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From levels of almost $1700/oz to $1200/oz, gold has had an extremely difficult ride this year, and for gold miners, the ride has been even more difficult. Barrick Gold (NYSE:ABX) plunged almost 54%, year-to-date. The story has been the same for other gold producers like Newmont (NYSE:NEM) and Goldcorp (NYSE:GG), with both stocks declining around 50% and 43% respectively. While the price of gold has fallen almost 24% since the beginning of the year, some of Barrick's poor-timed decisions caused its stock price's decline of more than 50%.

After reaching highs in 2011, the fall in gold prices has resulted in massive asset write-downs, as the company won't be able to realize gold prices that it once thought were possible. Last year, Barrick Gold recorded impairment charges of $4.2 billion from its Equinox acquisition, negatively impacting the income statement and posting an annual loss of $665 million. The impairments didn't stop there. During the first nine months of 2013, the company recognized $9.34 billion in total impairment charges on its income statement, leaving the company with a net loss of $7.53 billion. Even though impairment charges are non-cash expenses, they clearly reflect that the company will be generating lower cash flows from the impaired assets in the future.

The company's ambitious Pascua-Lama project in South America has already been written down by $5.16 billion since the beginning of this year. In October, the company decided to suspend developmental work at its Pascua-Lama project, which it previously expected to complete by the second half of 2014. The company had a difficult time dealing with this project due to schedule delays, environmental penalties, increased cost outlays, and on top of all these, declining gold prices. By the end of the third quarter, the company had spent $5.7 billion on the project. The Pascua-Lama mine, earlier referred to by the company as one of the world's lowest cost mine when operational, was expected to help the company reduce the overall cost of production. With gold prices declining and the company's debt level rising, Barrick was forced to temporarily abandon work at Pascua-Lama. With the suspension of work, the company expects a reduction of $1 billion in its capital expenditure, or capex, in 2014. Historically, the company has had a problem generating the ideal amount of cash from capex. Below I have analyzed the company's efficiency in generating cash by calculating its cash flow to capex ratio.

Parameter

2010

2011

2012

9 Months 2013

Cash flow from operations, or CFO

(in $ million)

4127

5315

5439

3212

Capex

(in $ million)

3323

4973

6369

4191

CFO/capex ratio

1.24

1.06

0.85

0.76

The company's capex has been on the rise consistently, and it hasn't generated cash in line with its capex. A consistently declining cash flow to capex ratio suggests that the company didn't handle its capex efficiently. However, with the delay of the Pascua-Lama project, the company will incur less capex. Going forward, I expect the company to post a better cash flow to capex ratio.

Is a turnaround possible?

Gold prices have remained under pressure for a major part of this year, giving no respite to gold producing companies. In such an environment it becomes extremely important for these companies to focus a lot more on efficiency. With Barrick Gold, the cost of producing gold has never been a problem compared with other gold producers. All in sustaining cost, or AISC, is a common metric used by gold producers to report the overall cash cost of producing gold plus the cost of sustaining the production of gold. In the third quarter of 2013, Barrick produced 1.84 million ounces of gold at an AISC of $916/oz. On the other hand, the AISC of Newmont and Goldcorp came in much higher at $993/oz and $992/oz respectively in the third quarter.

In a bid to make its overall portfolio efficient, Barrick is focusing on selling higher-cost assets to reduce the overall AISC. Earlier in October, Barrick Gold completed the $300 million sale of its three gold mines located in Australia to Gold Fields (NYSE:GFI). These mines reported an average AISC of $1,145/oz in the first half of 2013, much higher than the company's average AISC of $919/oz during that period. Moreover, the company is looking to sell its stake in Marigold mine, located in Nevada. The mine, jointly owned by Barrick and Goldcorp with one-third and two-third stakes respectively, is one of the higher cost mines with a reported AISC of $1,476/oz in the third quarter. Moreover, the company revised its 2013 AISC guidance, changing it from 1000/oz-1100/oz to 900/oz-975/oz. I expect the company to meet its AISC guidance comfortably, considering its 2013 nine months average AISC of $918/oz.

The asset sales will not only generate cash for the company, but will also it reduce the overall cost of producing gold, thus resulting in better profit margins in the coming quarters. Further, the company plans to reduce its debt level through the sale of higher-cost assets.

Debt management

Barrick's increased capital spending in Pascua-Lama and acquisition of Equinox made the company highly leveraged, increasing its total debt from $6.7 billion at the end of 2010 to $15.4 billion at the end of the third quarter of 2013. However, the company raised $2.9 billion in net proceeds by making an equity offering of 163.5 million shares at a price of $18.35/share in October 2013. These proceeds will be used to reduce the company's outstanding debt by $2.6 billion. Even though the company's equity offering has led to a share dilution by increasing the number of outstanding shares to 1.16 billion, I expect debt repayments will help the company function better with improved financial flexibility.

Conclusion

With huge asset impairments and the recent equity offering, investors who have held long positions in Barrick's stock have had an extremely difficult time. However, considering the company's plan to optimize its overall portfolio by selling its higher-cost assets, I expect the company to report better results in the future. The company is already operating at a much lower cost compared to its peers. I recommend investors hold on to their positions in Barrick.

Source: Will Barrick Gold Shine Again?