uploads///Leverage

Has Barrick Successfully Allayed Financial Leverage Concerns?

By

Mar. 1 2016, Updated 4:06 p.m. ET

Financial leverage

Along with Barrick Gold (ABX), Newmont Mining (NEM) is one of the most highly-leveraged senior gold miners. Both of these miners have debt reduction as their number one priorities.

Barrick set an ambitious target to reduce its debt by $3 billion in 2015 and completed it through non-core asset sales worth $3.1 billion.

After this reduction, Barrick had net debt of $7.5 billion at the end of December 2015. Barrick’s highly leveraged balance sheet is one of the major investor concerns for the company, but it has started allaying somewhat with the company’s focus on debt reduction.

Article continues below advertisement

As the above graph shows, along with Yamana Gold (AUY), Barrick’s net debt-to-forward EBITDA (earnings before interest, tax, depreciation, and amortization) is among the highest compared its peers, at 2.5x compared to an average of 1.8x. Goldcorp (GG) still has lower financial leverage than its senior gold peers (GDX). Kinross Gold’s (KGC) balance sheet is in good shape.

Further debt reduction

After reducing debt by $3.1 billion in 2015, Barrick’s management is targeting another $2 billion in debt reduction in 2016. It has announced a debt tender of $750 million toward achieving this debt reduction.

The company is aiming for less than $5 billion in debt while keeping $1.5–$2 billion in cash balance over the medium term. To achieve this objective, it could sell more of its non-core assets. However, Barrick has said that it could also be a buyer going forward if it meets its 15% hurdle rate and strategic objectives under a friendly deal.

Ample liquidity

Near-term debt maturities are not an issue for Barrick. It has only $250 million in debt maturing in 2016–2017, while more than 50% of its debt will be due after 2032. Its liquidity is also abundant, as it has $2.5 billion in cash at hand. It has also extended the majority of its undrawn credit facility of $4.1 billion to 2021.

Barrick mentioned free cash flow (or FCF) generation as one of the avenues for reducing its debt going forward. In this context, we’ll take a look at Barrick’s FCF outlook and its drivers.

Advertisement

More From Market Realist