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What Caused the Free Cash Flow Bonanza for Barrick Gold in 3Q16?

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Focus on free cash flow generation

Barrick Gold’s (ABX) management has defined value creation for shareholders in terms of FCF (free cash flow) per share. The company intends to maximize FCF by allocating capital to opportunities that offer the highest returns. It defines its strategic focus as meeting a hurdle rate of 15.0% at a gold price of $1,200 per ounce.

Barrick Gold delivered FCF of $674.0 million in 3Q16 compared to $274.0 million in 2Q16. This is more FCF in just one quarter than the company generated in all of 2015. The third quarter also marked the sixth consecutive quarter of positive FCF. It brings FCF for the first nine months to ~$1.1 billion.

It’s worth noting that this FCF improvement is in spite of lower production due to noncore asset sales. Higher gold prices as well as the company’s continued focus on costs helped FCF generation.

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Break-even FCF

At the 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. During the earnings call, the company stated that it’s on track to achieve break-even FCF less than $1,000 per ounce in the third quarter.

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. In terms of dividends, management mentioned that it will continue to evaluate dividends quarterly, but right now the company’s focus is to “drive hard on debt.”

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.

You 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 GDX’s holdings. The SPDR Gold Shares (GLD) tracks spot gold prices.

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