High financial leverage has been one of the biggest concerns that investors have had about Barrick Gold (ABX) in recent years. With rising gold prices since the start of the year, that concern has somewhat subsided. However, Barrick Gold is still trying to reduce its debt to maintain an optimal leverage ratio as it weathers this volatile metal price environment.
Improving its balance sheet
Barrick Gold has reiterated that strengthening its balance sheet is its top priority. The company reduced its debt by $968 million in the first half of 2016. For the first nine months, it reduced debt by $1.4 billion, which is close to 70.0% of its target of $2.0 billion for 2016. The company mentioned that it’s on track to achieve its targeted debt reduction in 2016. It plans to achieve this target through existing cash balances and 4Q operating cash flow.
The company also noted that with a stronger balance sheet, it will be better able to withstand gold price (GLD) volatility and raise free cash flow over the long term.
The company has reduced debt by over $4.5 billion since early 2015, which has helped it save more than $180 million annually on interest expenses. Even after this debt reduction, Barrick Gold remains highly leveraged compared to peers Goldcorp (GG), Kinross Gold (KGC), Yamana Gold (AUY), and Agnico Eagle Mines (AEM). However, that should be less of a concern to investors as its free cash flow (or FCF) is set to rise.
Barrick Gold delivered FCF of $674.0 million in 3Q16 compared to $274.0 million in 2Q16. The third quarter also marked the sixth consecutive quarter of positive FCF. With higher gold prices, all gold miners generate FCF. However, Barrick Gold is targeting a break-even FCF even when gold prices are below $1,000 per ounce. During the 3Q16 earnings call, the company stated that it’s on track to achieve break-even FCF with prices under $1,000 per ounce in the third quarter.
The company is also comfortable as far as short-term liquidity is concerned. It had a cash balance of $2.6 billion and an undrawn credit facility of $4.0 billion at the end of 3Q16. The company now has less than $200 million in debt due before 2019. Its maturities over the next five years are manageable, according to the company.
In the next part of this series, we’ll look at Barrick Gold’s valuation relative to its peers.