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Barrick Gold in 2015: Strict Capital Allocation to Drive Returns

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Reassessing capex budgets

Barrick Gold (ABX) is reassessing its 2015–2016 capital budget with a view to making capital allocation more strict. 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. As previously mentioned in this series, Barrick Gold has identified ~$200 million in capex reductions.

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Capital intensity

Capital intensity has fallen by ~$30 per ounce. Barrick Gold notes, meanwhile, that these reductions are partially offset by the increase in sustained capital expenditure needed to operate the Lumwana mine. As we learned earlier in this series, Barrick has decided to keep the Lumwana operations going.

The impact of these developments on capex guidance is a reduction of $100 million to between $1.8 billion and $2.1 billion.

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.

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