Barrick Gold Corporation (USA) (NYSE:ABX) reported net earnings of $175 million ($0.15 per share) for the third quarter, and adjusted net earnings of $278 million ($0.24 per share).
Robust cash flow generation and low all-in sustaining costs in the third quarter reflect our focus on productivity, efficiency, cost management, and capital discipline. Through our collaboration with Cisco, we will leverage digital technologies and innovation to unlock even more value, while improving decision-making and performance across the entire organization.
We remain on track to reduce our debt by $2 billion this year. With a stronger balance sheet, we will be better able to withstand gold price volatility, with greater flexibility to invest in our business to grow free cash flow per share over the long term. In support of this objective, we are growing margins at our existing operations through innovation and productivity improvements, and we are advancing a deep pipeline of internal growth projects, many of which are located at or near existing operations and infrastructure. At the same time, we are continuously evaluating external opportunities. The appointment of Mark Hill as the Company’s first-ever Chief Investment Officer will bring added consistency and rigor to all capital allocation decisions. Ultimately, our objective is to grow free cash flow per share by allocating capital to opportunities that align with our strategic focus, and meet our 15 percent hurdle rate at a gold price of $1,200 per ounce. By doing so, we intend to deliver superior long-term value to our owners through metal price cycles.
Third quarter net earnings were $175 million ($0.15 per share), compared to a net loss of $264 million ($0.23 per share) in the prior-year period. Adjusted net earnings for the third quarter were $278 million ($0.24 per share), compared to $131 million($0.11 per share) in the prior-year period. Higher earnings compared to the prior-year period reflect higher gold prices, and a decrease in operating costs, driven by lower fuel and energy prices, favorable foreign exchange movements, as well as the divestment of higher-cost mines. In addition, earnings benefited from lower exploration, evaluation, and project expenses, primarily driven by lower spending at Goldrush and Pascua-Lama, partially offset by the loss of earnings from divested sites, and higher income tax expense.
Significant adjusting items (pre-tax and non-controlling interest effects) in the third quarter of 2016 include:
- $49 million in impairment charges, and $37 million in disposition on sale losses, primarily related to the write-down of our equity investment in Zaldívar based on final purchase price adjustments;
- $34 million in insurance proceeds relating to the 2015 oxygen plant motor failure at Pueblo Viejo;
- $30 million in losses on debt extinguishment; and
- $19 million in unrealized foreign currency translation losses, primarily related to the Argentine peso.
Third quarter revenues were $2.30 billion, compared to $2.32 billion in the prior-year period. Operating cash flow in the third quarter was $951 million, compared to $1.26 billion in the third quarter of 2015. Higher operating cash flow in the prior-year period reflects the accounting treatment of $610 million in proceeds from our gold and silver streaming arrangement with Royal Gold. Excluding the proceeds from that transaction, operating cash flow for the third quarter of 2016 was $306 million higher than the prior-year period, despite lower production due to non-core asset sales.
Free cash flow for the third quarter was $674 million, marking six consecutive quarters of positive free cash flow. In the first nine months of 2016, we have generated approximately $1.13 billion in free cash flow, despite lower production due to non-core asset sales. This demonstrates the impact of our driving focus on capital discipline, improved operational efficiency and productivity, and stronger cost management, underpinned by our Best-in-Class approach.
In connection with a continuous disclosure review by the Ontario Securities Commission, the Company has included additional disclosure with respect to its first and second quarter 2016 results in its third quarter Management Discussion & Analysis (“MD&A”) to provide greater prominence to the Company’s GAAP measures for those periods, including segment by segment GAAP reconciliations, and GAAP cost guidance on a segment by segment basis for those periods. The additional disclosure can be found on pages 63 and 73 of our MD&A.
Restoring a Strong Balance Sheet
Strengthening our balance sheet is a top priority, and we remain on track to achieve our $2 billion debt reduction target for 2016. During the third quarter, we reduced our total debt by $461 million, and have completed more than $1.4 billion in debt repayments year to date, representing over 70 percent of our debt reduction target for the year. We expect to achieve our 2016 debt reduction target using existing cash balances and fourth quarter operating cash flow.
The Company’s liquidity position is strong and continues to improve, underpinned by robust free cash flow generation across the business, and modest near-term debt repayment obligations. In the first nine months of 2016, the Company generated$1.93 billion in operating cash flow, and $1.13 billion in free cash flow.
At the end of the third quarter, Barrick had a consolidated cash balance of approximately $2.6 billion. The Company now has less than $200 million in debt due before 2019, and about $5 billion of our outstanding debt of $8.5 billion does not mature until after 2032. Over the medium term, we aim to reduce our total debt to below $5 billion.
Operating Highlights and Outlook
Our over-arching objective as a business is to grow our free cash flow per share. In support of this objective, our Best-in-Class approach is focused on driving industry-leading margins across three pillars. The first is business improvement, a continuous effort to make existing processes and systems as efficient as possible. The second is step changes, making fundamental changes to existing processes and systems, in ways that push performance beyond current limits. The third is innovation, which involves redesigning and reimagining systems and processes to achieve levels of performance not possible using existing methods and technology. We are now advancing a pipeline of initiatives across each of these pillars, reflected in falling costs, greater productivity, and improved capital discipline with each passing quarter. Our aspiration is to achieve and maintain all-in sustaining costs of $700 per ounce or lower by 2019.
Barrick produced 1.38 million ounces of gold in the third quarter at a cost of sales of $766 per ounce, compared to 1.66 million ounces at a cost of sales of $829 per ounce in the prior-year period. All-in sustaining costs in the third quarter were$704 per ounce, compared to $771 per ounce in the third quarter of 2015.
Compared to the first nine months of 2015, cost of sales applicable to gold declined by seven percent. Over the same period, all-in sustaining costs have fallen by 16 percent.
Please see page 36 of Barrick’s third quarter MD&A for individual operating segment performance details.
We now expect full-year gold production of 5.25-5.55 million ounces, up from our original estimate of 5.00-5.50 million ounces. Cost of sales applicable to gold is anticipated to be in the range of $800-$850 per ounce. We have reduced our all-in sustaining cost guidance for 2016 to $740-$775 per ounce, down from $750-$790 per ounce at the end of the second quarter, and below our original 2016 guidance of $775-$825 per ounce. Please see Appendix 1 of this press release for individual mine site guidance updates.
Capital expenditures for 2016 are now expected to be $1.20-$1.30 billion, down from $1.25-$1.40 billion at the end of the second quarter, and below our original 2016 guidance range of $1.35-$1.65 billion.
Operations at the Veladero mine in Argentina were suspended from September 15 until October 4 after falling ice damaged a pipe carrying process solution in the leach pad area, causing some material to leave the leach pad. This material, primarily crushed ore saturated with process solution, was contained in the area of the mine where the incident occurred, and returned to the leach pad. Extensive water monitoring in the area confirmed the incident did not result in any environmental impacts. The Company immediately completed a series of remedial works required by provincial authorities, including increasing the height of the perimeter berms that surround the leach pad, to prevent such an incident from occurring again.
In addition to these works, and in keeping with our vision for a digital Barrick, we are making Veladero a trial site for digital technology that will enhance our environmental and water monitoring activities, while also providing greater transparency to authorities and communities.
Reflecting the impact of this temporary suspension, along with adverse weather conditions, we now expect 2016 production from Veladero to be in the range of 530,000-580,000 ounces of gold, down from our previous guidance of 580,000-640,000 ounces. Cost of sales applicable to gold at Veladero is now expected to be in the range of $820-$900 per ounce for 2016. All-in sustaining cost guidance has been increased slightly to $800-$870 per ounce, from the previous range of $790-$860 per ounce.
Copper production in the third quarter was 100 million pounds at a cost of sales attributable to copper of $1.47 per pound, and all-in sustaining costs of $2.02 per pound.
We continue to expect copper production for 2016 in the range of 380-430 million pounds, at a cost of sales applicable to copper between $1.35-1.55 per pound. Copper all-in sustaining cost guidance for 2016 has been narrowed to $2.00-$2.20 per pound.
Digital Barrick Update
During the quarter, we announced that we are partnering with Cisco to drive the digital reinvention of our business. Through this collaboration, we will harness digital technology to unlock value across our business, helping us grow our cash flow per share by enhancing productivity and efficiency at our mines, and improving decision-making and performance across our business. Just as importantly, digital technology will allow us to reduce our environmental impact, and be even more transparent with our local partners, including communities, local governments, and NGOs.
Our collaboration with Cisco is strategic: we are working together to define opportunities and-by combining our knowledge, networks, and resources-to develop new technology solutions.
We have already begun working together to develop a flagship digital operation at the Cortez mine in Nevada-embedding digital technology throughout the mine to deliver better, faster, and safer mining. Ultimately, the goal at Cortez is to redefine best-in-class mining.
With the Cortez test case proven, Cisco will support us as we transform our entire business over time-bringing digital technology to all of our mines, as well as to our head office. New digital tools will permit Barrick’s leaders to make decisions with greater speed, precision, and productivity, and will better equip the Company to assess and mitigate risk.
Overall, our approach to digital reinvention is similar to that used in agile software development. Work is phased, a proof-of-concept is demonstrated, and if it succeeds, it receives more funding so it can be swiftly implemented and accelerated. If a project is not delivering benefits within six weeks, we will make adjustments, or stop. This approach minimizes upfront capital and execution risk.
We will apply the same rigor and scrutiny to digital projects as we would for any other capital allocation decision. All significant investments will need to be approved by our Investment Committee.
We have earmarked approximately $100 million for digital projects in 2016 and 2017. This is money we will invest directly in our business. Our Investment Committee has approved the first wave of digital projects at the Cortez mine with a budget of up to $50 million in 2016 and 2017. These include:
- The implementation of a short-interval control system underground. The system, commonly employed in manufacturing, will use sensors to ensure that both people and equipment are performing according to plan, and at the highest level, driving improvements in daily tonnage rates and labor productivity. Any deviations from plans can be immediately identified, addressed, and resolved.
- The implementation of a tele-remote system. Equipment operators will no longer spend significant time traveling between the surface and the operating face-time during which equipment sits idle. Instead, they will operate underground equipment (including drills, road-headers, loaders, and haul trucks) from a comfortable, centralized control room on the surface, using reliable and continuous data feeds to inform their decisions. These changes are expected to improve overall productivity, and decrease operating costs, while reducing the number of people underground.
- The digitization of maintenance management. The mine will implement a tablet-based digital workflow and task-management system that will replace the existing paper-based system. These changes are expected to increase equipment availability, and reduce unplanned maintenance work, leading to lower parts inventory, improved continuity of production, and lower operating costs.
- The automation of the processing plant. The mine will implement an advanced operating control system at the processing plant, building on recent system upgrades to optimize crushing, grinding, and carbon leaching and handling circuits for improved gold recovery.
- The consolidation of data. The mine will connect up to 150 distinct systems and data sources to one data management platform, which will enable better analysis, planning, and decision-making.
In parallel with these projects, we have also begun to explore how to leverage digital technologies to streamline the permitting process, with better transparency.
Planning for the next wave of projects will continue in parallel with the implementation of the current, first wave.
The Pascua-Lama project, located on the border between Chile and Argentina, is one of the world’s most attractive undeveloped gold and silver deposits, with the potential to generate significant free cash flow over a long mine life. During the third quarter, we announced the appointment of George Bee as Senior Vice President for Lama and Frontera District Development. Mr. Bee and his team are now advancing a scoping study on the use of underground mining methods for a Lama starter project on the Argentinean side of the Pascua-Lama project. Such a project could represent the first stage of a phased development plan for Pascua-Lama. Concurrently, the team in Chile remains focused on optimizing the Chilean components of the project, while addressing outstanding legal, regulatory, and permitting matters.
Our Investment Committee will continue to scrutinize the project as it advances, applying a high degree of consistency and rigor-as we do for all capital allocation decisions at the Company-before further review by the Executive Committee and the Board at each stage of advancement. (Original Source)
Shares of Barrick Gold are currently trading at $16.65, down $0.24 or -1.42%. ABX has a 1-year high of $23.47 and a 1-year low of $6.90. The stock’s 50-day moving average is $17.14 and its 200-day moving average is $18.79.
On the ratings front, ABX has been the subject of a number of recent research reports. In a report issued on October 17, BMO analyst Andrew Kaip maintained a Buy rating on ABX, with a price target of $25, which represents a potential upside of 50% from where the stock is currently trading. Separately, on October 7, Jefferies’ Chris LaFemina reiterated a Buy rating on the stock and has a price target of $26.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Andrew Kaip and Chris LaFemina have a yearly average loss of -3.8% and -20.1% respectively. Kaip has a success rate of 42% and is ranked #3414 out of 4197 analysts, while LaFemina has a success rate of 34% and is ranked #4001.
Overall, 5 research analysts have assigned a Hold rating and 5 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $26.00 which is 56% above where the stock opened today.
Barrick Gold Corp. mines and explores for gold, copper and nickel. It operates through its projects in Canada, the United States, the Dominican Republic, Australia, Papua New Guinea, Peru, Chile, Argentina, Zambia, Saudi Arabia and Tanzania. The company’s gold operating units are: Cortez, Goldstrike, Pueblo Viejo, Lagunas Norte, Veladero, North America-other and Australia Pacific.