Barrick looks to cut high-cost mines

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After its second major writedown in just six months, Barrick Gold Corp. is trying to wooing back shaken investors by focusing on assets closer to home.

The world's largest gold miner announced a hefty $8.7-billion (U.S.) after-tax impairment charge, leaving the company with a second-quarter loss of $8.6-billion.

Barrick also slashed its dividend by 75 per cent as part of its second quarter earnings. In response to the losses, the Toronto-based company plans to shed, suspend or shut high-cost mines and continue to cut costs.

Chief executive officer Jamie Sokalsky said he is considering changes to his lineup of high-cost mines, most of which are in Africa and Australia. On a conference call Thursday, he said is already "well-advanced in a process to sell certain Australian assets."

The miner will also continue to slash expenses where possible, having already cut or deferred $4-billion in capital spending over the past year, half of which came in the first six months of 2013.

Barrick announced it will now also defer as much as $1.8-billion of capital spending at its Pascua-Lama project in South America, a mountaintop mine in the Andes that straddles Chile and Argentina.

Regaining investors' trust in any gold plays will not be easy, however.

Mining companies have announced massive writedowns as growth in the United States has diverted gold investors to stocks and other instruments driven by a stronger U.S. economy.

Early on, the writedowns largely stemmed from troubled acquisitions completed two or three years ago. Kinross acquired Red Back Mining for $7.1-billion in 2010 and Barrick bought Equinox Minerals Ltd. for $7.3-billion in 2011. The latest round of writeoffs, however, are largely attributable to a falling gold price.

Bullion is now worth $1,311 per ounce, down from its high of $1,900. At this level, miners must to adjust their cash flow projections and write off profits they expected to cash in over the next few years.

Bracing for another slump, Barrick said it is re-evaluating all of its assets by assuming that gold drops to $1,100 per ounce. At this price, some of its Australian and African assets will not be profitable, such as Porgera, its major Australian project, which posted an all-in sustaining cost of $1,306 per ounce in the second quarter. (All-in sustaining costs include labour, administrative fees and exploration expenses, among others.)

Barrick's share of African Barrick Gold assets, which the company spun off in 2010, also weighs on profitability with all-in sustaining costs of $1,550 to $1,600 per ounce.

Mines with all-in costs above $1,000 an ounce contribute about 25 per cent of Barrick's expected 2013 gold production. Mr. Sokalsky said he is "prepared to make the tough decisions. Our goal is to significantly reduce the percentage of mines in our portfolio that are above $1,000 per ounce and we're working on the plans to do that."

Barrick's North American assets produced gold at all-in sustaining cost of $797 per ounce in the second quarter, while South America's production came with all-in costs of $821 per ounce – some of the lowest figures in the industry.

The main uncertainty for Barrick in South America is its Pascua-Lama project, on which the company has already spent $5.4-billion. Acknowledging that many investors have questioned whether Barrick should forge ahead with the project, Mr. Sokalsky said it certainly will continue development regardless of the changing economics of gold production and permitting problems that have delayed the mine.

"The economics are not as robust as we would need to 'green light' new production," Mr. Sokalsky said, but "the decision to stop or suspend is much different from the decision to start construction."

While Barrick's long list of writedowns are mostly non-cash charges (meaning they are accounting losses rather than cash out of its coffers), they demonstrate that it no longer expects the same future cash flows from its major projects. That reality weighs on Barrick's stock because it has more than $14-billion of long-term debt outstanding.

Analyst Greg Barnes at TD Securities said in a research note that Barrick's core operations beat earnings expectations and adding that "despite all of the Pascua Lama issues, [its] underlying operations are performing well."

Stripping out the writedowns announced Thursday, Barrick made $663-million, or 66 cents per share, down from $821-million, or 82 cents per share in the same period last year.