been spent, but further delays and deferments and adjustments to the mine plan on both sides of the Chile/Argentina border, which the project straddles, will undoubtedly add to capital costs here. 
See: Top 10 gold miners face 2013 earnings nightmare
Indeed the latest deferral of start up there is part of the reason Barrick says it may now well not meet its original target of producing 8 million ounces of gold a year by 2016 – although this year’s guidance of 7-7.4 million ounces is being held and cost guidance is being reduced from its earlier $1,000 to $1,100 per ounce to the new level of $900 to $975 per ounce – a pretty rapid fall, although, again, some of this will probably have been achieved by running higher grades through the various mine plants and closing down less payable sections at its poorer performing mines.
Barrick does have a long term debt overhang and, as noted above, Pascua Lama remains a drag on finances, but too much has probably been spent there to consider shutting it down at this stage – although some have questioned whether the mine will ever come on stream given some of the environmental opposition on both sides of the border.  It’s probably a problem Sokalsky would rather not have inherited – but if it does eventually come on stream it should meet Barrick’s criteria on the cost front.
Of course if Barrick is successful in bringing costs down in its operational reviews of its poorly performing mines, and implementation of the new measures it comes up with, then perhaps it won’t actually need to sell them off.  However it is also possible it may be trying to concentrate operations geographically into the Americas and would sell off its African and Australasian operations regardless.
This kind of dilemma will be facing mining companies of all kinds – not just the gold miners.  There has been a huge spate of CEO changes at major companies given the big fall offs in profits, and corresponding write downs of assets due to what is now seen in hindsight as poor decision making when prices were high and the miners could seemingly do no wrong.
iPad Version: Picture - Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo: REUTERS/Yuriko Nakao

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