(Kitco News) - Barrick Gold Corp. (NYSE, TSX: ABX) officials are emphasizing that the company is looking to reduce both operating costs and debt in a declining gold-price environment.
They made their remarks in a conference call with analysts and investors Thursday morning after Barrick posted a smaller adjusted net profit for the second quarter, compared to a year ago, and also trimmed the dividend. The world’s largest gold-mining company lowered its guidance for production in 2015 but also chopped its outlook for all-in sustaining costs. The board of directors reduced the quarterly dividend from 5 cents per share to 2 cents per share.
Adjusted second-quarter net earnings were $60 million, or a nickel per share, compared to $159 million, or 14 cents, in the same period a year ago. Lower adjusted net earnings reflect lower gold sales and lower realized gold and copper prices compared to the prior-year period, the company reported.
Barrick had a net loss for the quarter of $9 million, or a penny per share, compared to a net loss of $269 million, or 23 cents, in the prior-year quarter. Significant special items included $22 million in impairment charges primarily related to power assets at Pueblo Viejo in the Dominican Republic, $30 million in unrealized foreign currency translation losses, $17 million in costs tied to closure of the Perth office, and a $15 million positive adjustment reflecting the increase in the discount rate used to calculate the provision for environmental remediation at closed mines.
For the quarter ending June 30, Barrick received an average gold price of $1,190 an ounce, down from $1,289 in the same period a year ago. Since the quarter ended, gold has fallen below $1,100. Lower prices hurt revenues for mining companies as a whole, with their share prices sagging in recent weeks.
Even before the most recent fall in gold prices, company officials undertook planning to “stress test” their business even if gold prices fell to $900 an ounce, said Kelvin Dushnisky, co-president of Barrick.
“This identified a series of actions we can take if prices decline from current levels,” he said.
The company has cut or deferred capital spending, made cost reductions in other areas and is cutting debt, he continued. Guidance for all-in sustaining cost guidance for 2015 has been reduced to between $840 and $880 per ounce from $860 to $895 per ounce previously.
“We don’t expect gold to reach $900 an ounce, but if it does, we know what we need to do,” said James Gowans, co-president of Barrick . “This may involve partial or full suspensions of non-core mines, further head-count reductions and raising cut-off grades for processing higher-grade stockpiles at our operations.”
However, he also pointed out that 50% of Barrick’s core operations have cash costs that are “substantially below” the current price of gold.
“Strengthening our balance sheet is a top priority and we have made excellent progress on our debt-reduction target,” Dushnisky said. “While these steps are generating positive results, we know there is more we can do to ensure we continue to deliver free cash flow in a lower gold-price environment. With that in mind, we are targeting $2 billion in reduced spending across the company by the end of 2016…with a hard focus on our operating costs.
The company has already identified $1.4 billion in potential savings, Barrick said.
The board cut the dividend to “conserve cash and increase our financial flexibility,” Dushnisky said. The dividend will be paid on Sept. 15 to shareholders of record at the close of business on Aug. 31.
Dushnisky said Barrick has made “great progress” on its $3 billion debt-reduction target for 2015. The various actions taken so far represent $2.7 billion, or 90% of the target, officials said. Barrick reported that total debt was reduced by approximately $250 million in first half, plus the company has announced a number of asset sales with the stated goal of net reduction.
So far, transactions include sale of the Cowal mine in Australia mine for $550 million; sale of a 50% interest in Barrick (Niugini) Ltd. for $298 million in cash, establishing a partnership with China's Zijin Mining; and sale of a 50% interest in the Zaldvar copper mine in Chile to Antofagasta Plc. for $1.005 billion. Also, Barrick late Wednesday announced a streaming agreement with a subsidiary of Royal Gold, Inc. for Barrick’s share of gold and silver production from the Pueblo Viejo mine, with Barrick to receive an up-front payment of $610 million.
Barrick suggested additional asset divestments may be in the works, commenting that over the last several months, it has received interest in non-core assets in Nevada and Montana.
“Over the next several weeks, we intend to commence a formal process to sell Bald Mountain, Round Mountain (50% interest), Spring Valley (70% interest), Ruby Hill, Hilltop and Golden Sunlight,” Barrick said in its earnings release. “These assets represent an attractive portfolio of producing and development-stage assets in a politically stable and highly prospective region.”
Capital and other expenditures were reduced by $240 million in the second quarter. Total capital expenditures for 2015 are now expected to be $1.6 billion to $1.9 billion, 20% lower than in 2014. Exploration expenditures are now expected to be $180 million to $220 million, a 17% reduction from original guidance. The mining giant said it is on track to achieve approximately $50 million in general and administrative cost savings in 2015, exceeding the original $30 million target.
Production in the second quarter was 1.45 million ounces of gold at all-in sustaining costs of $895 per ounce. This was in line with company expectations that the second quarter would be the highest-cost one of the year, Dushnisky said.
Full-year gold production is now expected to be between 6.1 million and 6.4 million ounces, down from 6.2 million to 6.6 million previously. Barrick said this reflects the impact of asset sales.
Free cash flow in the second quarter was $26 million, compared to negative free cash flow of $128 million in the prior-year period, Barrick said. Operating cash flow in the second quarter was $525 million.
By Allen Sykora of Kitco News; asykora@kitco.com