Barrick Gold (ABX) owns some of the most prospective and productive mines worldwide and because of this the company enjoys low cost production. The long-term growth of the company depends upon its focus on maximizing risk-adjusted returns and free cash flow by delivering gold from a high quality profitable production base. The company is no longer targeting the annual gold production of 8 million ounces in 2016 mainly due to the suspension of the Pascua Lama Project. The long-term growth of the company depends upon its focus on maximizing risk-adjusted returns and free cash flow by delivering ounces from a high quality profitable production base.
Lowest Cost Senior Producer
The company has the one of the lowest AISC (all in sustaining costs) in the industry. The company reported its AISC for the third quarter of 2013 to be $919 per ounce. The company has also estimated that for full year 2013, production of 7.0 to 7.4 million ounces will be produced at an AISC of $900-$975 per ounce. It is of worth mentioning here that almost 60 percent of the gold will be produced at an AISC of $700 per ounce, which will be extracted from 5 primary mines: Cortez, Goldstrike, Lagunas Norte, Veladero, and Pueblo Viejo. Moreover, almost 75 percent of gold will be produced at an AISC of $800 per ounce.
Source: Investor's Presentation
The chart below represents the AISC of Barrick Gold in comparison with the other companies in the industry. Currently Barrick has the lowest AISC in comparison with the given companies. Barrick, the world's leading gold producer, is leading the industry since it is the only miner that has reported a decreasing AISC. Moreover, the company is aggressively putting efforts into reducing its operating costs by an additional $500 million as it is planning to move ahead with job cuts, which will ensure improving efficiency and also streamline production.
AISC of Leading Miners in Relation to Gold Prices
Focusing on Capital Optimization
In addition to the lowest cost of production, the company is determined to seek disciplined capital allocation. There are a number of initiatives taken in this regard by Barrick so let us examine them.
- The suspension of the Pascua Lama Project is generally perceived as a relief to the company, as the project's galloping costs, at times when gold prices declined by 21 percent in the current year, was adversely affecting Barrick's financial position. The restart of the project depends upon the gold prices, future costs and the regulatory and legal outlook. However, till then, the suspension will allow the company to reduce the capital spending by more than $1 billion in 2014 coupled with improving near term cash flows.
- The company continues to focus on optimizing its portfolio of assets as it has completed the divestiture of its Yilgarn South assets in Western Australia. The Yilgarn asset includes the Granny Smith, Lawlers and Darlot mines. In 2012, these mines produced 452,000 ounces of gold with the AISC of $1137 per ounce and in the first half of 2013 the production was 196,000 at an AISC of $1145. The sale price of these assets is estimated to be almost $300 million. The divestiture of these assets will allow Barrick Gold to not only get rid of its costly production but also to maximize its free cash flow.
- In addition to the Yilgarn assets, the company seems to be determined to sell its inefficient assets since this will result in reducing operating costs. Keeping that in mind, Barrick Gold is considering the sale of its Plutonic and Kanowna operations in Australia. Moreover, the company observed that in the near future, it would sell or close 12 out of a total of 27 mines.
Strengthening its Financial Position
Dividend cut will improve free cash flow
Barrick decided to cut off the dividends by $0.15 per share. The decision will ensure additional capital of $600 million every year. Given the anticipated capital budget and the current fluctuation in gold prices, the dividend cuts seem to be appropriate.
Capital Expenditure ex cut will further strengthen position
In addition to the dividend cuts Barrick will reduce almost $600 million due to the suspension of the Pascua Lama Project and an additional $400 million due to the sale of Barrick Energy.
Lower debt will increase the bottom line
While combining the proceeds of Yilgarn assets with capital expenditure and dividend cuts, it is expected that the company will experience a reduction of $2 billion in the head of capital and operating costs. These savings are most likely to be utilized to pay off the company's $3.5 billion debt over the next five years. The lower debt profile will allow Barrick to lower its interest expenses, which will strengthen the bottom line growth of the company.
Currently, Barrick Gold has proven and probable reserves of almost 139.9 million ounces and an enterprise value of approximately $2,955 million. The chart below represents the EV/ proven-probable reserves in comparison to other key companies operating in the industry.
The company seems to be undervalued, as its EV multiple is the lowest among its competitors. The average multiple of the industry is 180.50, using average industry multiple the intrinsic value of the stock is calculated below.
The Canadian gold miner, Barrick Gold, possesses some of the world's most productive and prospective mines. The company is taking the right steps to divest costly assets to improve its free cash flow. Additionally, the company has been operating with one of the lowest AISCs in the industry. Due to its low-cost productions Barrick's position to enhance profitability cannot be matched. Based on the aforementioned arguments, I believe that the company is well positioned to outclass the industry in the years ahead.
In addition, given the EV/proven-probable reserves multiple, the stock is relatively undervalued. The current depressed stock price seems to be an investment opportunity with an upside potential of 45%. Based on the above arguments and valuation, I believe that it is high time to make Barrick a part of your portfolio.