uploads///Debt reduction

Barrick Gold Completed Its Debt Reduction Target for 2015: What’s Next?

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Nov. 18 2015, Published 1:15 p.m. ET

Favorable pricing

The market was expecting lower sales proceeds from the assets sold by Barrick Gold (ABX). The average sales proceeds expected by the market was not more than $500 million–$600 million. The current sales proceeds of $720 million exceeded market expectations, and Barrick Gold’s share price rallied strongly after the sales announcement was made.

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Financial leverage

Investors have been wary of Barrick Gold’s bloated debt levels for a long time. This transaction, as well as those that concluded before this one, demonstrates the company’s intent to become a leaner organization in the face of a volatile gold price environment.

Including these sales, Barrick announced sales totaling $3.2 billion in 2015. This is higher than its debt reduction target of $3 billion for 2015. Assuming all the sale proceeds are applied toward debt reduction, its net debt will be lower by over 25% in 2015 compared to the end of 2014. The market will now await Barrick’s debt reduction target for 2016.

Barrick Gold’s (ABX) net debt to forward EBITDA (earnings before interest, tax, depreciation, and amortization) has improved to decline slightly after the deal. The company’s maturity profile is comfortable in the near term, with just $250 million to be due before 2018.

Barrick Gold’s peers, including Goldcorp (GG), Agnico-Eagle Mines (AEM), and Kinross Gold, are less levered. The iShares Gold Trust ETF (IAU) and the SPDR Gold Trust ETF (GLD) are two major gold ETFs that track the performance of gold prices. Randgold Resources (GOLD) and Kinross Gold Corporation (KGC) form 5% and 4%, respectively, of the Sprott Gold Miners ETF (SGDM).

Loss of production

Barrick Gold expects to lose ~400,000 ounces of gold production from the sale of these assets. This constitutes close to 6.2% of the company’s 2015 expected production. Barrick’s gold output has been in a slow decline after a series of recent asset sales, and some assets such as Lagunas Norte are reaching the end of their mine life. However, Barrick has some organic growth options to offset this decline, which include the study on Deep South at Cortez, a study to extend the mine life of Lagunas Norte, and additional shaft on Turquoise Ridge.

Barrick Gold (ABX) is still highly levered and its production profile is currently shrinking. Growing production, cutting costs, and continuously reducing its financial leverage are several measures that could push Barrick’s share prices up.

In the next part of this series, we’ll see how the acquisition of these assets could lead to a production upside for Kinross Gold.

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