Barrick's Dirty Dozen

Sep.20.13 | About: Barrick Gold (ABX)

On September 12 2013 Jamie Sokalsky, CEO of Barrick Gold (NYSE:ABX), gave a presentation at the 2013 Canada Mining Conference. The webcast of this presentation is available here. In this presentation a very strong emphasis was put on explaining the mine portfolio and outlining future plans of optimizing this portfolio. Mr. Sokalsky stated:

"[Barrick has] 5 core long-live mines in the Americas. Those mines this year will generate about 60% of our production at All-In-Sustaining-Costs of only $700 per ounce.

We also have 75% of our 2013 production at All-In-Sustaining Costs of $800 per ounce.

In that 25% that's well above that is what we are working on to either change, reduce or divest."

Mr. Sokalsky also stressed that All-In-Sustaining-Cost, or AISC, guidance has already been lowered this year by $100 per ounce to $900 to $975 making Barrick the lowest cost senior gold producer.

Barrick has already taken steps to optimize the asset portfolio earlier in the year by divesting Barrick Energy in a $400M deal and has agreed to sell the three Australian Yilagarn South mines to Gold Fields (NYSE:GFI) for $300M. We will use the Yilgarn South deal later in this piece as a yard stick for possible further divestments so it's worth taking a moment and reading up on some details here.

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The visualization above is taken from the mentioned presentation and illustrates the points made with regards to the 5 core mines and the 75% low cost mines.

We found that the company has its work cut out in order to achieve these benchmarks. Here are the challenges the company will face in order to achieve the ambitious targets presented by the CEO:

  • The cut-off for "good mines" in the visualisation above is AISC of $1000/ounce. The "good mines" are grouped into 5 core mines, and what we will call 6 "Tier 2" mines. These 11 mines are forecast to produce below $1000/oz AISC. Two of the Tier 2 mines produced at significantly higher cost than this cutoff throughout the first half of 2013: the Turqoise Ridge mine ($1,110/oz) and Ruby Hill ($1,179/oz).
  • Production of the 5 Core mines amounted to 46.6% of total production in H1/2013, already discounting production at Yilgarn South. These 5 Core mines will need to show stellar performance in order to increase their output to 60% of total output. These mines have been producing at $638/oz in H1/2013 in line with the forecast shown above.
  • Using H1/2013 data only 40.7% of production was recorded under $800. This value increases only very slightly to 43.2% when taking into account Q2/2013 operating records. This leaves a wide gap to the 75% forecasted by the CEO in his presentation. Using H1/2013 data again we find that 75% of production was mined at AISC of more than $1,300.
  • AISC for the first half of 2013 were $1,061/oz. Some major cost reductions will be needed to comply with the new guidance of $900/oz to $975/oz for the year.

We will be monitoring production results and watch with interest as Barrick attempts to achieve the targets outlined by its CEO; and report our observations as the year draws on.

The Dirty Dozen

Turning to the 25% of production that we have dubbed the "dirty dozen", the mines with production costs above the cut-off of $1,000/oz. This dirty dozen includes the two mines mentioned above that are forecasted to lower their full-year AISC enough to squeeze into the Tier 2 group of mines. That leaves 10 mines to deal with.

The table below lists these mines and also gives the AISC for the for first half 2013. The table also shows cash flows generated presuming first half production metrics and three different gold price assumptions: firstly, 1,441/oz (the realized sales price for H1/2013); secondly $1,200/oz; and thirdly a downside case of $1,000/oz. We also repeat comments that Mr. Sokalsky gave for each of these mines in his presentation.

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The same cash flow data for all mines in the portfolio is visualized in the diagram below. This diagram supports the 5 Core Mine strategy. Quite obviously the 5 top assets generate the lion's share of Barrick's cash flow. There are also several mines in the middle of the diagram that generate only negligible cash flow.

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At the far right side of this diagram we find a cash sink called Bulyanhulu. This mine by itself almost looses as much money as Cortez makes. The other two mines operated by African Barrick (OTC:ABGLF) (North Mara and Buzwagi) are also found towards the right of this diagram. Not selling the stake in African Barrick to the Chinese suitor last year is really coming back to bite the bottom line in the current price environment.

The Pierina mine has been bleeding cash and will be closed.

The Round Mountain and Marigold mines are operated with JV partners. Marigold [operated by Kinross Gold (NYSE:KGC)] does not look much better than Pierina and should be a candidate for closure as well. Round Mountain [operated by Goldcorp (NYSE:GG)] is in better shape and has generated some free cash flow in the first half of the year. Barrick has stated that mine plans are optimized together with JV partners. We will be interested to see the outcome of these talks in the next quarterly report.

The Porgera mine is another worry. This mine has generated minimal cash flow in H1/2013 and has quite likely lost money since the gold price drop in April. Considering the multitude of issues reported from this mine we wonder how Barrick will deal with this one. "Exploring alternatives" sounds a lot like code for "looking for a buyer". Could there be some more interest from a Chinese party, given the mine is situated in Indonesia?

Bald Mountain is another mine that has been losing money and the Hemlo mine is only marginally profitable. More optimization and mine plan changes have been flagged for these two mines. We are holding our breath.

This leaves the Plutonic mine in Australia as the last one to mention. A sale of this mine is in the cards and the mine is probably the best looking one on this list. The Yilgarn South sale has allegedly attracted more interested parties than just Gold Fields and these parties might still be around for discussions regarding the Plutonic mine. Local miner Northern Star (OTCPK:NSMSF) comes to mind. Applying similar metrics as were achieved for the Yilgarn South sale we would assume a value of around $75M give or take $25M for this mine. If we had the money, your humble scribe would be interested.

In Conclusion

Barrick's portfolio is without doubt impressive. However, achieving 2013 performance as outlined by the CEO in a recent presentation seems almost out of reach. We will be watching and reporting as the year wears on.

The portfolio also has its problem spots, foremost by virtue of the assets in Tanzania controlled by African Barrick. Finding a solution for this cash sink seems like the most pressing issue with regards to portfolio optimization.

Plutonic seems like a good candidate for another divestiture. The remaining members of the dirty dozen will most likely stay with investors with small improvements to be announced in due time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.