In Barrick Gold Corp.'s long and expensive road to stock market redemption, investors are giving management credit for taking their lumps in the name of a more prudent approach to their business – even if the price tag for that prudence is running in the billions. But while it's abundantly clear that the world's largest gold miner is now focused more on getting better than getting bigger, the company's own projections for 2014 suggest that all the pain to date isn't yet translating into lower costs.
In its year-end financial report Thursday, Barrick lowered its production target for 2014, and reported $2.82-billion (U.S.) in impairment writedowns, resulting in a fourth-quarter loss of $2.83-billion. It slashed its estimate of proven-and-probable gold reserves – a key to assessing the long-term value of the company's assets – by a massive 26 per cent.
And how did investors greet all these bleak numbers? By bidding the company's stock up more than 6 per cent.
Investors are clearly encouraged by the coldly conservative approach Barrick management has embraced in assessing the economic viability of its mining assets, in light of the slumping gold price of the past year. The company slashed its price assumption to $1,100 (U.S.) an ounce, from $1,500 a year ago. That's at the root of the production and reserve cuts as well as much of the writedowns.
Barrick is hardly alone in this. Goldcorp Inc. on Thursday slashed its reserves by 15 per cent; on Wednesday, Kinross Gold Corp. cut its reserves by 14 per cent. But so far, Barrick has adopted by far the most conservative price assumption among major gold producers. Kinross is using $1,200 an ounce, and Goldcorp $1,300. (Gold traded at $1,300 an ounce Thursday; forecasters are looking for an average price in the $1,200 range over the next three years.)
This ultra-conservative approach is certainly a refreshing change from a company that in the past has pursued growth above all else – too often overpaying for assets in the quest to secure reserves. Now, Barrick is bullet-proofing itself against further downside in the gold price, sacrificing growth to secure more sustainable profitability and financial health. It's the highest-cost reserves that get dropped when you lower your gold-price assumption; the reserves that remain are the most cost-effective and profitable ones.
Yet despite the writedowns, reduced production targets and deep cut in reserve estimates, and for all the company's talk about becoming more lean and efficient, the cost benefits are not yet evident. The company is forecasting its all-in sustaining costs (AISC) at about $950 an ounce of gold production in 2014 – which would be up 4 per cent from the 2013 average of $915. (AISC reflects not just cash production costs but administrative, exploration and capital costs, and is considered a more accurate reflection of the full costs of gold production.) Granted, that's at the low end among Barrick's peers – but it's going the wrong way.
For shareholders trying to be patient, that has to be a little frustrating. Because ultimately, this must be the end goal of all the pain and cuts – to produce gold in a more cost-effective and (presumably) profitable way.
Barrick may have reduced the value of assets on the books to reflect its new heightened sensitivity to mining economics, but it still holds the assets. Roughly 20 per cent of 2014 output will come at an AISC at or above its $1,100-an-ounce price assumption. It still has inefficient properties to sell and cost savings to wring out of others. It still has $13-billion of debt to rein in.
What Barrick has done so far is merely to set itself on a firmer foundation; the rebuilding is still to come. Investors will have to remain patient.
Editor's note: The percentage of Barrick's 2014 output that will come at an AISC has been corrected in this article.