Barrick Gold Corp. is moving aggressively to slash costs and deal with a debt hangover, halting construction at its expensive Pascua Lama mine and raising billions in one of Canada’s biggest stock sales.
Faced with weaker gold prices and $14.6-billion (U.S.) in long-term debt, not to mention the wary eyes of credit rating agencies, the world’s biggest gold miner moved on several fronts Thursday.
First, it announced a suspension to construction at its troubled Pascua-Lama gold and silver project that straddles the border between Argentina and Chile.
It then unveiled a $3-billion stock sale, eclipsing those of the big banks at the height of the financial crisis, selling 163.5 million shares at $18.35 each to redeem or buy back debt.
The bold moves are aimed at cutting capital costs – the Pascua-Lama move alone will account for 2014 savings of up to $1-billion – and bringing down a debt load built up after the acquisition of copper producer Equinox Minerals Ltd.
Now leaner and able to boast some of the lowest gold production costs, Barrick has cut jobs, reduced its dividend and recorded almost $14-billion in writedowns, including $5.1-billion for Pascua-Lama. It is in the process of closing, divesting or revamping mines that cost more than $1,100 to produce an ounce of gold.
Pascua-Lama was a critical project, with gold reserves of almost 18 million ounces, that had been expected to begin production in 2016. But the mine has been dogged by delays and regulatory issues. The cost of building it, initially forecast at $3-billion, had jumped to $8.5-billion and was expected to climb further still. It’s not clear when or whether construction will resume.
“Yes, it is disappointing that we have had to make this decision but it is the right one for us at this point,” chief executive officer Jamie Sokalsky told analysts after Barrick, which reports in U.S. dollars, posted a plunge in third-quarter profit.
“... We will maintain our option to resume construction and finish the project when improvements to its current challenges have been attained.”
It is crucial for Barrick to reduce its debt in order to maintain an investment grade credit rating. Because of its debt levels and the uncertainty surrounding Pascua-Lama, Moody’s Investors Service downgraded Barrick’s credit to the second lowest investment grade in April.
Analysts congratulated Barrick on the Pascua-Lama decision. “Reserves don’t disappear and it gives [Barrick] breathing room,” said John Ing, president of Maison Placements Canada.
Still, Barrick shares lost 5 per cent on the New York Stock Exchange in regular trading, and a further 5.7 per cent to $18.28 after hours in the wake of the stock sale announcement. Since last November, Barrick has lost about half its market value.
Moody’s said the decision to temporarily stop building Pascua-Lama did not improve Barrick’s credit rating because the company was still highly leveraged.
“The positive aspect of it is that they save cash in the near term, which is helpful to their credit profile. But in the medium term they have reduced production with that mine being deferred,” Darren Kirk, Moody’s senior credit officer, said before the miner announced the stock sale.
“At the end of the day their metrics are still stretched for the rating and the outlook is negative today,” he said.
Barrick earned $172-million or 17 cents per share in the third quarter, down from $649-million or 65 cents per share last year.
Stripping out an income tax expense from its Pueblo Viejo mine in the Dominican Republic and other one-off items, the company earned 58 cents a share for the quarter. Analysts had expected about 50 cents a share.
Mr. Sokalsky said Barrick will save an additional $500-million a year from eliminating about 1,850 jobs and streamlining operations.
For the quarter, the company produced 1.85 million ounces of gold and spent, on average, $916 to produce one ounce. Barrick said its full year gold production is now expected to be at the low end of its previous forecast of between 7 million and 7.4 million ounces.
The company expects to spend between $900 and $975 to produce an ounce of gold, in line with previous guidance. That cost, also known in gold parlance as the ‘all-in-sustaining-costs,’ is one of the lowest among gold producers.
The price of gold has dropped 23 per cent to $1,322.70 an ounce from this time last year.
With files from reporters Boyd Erman and Marta Lillo
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