In its second-quarter 2013 financial report, released August 1, Barrick Gold reported $8.7 billion in after-tax impairment charges, largely driven by significant decreases in long-term metal price assumptions following the sharp decline in spot prices during the quarter. The charges included $5.1 billion for the Pascua-Lama project in Chile, $2.3 billion in goodwill impairments, and $1.3 billion in other asset impairment charges.
On the brighter side, Barrick reported strong operating results from its gold and copper mines during the quarter and offered a broad outline as to how the company is positioning itself to operate in a lower metal-price environment.
Barrick produced 1.81 million oz of gold during the second quarter at all-in sustaining costs of $919/oz and adjusted operating costs of $552/oz. Its full-year 2013 production guidance is 7 million to 7.4 million oz of gold at all-in sustaining costs of $900 to $975/oz.
Barrick President and CEO Jamie Sokalsky said, “These results reflect the high quality of Barrick’s portfolio of assets and our increasingly effective efforts at controlling costs. We are disappointed with the impairment charges for Pascua-Lama and other assets but are confident that these assets, some with mine lives in excess of 25 years, will generate substantially more economic benefits over time.
“Over the past year, we have taken and are continuing to take a series of steps to reduce costs as part of our disciplined capital allocation framework, which allowed us to respond quickly to the new metal-price environment. We have reduced 2013 budgeted capital and costs by about $2 billion, which has offset the cash-flow impact of the drop in gold and copper prices that has occurred this year. We have reduced all-in sustaining cost guidance by about $100/oz this year from levels that are the lowest of our peers.
“The bulk of our expected 2013 gold production is at all-in sustaining costs well below current spot levels, and for those operations that are not generating positive cash flow, we will change mine plans, suspend, close or divest them. [Editor’s note: See story below regarding Barrick’s sale of three Australian mines.]
“We are progressing the Pascua-Lama project by extending the overall construction schedule over a longer period, which substantially alleviates near-term capital spend, and we are also working to meet regulatory requirements.
“We also termed out $3 billion of debt at attractive rates to reduce near-term maturities.
“And finally, in light of the current environment, we have also made a decision to lower the quarterly dividend to improve liquidity. We recognize the importance of dividends to our shareholders, and it is our goal to return more capital to investors in the future, but at this time, this is the prudent course of action.”
Barrick’s asset base provides it with significant operational flexibility. Its five key mines—Cortez, Goldstrike, Pueblo Viejo, Veladero and Lagunas Norte—are expected to generate about 60% of the company’s 2013 production at average all-in sustaining costs (AISC) of $650 to $700/oz. An additional seven mines have AISC below $1,000/oz, bringing the total amount of expected 2013 production with costs below this level to about 75%.
For the remaining operations with expected 2013 AISC above $1,000/oz, Barrick plans to change mine plans, suspend, close or divest them to improve cash flow. Actions being considered as part of an ongoing process include:
• Mine-plan changes at Bald Mountain in the United States to reduce the number of pits and focus on the most profitable ounces, while retaining the option to access other ore in the future.
• Working with joint-venture partners to optimize mine plans at Round Mountain and Marigold in the United States.
• Deferral of the open-pit expansion and optimization of the underground mine plan at Hemlo in Canada.
• Evaluating mine-plan changes and exploring other alternatives at Porgera in Papua New Guinea.
• Finalizing a detailed operational review to aggressively optimize mine plans and improve operations at African Barrick Gold in Tanzania.
• Assessing closure options for Pierina in Peru.
At each of its mines, Barrick is developing mine plans to maximize cash flows. The company anticipates that this process could have an impact on its year-end 2013 proven and probable reserves and expected future production levels; however, where possible, it will maintain the option to access the metal in the future.
As a result of the schedule delay at Pascua-Lama, expected mine plan changes to maximize cash flow, and the likelihood of further asset divestitures, Barrick is no longer targeting company-wide gold production of 8 million oz in 2016.
Barrick is cutting or deferring about $4 billion of previously budgeted capital expenditures over a four-year period, shelving certain major projects, and launching a portfolio optimization process.
In other cost-cutting measures, Barrick has reduced its corporate office staff by approximately 30% and made other significant job reductions at regional locations. As part of an ongoing, company-wide overhead and operational review initiated in the first quarter, Barrick is also evaluating further changes and cost reductions to make its organization more efficient by simplifying the management structure and placing a greater emphasis on clearly defined responsibilities and accountabilities.