Barrick Gold Corporation released its third quarter results on October 28 and conducted a conference call with analysts the next day. As expected, the decline in gold prices over the last twelve months negatively impacted the company’s profits. However, Barrick’s ongoing efforts to reduce operating costs and improve the productivity of its operations, aided by favorable currency movements, helped partially offset the impact of weak gold prices on earnings. The company’s adjusted net earnings, which exclude the impact of non-recurring items on earnings, declined by roughly 41% year-over-year to $131 million in Q3 2015. The key takeaway from the earnings conference call was the management’s continuing focus on reducing operating costs and the company’s debt. Such a strategy would allow the company to operate competitively in an environment of weak gold prices.
Decline in Gold Prices
The average realized price for Barrick’s gold sales declined roughly 12% year-over-year to $1,125 per ounce in Q3 2015. Gold prices have declined over the course of the last twelve months mainly due to concerns over an interest rate hike by the Fed. From an investment point of view, precious metals such as gold are generally considered safe haven assets and investments are primarily made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions tend to lower the investment demand for gold. Moreover, since investments in gold do not offer any returns besides capital gains, with an increase in interest rates investors tend to shift towards interest-bearing assets. Fears over an interest rate hike reduced the investment demand for gold and led to a fall in the prices of the metal over the past year, negatively impacting Barrick’s realized prices in Q3.
However, with the Fed keeping interest rates unchanged at its September meeting, gold prices have recovered somewhat, as illustrated by the chart shown below. Going forward, any changes in the Fed’s stance are likely to cause short term fluctuations in gold prices.
Focus on Cost and Debt Reduction
In order to respond to the decline in gold prices over the past couple of years, Barrick Gold has tried to lower its operating costs through a combination of cost reduction, productivity improvements, and the sale of high-cost mining operations. As a result of Barrick’s cost reduction initiatives, the company reported an all-in sustaining costs metric of $793 per ounce in Q3 2015, around 7% lower than in the corresponding period of 2014. The AISC metric captures all the costs required to sustain a company’s ongoing mining operations. Besides the divestment of high-cost mines, an increase in output from the company’s low cost Goldstrike and Cortez mines has also reduced AISC in Q3 2015. Barrick has also lowered the AISC guidance for its gold mining operations for 2015 to $830-870 per ounce, as compared to its previous guidance of $840-880 per ounce.
In addition to reducing the company’s AISC, the sale of non-core assets has also been a part of Barrick Gold’s efforts to reduce its debt. Through a combination of cost reduction and the proceeds of non-core asset sales, a joint venture agreement and a streaming agreement, Barrick has almost secured a $3 billion reduction in its debt burden in 2015. A combination of non-core asset divestments and the company’s cost rationalization efforts have helped lower Barrick’s cost structure, positioning the company to operate competitively even if gold prices fall further. These measures should help Barrick weather short-term fluctuations in gold prices caused by changing expectations of the trajectory of interest rates and economic growth.
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