Barrick Gold: Possible Upside Catalysts

Aug.11.14 | About: Barrick Gold (ABX)


Barrick has been an underperformer this year, but the company is ready to take steps that will enhance shareholder value.

Barrick's cost performance remains solid and provides the necessary flexibility for the company.

Recent Ma'aden deal could be a precursor of a much bigger move.

Barrick Gold (NYSE: ABX) has been out of investors' favor for several years now. The company was too much focused on production growth, accumulated big debt and ran into trouble with its gigantic Pascua-Lama project. However, things have recently changed. Barrick optimized its portfolio, pushed costs down and looks ready to take next steps.

Cost performance remains robust

Barrick's second quarter all-in sustaining costs (AISC) were $865 per ounce, higher than $833 per ounce in the first quarter but well below the initial guidance of $920 - $980 per ounce. As a result, the company revised its 2014 guidance to $900 - $940 per ounce. This improvement is due to company's cost cutting measures as well as optimized portfolio. Barrick's five key mines - Pueblo Viejo in Dominican Republic, Cortez and Goldstrike in U.S, Veladero in Argentina and Lagunas Norte in Peru - are expected to deliver 60% of company's total 2014 production at AISC between $750 and $800 per ounce. With such a strong core, Barrick remains well positioned for strong cost performance going forward.

Ma'aden deal hints at possible Pascua-Lama solution

Back in July, Barrick Gold announced a deal to form a joint venture with Saudi Arabian Mining Company (Ma'aden) to operate the Jabal Sayid Copper mine. Barrick will get $210 million of cash for its 50% interest in this project, but more importantly, the project will move forward. The mine is expected to start production in late 2014 and produce 100 - 130 million pounds of copper per year in the first five years of operation. Current copper production guidance is 410 - 440 million pounds, so copper from Jabal Sayid won't bring dramatic changes to Barrick's copper presence. However, something is certainly better than nothing, so the Ma'aden deal is positive for Barrick.

What's more interesting is Barrick's readiness to choose a joint venture for a problematic project. This is what we will likely see with Barrick's troubled Pascua-Lama. The project has been put on hold due to uncertain gold price environment, environmental problems and opposition from local communities. In the second quarter, Barrick managed to sign a Memorandum of Understanding with local communities. While this is a positive fact, it's only a small step forward for the stalled project.

However, Pascua-Lama is huge and holds 15 million ounces of gold reserves, as well as 675 million of silver. What's more, Barrick has already spend billions on Pascua-Lama and will certainly have to proceed with the project. While Barrick states that it could try different options to proceed with Pascua-Lama including royalty and streaming deals, I believe that a joint venture is the most viable option. Selling a part of Pascua-Lama will be a huge step forward, as it will help Barrick lower its debt from the $13 billion level.

The recent change in Barrick's management means that John Thornton, who will lead the company after the current CEO Jamie Sokalsky steps down on September 15, will have a carte blanche. In this light, I expect to hear more from Barrick on Pascua-Lama until the end of this year.

Possible merger with Newmont Mining: Barrick has the power to dictate terms

Newmont Mining (NYSE: NEM) has recently stated that it was open to merger talks with Barrick. The company did not sound that friendly since April, when it decided to terminate ongoing merger talks. Things have definitively changed since then. Barrick got new leadership while Newmont Mining got more problems. The decision to file for international arbitration over copper export restrictions in Indonesia was a wrong move, and Newmont Mining's position in the country has been compromised.

While Freeport-McMoRan (NYSE: FCX) was able to resume exports from the country following a lengthy negotiation process, Newmont Mining has to keep its facilities shut. What's more, it's likely that Newmont Mining will be forced to the negotiation table and could get worse terms than Freeport-McMoRan. In addition, Newmont Mining's second-quarter AISC were $1063 per ounce, significantly higher than Barrick's. This puts Newmont Mining in a difficult position if it wants a merger on its own terms. Bluntly said, it would be Barrick who chooses the merger structure should it happen. So, if the merger happens, Barrick is likely to get a better deal for its shareholders.

Bottom line

All in all, I view three catalysts that could move Barrick's shares higher. First, Barrick's cost performance remains top-notch. As the company was careful with capital spending recently, it will translate into free cash flow that could be used to lower the debt burden. Second, Barrick is likely to find a partner for developing Pascua-Lama. I view the recent deal with Ma'aden as a precursor for a bigger move, which signals that the company is ready to take a flexible approach with troubled projects. Third, the possible merger with Newmont Mining would come on Barrick's terms, as Newmont Mining is currently not in a position to dictate its own rules.

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