Barrick rolls out ‘scenario planning’ as gold continues to lose lustre for investors
Barrick Gold Corp. has laid out some “scenario planning” that describes what the company plans to do if the price of gold keeps falling.
Gold plunged more than US$100 an ounce in July, dropping below US$1,100 amid expectations the U.S. Federal Reserve will raise interest rates this year. That has put enormous pressure on the gold mining industry, with many mines operating deep in the red.
Barrick is fortunate to have the lowest costs of any senior gold miner. However, the Toronto-based company is saddled with enormous debt, and further weakness in the price would pressure its balance sheet. Debt stood at US$12.4 billion at the end of the second quarter, though it is being reduced through asset sales.
Over the past 18 months, Barrick undertook a study of all its assets to determine what each mine could deliver at various gold price points. Those findings went into its “scenario planning” strategy that was laid out in its second quarter earnings this week.
“We can operate very comfortably with our core assets at a very low gold price level,” co-president Kelvin Dushnisky said in an interview.
At a price of US$1,100 an ounce (close to the current level), Barrick thinks it can remain cash-flow positive by doing the same things everyone in the industry is doing: slashing spending, renegotiating contracts, lowering contractor costs, and improving its supply chain and inventory management.
If gold goes down to US$1,000, Barrick expects to defer stripping activities at its mines and make further reductions to its head count and spending.
If gold plunges to US$900, the industry would be facing a true nuclear winter. Barrick said it could take much more dramatic actions in this scenario. They include partial or full shutdowns of its non-core mines, and focusing on higher-grade ore.
“We don’t expect gold to reach US$900 an ounce. But if it does, we know what we need to do,” copresident Jim Gowans said on a conference call.
Barrick has not laid out any scenario planning below US$900. That kind of price would have been unthinkable a few years ago, when gold was holding steady above US$1,700. But it seems increasingly plausible today as investors continue to lose interest in the sector. Gold was below US$900 as recently as 2009; in 2002, it was below US$300.
Barrick has already taken major action this year to repair its balance sheet and increase its financial flexibility. It has announced a series of asset sales and other measures that reduce debt by US$2.7 billion. On Wednesday, the company slashed its dividend 60 per cent, put more assets up for sale, and said it is targeting US$2 billion of spending reductions by 2016.
Barrick managed to generate US$26 million of free cash flow in the second quarter. But that was at a realized gold price of US$1,190 an ounce, significantly higher than the current one.
Dushnisky noted the company has relatively high capital spending at some of its mines in 2015 and 2016, which affects free cash flow. But that spending is being reduced.
“We’re pleased that we’re generating free cash flow given that the gold price has been US$1,100 or less,” he said.
We don’t expect gold to reach US$900 an ounce. But if it does, we know what we need to do.