The Struggling Story Of Barrick Gold

| About: Barrick Gold (ABX)

Barrick Gold (NYSE:ABX) reported a fourth quarter net loss of $2.83 billion that was primarily driven by impairment charges of $2.82 billion. However, excluding the after tax impairment charges, adjusted net earnings were $0.41 billion reflecting $0.37 per share. Similarly, for full year 2013, Barrick reported adjusted earnings of $2.57 billion excluding the after tax impairment charges of $11.54 billion.

The company produced nearly 1713 thousands of ounces at an all-in sustaining cost of $899 per ounce for the fourth quarter which makes the full-year production equal to 7166 thousands of ounces at an average all-in sustaining cost of $915 per ounce. Similarly, the company produced 139 million pounds of copper for the fourth quarter which makes full-year 2013 production nearly 539 million pounds at an average all-in sustaining cost of $1.92 per pound. The operating highlights for 2013 and guidance for 2014 can be seen in the chart below.

Over the past couple of years the company has made several poor decisions such as hedging its gold production when prices were low and the terrible acquisition of Equinox minerals in 2011. In addition, the company carries the huge burden of debt which means that its interest payments will increase its effective production. However, the company has taken certain steps in the recent past to address these problems. Let's discuss these steps and see whether or not the company is on the right track.

The fourth-quarter net loss was largely driven by impairment charges. In the near term weakening gold prices and impairments can adversely affect the stock price of the company. However, impairment charges don't provide any long-term economic prospects for the underlying mine operations and their profitability. So any increase in the gold prices will likely increase the estimated fair value of such mines and this will then increase the share price.

It makes sense for gold miners to extract less gold when gold prices are depressed and vice versa. So in anticipation of lower gold prices Barrick also stated that its production guidance would remain low for 2014. Moreover, the higher mining cost led the company to suspend the Pascua Lama mining operations in Argentina. The decision to suspend the project is based on low gold prices and partly due to permitting difficulties on the Chilean side. The change in assumption means that the company is going to focus on the most profitable ounces which I believe is the right thing to do in the current price environment. However in the long term, Pascua Lama, that has nearly 18 million ounces of proven and probable reserves will not remain sidelined for very long and will be restarted with the recovery in gold prices.

Barrick expects its all-in sustaining cost to remain in the range of $920-$980 per ounce during 2014. Although the AISC of Barrick is below the current market price of gold the huge burden of debt hinders the company from operating with a higher operating margin. The company needs to de-lever its balance sheet.

Owing to its debt, Barrick also faces liquidity problems. The company issued $3 billion in stock to pay down its debt. By repaying its debt the company has solved the liquidity problems and it now has $1 billion remaining with maturity within four years. However, the long-term debt still exposes the company to interest rate risk and also worries investors.

I do not believe that investors need to be very concerned about any liquidity crunch for the foreseeable future. However the debt problem will persist for the long term, between six and ten years, if the gold prices remain depressed. Conversely, if the gold prices bounce back and are sustainable things will change for Barrick.

Bottom Line

The fact that cannot be ignored is that Barrick remains one of the lowest cost miners but there is still a lot that needs to be done in order to lower the debt and get the Pascua Lama project going. The year 2013 has not been pleasant for the company as it was hit by huge impairment charges but it has also taken steps to remain competitive.

The steps to de-lever the balance sheet with its $3 billion equity offering, suspension of mine operations to alleviate cash flow, reduction of capital expenditures and selling off of non-core assets are the right actions taken by management to reposition the company in the anticipation of depressed short-term gold prices. It appears that the company is struggling to make up for past mistakes. However, regardless of these steps a lot is dependent upon the recovery of the gold prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.