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Why Barrick’s Superior Cost Profile Bodes Well for 2017

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Strong cost position

Cost discipline and lower-cost assets are critical for miners (GDXJ) (GDX). They help miners navigate through lower metal price environments while improving their margins and free cash flows in times of higher metal prices.

Barrick Gold (ABX) is very competitive as far as its all-in sustaining costs (or AISC) are concerned. In fact, it is the lowest-cost senior gold producer. Barrick Gold’s costs are lower than those of its nearest peers (RING) like Newmont Mining (NEM), Yamana Gold (AUY), and Kinross Gold (KGC). Barrick achieved AISC of $704 per ounce in 3Q16. This was an impressive fall of 8.7% YoY (year-over-year) and 10.0% over the last quarter.

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Focus on lowering costs

On the back of its strong year-to-date results, Barrick Gold has reduced its cost guidance to $740–$755 per ounce from $750–$790 per ounce. This is the third time the company has improved its cost guidance. In its 2Q16 results, Barrick improved its cost guidance to $750–$790 per ounce from $760–$810 per ounce.

Barrick aspires to achieve AISC below $700 per ounce by 2019. This target is below the 25th percentile of the industry cost curve. The company’s estimates for 2017 and 2018 are $765 per ounce and $750 per ounce, respectively.

Drivers for lower costs

The company expects about 70% of its 2016 production to come from its five core mines in the Americas. These mines are relatively lower cost. The company has been trying to increase the proportion that these mines contribute to overall production. The divestment of other assets helped the company achieve this. The company is expecting the AISC for these five core mines to be between $620–$650 per ounce. The reserve grade of its core mines is also quite high at 1.9 grams per ton, which is almost double that of its peer group (GDX) (GDXJ).

The company has also lowered its capital expenditure requirements significantly in the last few years. The lower capex requirements have helped it achieve a lower break-even price, which can help it survive the volatile gold price outlook for longer.

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