Barrick Gold (NYSE:ABX) shares have fallen off a cliff in the last two years as there has been uncertainty around gold pricing. However, there has been a recovery of sorts this year with Barrick shares already up close to 16%. The company has made a few good moves to keep its business afloat despite losses by divesting certain properties and also restructuring debt.
For example, earlier in 2014, Barrick termed out $3 billion in debt to extend its debt maturity schedule. The $3 billion equity offering, the $2 billion of reductions to budgeted capital and cost, along with the decision to temporarily suspend Pascua-Lama operations, have led to improvements in Barrick's liquidity and near-term cash flow. The company has also sold several non-core assets worth almost $1 billion. However, do moves like these make Barrick a long-term buy?
Recent results paint a bad picture
Going by recent results for the fourth quarter, there aren't many reasons to invest in this company. Barrick reported a net loss of $2.83 billion in the fourth quarter. Adjusted net earnings were $0.41 billion. For the full year, Barrick reported a net loss of $10.37 billion, including after-tax impairment charges of $11.54 billion. Adjusted net earnings were $2.57 billion.
Considering the quagmire that the gold mining industry is in, it would make more sense to see what Barrick has been doing to improve its operations going forward.
Barrick has adopted a conservative approach to gold prices while valuing reserves. The company reduced its gold price assumption by 27% to seek higher returns, reducing its reserve by 13%.
Management's decision of not spending in excess of $500 million over the life of the mine at Bald Mountain by developing six additional open pits that did not generate a suitable risk-adjusted return on invested capital also sounds wise. This could result in the life of mine being shortened by 12 years from 2034 to 2022. However, it maintains the option to develop these pits in the future should the conditions change and gold prices increase.
The disciplined capital allocation framework adopted by Barrick in mid-2012 has been the driving factor behind decisions made by the company, putting it in a much stronger position to deal with the challenging gold price environment. This is why, for 2014, management expects gold production between 6 million and 6.5 million ounces, and much of that lower expected production this year compared to last year is a result of decisions made to prioritize profitable production and maximize near-term free cash flow.
Barrick is expected to spend about $2.5 billion less in 2014 than last year. This decrease relates to lower project capital expenditures, primarily as a result of its decision to temporarily suspend Pascua-Lama, but it also represents lower sustaining and expansion CapEx throughout the company.
The company will be spending $400 million to $500 million in costs associated with care and maintenance activities for Pascua-Lama and Jabal Sayid, as well as for expenses required to ramp down mining in the open pit at Porgera.
Focus on exploration and profitable production
Despite narrowing its exploration focus, Barrick is bullish about the future. Exploration has been a key contributor to the success of the company, and it will continue to do the same in order to unearth valuable areas.
Barrick has acquired 110 million ounces and found 131 million ounces of gold through exploration. Its total 2014 exploration budget of $200 million to $240 million is a drop from last year's expenditure as the company continues to focus on high-priority quality projects.
The decrease in exploration budget relative to two years ago is unlikely to affect its ability to discover the next new economic gold deposit. Barrick has seized exploration opportunities in several regions. In fact, the absolute expenditure on projects and mines in the Americas has increased slightly. More than 50% of the exploration budget has been allocated to North America, of which the majority is meant for Nevada's Goldrush project, which is close to the Cortez mine.
Copper production in 2014 is expected to decrease slightly, about 10% to 470 million to 500 million pounds due to lower anticipated production from Zaldívar. C1 cash costs are expected to be in the range of $1.90 to $2.10 per pound as a result of the impact of lower production on unit costs.
Barrick has strengthened its balance sheet with a successful equity issuance in a tough market. It has cut its costs and suspended or cut lower return investments and sold numerous non-core assets. So, even though Barrick might be going through difficult times, it has set itself up for a rebound along with gold prices. The company has disciplined itself and it could be a good long-term buy as gold pricing improves.
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.