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TABLE OF CONTENTS Feb 24 - Mar 2, 2014 Volume 100 Number 2 - 0 comments

Barrick evolves into a 'leaner, more agile' operator

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VANCOUVER — The past two years have served as a stark reminder of the cyclical nature of the mining business, and senior producer Barrick Gold (TSX: ABX; NYSE: ABX) spent much of 2013 transforming its business to better cope with the ups and downs of the gold sector. On Feb. 13 the company unveiled its full-year operating results and updating investors on its sharper focus on disciplined capital programs and returns on investment.

Jamie Sokalsky is well into his second year as Barrick’s president and CEO, and during a conference call to discuss the company’s results he labelled the past year as a period of “recalibration.”

The company’s most notable adjustments include a 26% reserve decrease — to 104 million proven and probable oz. gold — as price cut-offs were pulled back by US$400 to US$1,100 per oz. Over the past six months, Barrick also announced agreements to divest six “non-core mines” and other assets for a total consideration of nearly US$1 billion.

“Almost two years ago — well before the gold price has declined — we led the way in changing our business quite dramatically to focus on risk-adjusted returns and pre-tax flow under our disciplined capital allocation framework.” Sokalsky commented. “Returns driving production rather than production driving returns has been the basis for every decision we’ve made since. As a result, I believe we’re transforming into a leaner, more agile organization.”

Barrick’s fourth quarter was defined by significant writedowns, however, as it recorded US$2.8 billion in impairment charges during the period. The biggest culprit was the company’s Pascua-Lama gold–silver development along the Chilean–Argentine border, where Barrick opted to indefinitely suspend development in late October. Pascua-Lama resulted in a US$900-million impairment, as the company wrote down its capital investments since the end of June and reduced the project’s carrying value by US$300 million.

The fourth-quarter results bring Barrick’s annual after-tax impairment charges to US$11.5 billion, which resulted in a net loss of US$10.4 billion, or $10.14 per share for the year. But the worst may be over for the company, as its core mines demonstrate strong operations and industry-low cash costs. Adjusted net earnings were US$2.6 billion, or $2.51 per share for 2013, while operating cash flow came in at US$4.2 billion.

Barrick cranked out 7.2 million oz. gold in 2013, with its five flagship operations — Cortez, Goldstrike, Lagunas Norte, Veladero and Pueblo Viejo — accounting for 55% of total output, or 4 million oz. gold at all-in sustaining costs of US$668 per oz. Sokalsky noted that Barrick reduced its global cost guidance twice during the year. The company originally estimated all-in sustaining costs of US$1,100 per oz. in 2013, but ended up at US$915 per oz.

“We’ve made significant progress in optimizing our portfolio this year. Ongoing portfolio management is fundamental to our business model, and our objective is to retain only those assets which can generate attractive returns and free cash flow over the long-term,” Sokalsky said, noting that Barrick will have  cut its operating mines from 27 to 19 by mid-year.

“It’s a significant reduction in our portfolio. But this isn’t just about divesting non-core assets to get cash. It’s about making sure we’re focused on the right assets, the ones that can best deliver that long-term value,” he added.

The end result is that Barrick’s growth has been put on hold. The company had previously forecast a production jump to 9 million oz. by 2016, but now expects gold output in 2014 to decline as it focuses on higher-grade ounces and lower costs. Barrick estimates it will produce between 6 million and 6.5 million oz. this year at all-in sustaining costs ranging from US$920 to US$980 per oz.

Sokalsky cited the work his team has done in strengthening Barrick’s balance sheet and providing more financial flexibility. Total capital expenditures are expected to drop by 50% in 2014 to US$2.5 billion. The company is targeting another US$500 million in annual cost savings from its new operating model, reduced procurement costs and other initiatives.

Barrick reported cash and equivalents of US$2.4 billion to end the year, and raised US$3 billion in a bought-equity deal during the fourth quarter to repay debt, which will reduce maturities over the next four years to US$1 billion.

The company has traded within a 52-week window of $14.22 and $33.38, and closed up $1.27 after its annual report en route to a $22.08-per-share close at press time. Barrick has 1.2 billion shares outstanding for a $26-billion market capitalization.

“I really believe that we have the best assets in the gold industry, which form a solid production platform of long-life and low-cost assets, as well as a portfolio of potential development opportunities,” Sokalsky said. “Some of the decisions we have had to make were tough, and they’ve resulted in fewer ounces. We cut costs and suspended, differed or cut lower-return investments, and we sold numerous non-core assets. I think we’ve come a long way, but there’s even more value to pursue.”

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