Restoring a strong balance sheet
During Bank of America-Merrill Lynch’s 2015 Global Metals, Mining, and Steel Conference held in Barcelona on May 12, Barrick Gold’s (ABX) co-president, Kelvin Dushnisky, reiterated the company’s stance on restoring a strong balance sheet by reducing debt.
The company also touched upon its disciplined approach to allocating capital. Barrick is reassessing its 2015-2016 capital budget with a new focus on making capital allocation stricter. The company says it will review individual projects against a hurdle rate of 15%.
Barrick expects the ROIC (return on invested capital) on its overall portfolio to be 10% to 15% over the metal price cycle. The company’s compensation plan is also weighed by 20% toward meeting annual 10% to 15% ROIC targets.
The company will defer, close, or sell the projects not meeting this criteria. Existing operations, including sustained capital expenditures, will also have to compete for capital. Many companies, including Newmont Mining (NEM) and Goldcorp (GG), have also acted on disciplined capital allocation policies to increase returns.
NEM, GG, and ABX form 6%, 7.3%, and 7%, respectively, of the VanEck Vectors Gold Miners ETF (GDX). The SPDR Gold Trust (GLD) is the world’s largest physical-gold-backed ETF tracking the price of spot gold.
Equity issuance is a distant fourth option
In response to a question regarding equity issuance, Kelvin Dushnisky commented that issuing equity would be a distant fourth option. We’ve already discussed Barrick’s three-pronged approach to debt reduction in one of our previous articles in this series.
Non-core asset sales
Barrick maintained that Acacia Mining remains a non-core asset. However, management commented that it is turning around very well. Management also explained the rationale behind selling Cowal and Porgera first. These assets went through value realization studies and also fell in the non-core area of the Asia Pacific region.
By selling these assets, Barrick will just have the Kalgoorlie mine left in this region, which will help reduce general and administrative expenses associated with this region. Newmont Mining (NEM), Barrick’s joint venture partner, operates the Kalgoorlie mine.