Barrick Gold's (ABX) decision to replace Aaron Regent with Jamie Sokalsky as CEO earlier this year shook up the mining industry and refocused everyone's attention on returns in the wake of a gold (GLD, DGP) price that was down almost 20% from its highs.
In his first conference call Jamie dedicated himself to refocusing Barrick on returns driving production rather than vice-versa. To this effect, the project portfolio is being refocused to drive returns as cost inflation causes the development costs at Pascua-Lama to skyrocket.
Pascua-Lama is a world class asset, and the problems related to developing this world class asset are equally challenging. The negotiations were very intense, as issues related to the location of the mill and mineral royalties had to be hashed out the deposit crosses two borders.
In the process of negotiating the agreement to exploit this deposit, some sacrifices had to be made. Unfortunately, the Argentine economy was more stable when the agreement was crafted, and they could not have foreseen the inflationary spiral and anti-competitive behavior happening within the country.
Cerro Casale and Donlin Gold are casualties of the new production-before-returns program being shelved until such time that they become economical under the new criteria.
Not all the news surrounding projects is bad, as Peublo Viejo has started production. Barrick's estimated share of production over the first five years will be 625,000-675,000 ounces of gold at total cash costs of $300-$350 per ounce once it is in full operation.
Exploration efforts at Goldrush continue to yield success with a significant increase in resources expected by year's end. The conservative approach by management with respect to the deposit is an indication that Goldrush could become a major discovery.
The potential sale of Barrick's stake in African Barrick Gold (GM:ABGLF) is complicated in nature for a number of reasons. At this year's PDAC conference, Chinese analysts swamped the floor on the second day of the conference, making it difficult to chat with mining executives. The interest in gold was evident throughout the conference, and it carries on to Barrick Africa.
Africa is a continent where the Chinese have built up very close business ties over the past decade, and that extends down into the mining sector, as the Chinese seek to build long-term relationships with the hopes of locking up mineral supplies. In fact it was Barrick who swooped in and snatched away Equinox Minerals from China Minmetals back in April of 2011, so there is a bit of backstory here.
The biggest fear with Barrick is leaning on Goldrush and Chimiwungo for reserve replacement rather than continue working through organic exploration programs. Both are world class assets and Goldrush has the potential to be something special. The Goldrush exploration program has continued to yield significant success. After speaking with one of the geologists at this year's PDAC, I believe this deposit will go down as something special to Barrick. It is hard to quantify without going into too much detail but the close proximity to Cortez allows for the potential of vending it into current operations. This option would save billions in capital outlays, but that is many years down the road. The current drilling program will prove up the earlier drill results while the deposit remains open in all directions.
Barrick is in a very difficult situation. Their size means that they need massive projects to efficiently replace reserves lost to production and maintain production levels.
On the flip side, their size makes them an attractive and liquid stock for many asset managers. When you combine their size and liquidity with exploration programs yielding exceptional results the stock is one set to claw back its losses over the last few years and then some into the future.
The stock appears to have gotten ahead of itself with respect to the latest rally as many managers shift allocations into the gold sector, but Barrick should be bought on the coming pullback.
A refocused Barrick will emerge stronger and more streamlined for the next leg up - if African Barrick is sold and cash flows from Pueblo Viejo begin to filter in.