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As the most debt-heavy miner in the industry, Barrick has the most to lose as gold prices decline. It also has the most to gain.

Fernando Morales/The Globe and Mail

The buzzword at Barrick Gold Corp. is governance, as the miner responds to unhappy shareholders by adding new members to its board and revising its pay practices for key executives.

The changes that may make the biggest difference to its survival, however, are occurring at the Toronto-based company's mines. During the past few months, Barrick has cut its head count and deferred capital spending. It has also slashed its dividend as the price of gold has slumped.

As the most debt-heavy miner in the industry, Barrick has the most to lose as gold prices decline. It also has the most to gain as gold prices rise, which may explain why the shares are now near $20, up about 40 per cent from their weakest points earlier this year, as gold has bounced off its recent lows.

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Investors who choose Barrick as a means of playing a gold rebound, however, could be in for a long, painful slog if the metal's price languishes.

"In the current environment, they've really taken it on the chin," says analyst Adam Graf of Cowen and Co. "You have to ask yourself if the stock price has fallen off enough to make it attractive and how vulnerable the stock is if gold were to move lower. I don't think Barrick has [declined] enough to say the strong leverage it has to the upside more than offsets the risk to the downside."

The one thing that is certain is that Barrick shares are a great choice for those with strong views on gold. With nearly $14-billion of borrowings, Barrick has more debt than any other major gold miner. When a company uses a greater proportion of debt, its shares have more room to gain when sales and profits grow.

Of course, the opposite is also true. An analysis by Toronto investors West Face Capital, obtained by The Globe and Mail, suggests Barrick shares have a value of less than $10 at current gold spot prices and have negative value at gold prices below $1,150 (U.S.) per ounce.

Any financial projection, however, depends on the assumptions that go into it. And some analysts see hope for Barrick.

Jorge Beristain, an analyst at Deutsche Bank, cut his ratings on the miners in April as gold prices fell. He expressed some of his deepest pessimism about Barrick, saying that a $1,300-per-ounce gold price could force Barrick to raise $2-billion (Canadian) to $4-billion in a stock sale, a move that would massively dilute the company's shareholders.

Since then, however, Barrick's market capitalization has increased from $14-billion to $20-billion. It has stretched out the schedule for capital expenditures on its massive Pascua Lama project in South America. It has also begun a program of asset sales and cut its annual dividend expense from $800-million to $200-million.

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Just as important, Mr. Beristain believes that gold miners are taking a tougher line on costs. He has cut his estimate of annual cost increases for the entire gold-mining industry from about 7 per cent to 3 per cent.

Now, says Mr. Beristain, Barrick may be able to avoid raising new cash through a stock sale, although "they're not out of the woods, by any stretch. Clearly, it's all hands on deck to right the ship." (He has a "hold" rating and $20 target price.)

One major task is ensuring the ship is the right size. Forecasts that suggest Barrick will turn cash-flow-negative with its current lineup of mines are based on the assumption that all the company's mines will stay open, regardless of efficiency. Instead, the company is ridding itself of its least-profitable properties.

Barrick says it gets roughly 60 per cent of its gold from five core mines in the Americas that produce at an all-in sustaining cost of roughly $700 (U.S.) per ounce. ("All-in sustaining cost" is an accounting yardstick designed to cover not just the cash costs of producing an ounce of gold, but also administrative and exploration expenses, as well as capital expenditures that sustain existing production.)

The miner says it faces "tough decisions" on mines that have all-in sustaining costs above $1,000 an ounce. It's agreed to sell one, has begun to close another, and has operational reviews or changes at five more.

Until the company is finished with its divestitures and reviews, it's difficult to assess its value. However, the estimates of Barrick's current value that are based on future cash flows – a "net present value" approach – are useful in showing that the shares are not as cheap as they might appear based on a simple comparison of share price to earnings.

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Barrick has a forward P/E ratio of about 8.5, which makes it look like a bargain compared to other major producers, all of which have P/E ratios that are comfortably into the double digits, according to Standard & Poor's CapitalIQ.

But back in August, when Barrick shares were below $17 (Canadian) apiece, BMO Nesbitt Burns analyst David Haughton noted that the company was trading at more than five times his estimate of net present value, versus an average of 2.4 times NPV at other senior producers. By that metric, Barrick looks quite expensive.

That's why investors who see opportunities for big gains in Barrick shares should also consider the possibility that they will have to watch the company muddle through its new reality for several years. Faced with a long-term slump in gold prices, Barrick would likely continue shutting mines and selling assets, and perhaps even eliminate its dividend entirely in an attempt to protect its share price.

The good news for shareholders? Barrick is unlikely to disappear, even if it does have to shrink to survive.

"You're not going to see a company the size of Barrick go away overnight because the gold price falls a few hundred bucks an ounce," Mr. Beristain says. "They will restructure, they will ultimately find a way to manage in the new gold environment. It may be as a much smaller company, but Barrick equity doesn't go to zero."

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