Focus on free cash flow generation
Barrick Gold (ABX) delivered a FCF (free cash flow) of $181 million in 1Q16, making it the fourth consecutive quarter of positive FCF. Barrick Gold’s management has defined value creation for shareholders in terms of FCF per share. During the 1Q16 earnings call, management mentioned that by continuously improving and innovating, it can expand the company’s margins, which will support the objective of growing FCF per share.
What’s driving FCF?
At current high gold prices, many gold miners are generating FCF, but Barrick Gold is targeting a break-even FCF even when gold prices are below $1,000 per ounce. It plans to do this by reducing capital intensity, improving productivity, and delivering on its mine plans. Barrick Gold’s management mentioned that at the start of 2015 it needed a gold price of $1,300 per ounce to achieve a break-even FCF.
Barrick Gold’s strategy is to prioritize cash flow over production. To achieve this goal, the company is trying to reduce overhead, working capital, and capital intensity through disciplined capital allocation.
Barrick Gold’s peers
Other gold miners, including Eldorado Gold (EGO), AngloGold Ashanti (AU), Goldcorp (GG), Yamana Gold (AUY), and Newmont Mining (NEM), are also taking steps to increase their FCFs to weather this volatile gold price environment.
Investors can gain exposure to the gold sector by investing in the VanEck Vectors Gold Miners ETF (GDX), which invests in intermediate and senior gold producers. Goldcorp makes up 7.6% of its holdings. The SPDR Gold Shares ETF (GLD) tracks spot gold prices.
In the next part of this series, we’ll discuss how Barrick Gold plans to improve its balance sheet.