Barrick Gold (ABX) is the world’s largest gold mining company. Despite a tremendous drop in the past years, from its all-time high around $50/share in 2011 to $8/share, it remains the biggest player in its industry sporting a $9 billion market cap.
Gold has had a rough run of it lately, falling from its all-time peak of $1900/oz down to $1100/oz today. Barrick has dropped with the tide, its high debt load being a key problem for the company’s outlook. The company’s debt is a real concern, and until recently, I felt shares were not yet a bargain.
All that changed, however, in July, as Barrick shares plunged from $10 to $7 in the space of just three weeks.
Despite the latest plunge in the share price, the company’s core business seems to be stabilizing. The company produced 1.4 million ounces of gold in Q2, and is on pace to produce about 5.5 million ounces for the year. It is producing at $895/oz all-in cash cost, leaving significant space between the cost of production and the current $1100/oz gold price. And that cash cost was down smartly from the $927 it cost the company to mine an ounce of gold in Q1.
Barrick was profitable in Q1 and lost just one penny per share in Q2 of this year; its operations are going fairly well despite the low current gold price. And the company managed to put up $525 million in operating cash flow in Q2 – a solid jump from the $316 million it managed in Q1. The company ended the quarter with $2.1 billion in cash on hand, plenty to weather any near-term storms.
Furthermore, the company is continuing to execute on its long-term turnaround strategy that will ensure the company’s survival through the current doldrums.
This strategy is focused on several points, all of which will shore up the balance sheet. The company is selling off non-core assets, it reduced the dividend, it will be cutting the long-term debt load by $3 billion, and it is reducing expenses by a hefty $2 billion target for 2016.
The dividend cut was disappointing for long-term shareholders but for new owners, it’s a clear positive. The dividend going forward will be 2 cents per quarter/8 cents per year. This amounts to a 1.2% yield, and is reasonable given the company’s current headwinds. While a dividend is nice, the real upside here comes when the gold cycle turns upward and Barrick shares double off the bottom.
Barrick is selling off assets to raise cash. The cash is being used to reduce the debt load. Already, the company has paid off $250 million in debt during the first half of 2015. And this rate promises to increase, since the company just finalized a deal that will bring them a more than $600 million upfront payment for a royalty stream on their Dominican Republic-located Pueblo Viejo mine.
Barrick gets $610 million in cash now, plus a portion of the spot price for the gold and silver produced at Pueblo Viejo. In all, the deal gives Royal Gold (RGLD), the buyer, 7.5% of the gold and 75% of the silver from the mine for the first several years of production at a sharply discounted price, and then 3.75% and 37.5% of the silver from the mine thereafter.
While this deal may benefit Royal Gold in the long run, particularly if the prices of gold and silver rise substantially, it gives Barrick a large sum of capital now which it can use to shore up its liquidity and pay off a good chunk of debt.
This royalty stream comes on top of the company’s recent move to sell 50% of its Zaldivar Copper mine in Chile for $1 billion in cash. With the price of copper plunging (it has a much uglier chart than gold), this seems like another sound move.
While cutting the dividend, selling assets and reducing headcount seem like discouraging moves, it all makes sense with a long-term perspective. As the world’s largest gold miner, Barrick is taking the painful but necessary steps to ensure its survival.
When the cycle turns – rest assured, it will – Barrick will still be the world’s most important, turning out 6 million ounces a year at less than $1,000 per ounce. Should gold turn back up to say, $1,500/oz, Barrick would be positioned most favorably to capitalize. The asset sales and dividend cut may seem ugly in the present, but in the long run, Barrick is making exactly the right moves. Buy the shares now, when the gold sector turns upward, you’ll have a big winner on your hands.