Barrick Gold Corporation
Barrick Gold Corporation is the largest gold producer in the world. Its stock price has suffered from gold price slump and high debt on its balance sheet. Is it an effective company or not?
Company Background
Barrick Gold Corporation, headquartered in Toronto, Canada, originated from Barrick Resources founded in 1980s. After suffering financial losses in oil and gas, the company decided to focus on gold. The company name was changed to Barrick Gold Corporation in 1995 (Reference 9). It is currently the largest gold producer in the world.
Business Model
Barrick creates value by developing and operating high quality mines, and growing its reserve/resource base through new mineral reserve discoveries and acquisitions.
Operation Model
Today Barrick operates in Argentina, Australia, Canada, Chile, Dominican Republic, Papua New Guinea, Peru, Saudi Arabia, US, and Zambia (Reference 7). Its operation include two main processes.
- Building mineral reserve/resource through exploration and acquisition
For continual growth and maintain its position as a leading gold producer, Barrick needs to constantly maintain and increase its reserve/resource to feed into future mine development.
One way of increasing resource is through exploration. Since 1990, Barrick has spent approximately $3.3 billion on exploration and discovered approximately 131 million ounces of reserves (Reference 7). Its average finding cost of is $25 per ounce, about half the industry average (Reference 7). Barrick’s recent discovery includes Goldrush discovery, one of the largest gold discoveries in the last decade (Reference 8). Additionally, Barrick holds claims on many of the world’s most prospective land on which the likelihood of discovery is relatively higher.
Barrick’s also has made a series of aggressive acquisitions to increase its resource/reserve. In 2001, the $2.3 billion acquisition of Homestake Mining made Barrick the world’s second largest gold producer (behind South Africa’s AngloGold, Reference 5). In 2005, Barrick paid $12 billion to acquire its rival Placer Dome (Reference 6), the largest acquisition in the history of gold mining.
Barrick is currently the largest holder of gold reserves in the world. Please see the graph below.
Source: http://marketrealist.com/2015/09/comp-gold-miners-expect-production-growth-going-forward/
- Mineral Extraction
Mineral extraction generates revenue which creates value for shareholders and job opportunities for workforce.
Among major gold producers, Barrick has one of the lowest cash costs per ounce as shown below.
Source: http://seekingalpha.com/article/3115306barrickgoldacontrarianpointofview?page=2
Barrick’s five core mines include Cortez in Nevada, Goldstrike in Argentina, Pueblo Viejo, Lagunas Norte in Peru, and Veladero. These operations made up 60% of Barrick’s 2014 production at $716 per ounce cost (Reference 7).
Barrack has been trying to reduce costs and increase mine life to maximize value extraction from these mines. For example, in Goldstrike, Barrick used thiosulfate circuit, an innovative technology, to unlock full value of the mine (Reference 7). At Lagunas Norte, Barrick was evaluating a plan to mine refractory ore below the current oxide ore body in order to extend the mine’s life (Reference 7). Barrick also completed a feasibility study on installing an additional shaft at Turquoise Ridge to potentially double total output (Reference 7).
Barrick also has a few other mines in operation generating cash flow at current gold prices. Overall costs of these mines are higher on average.
By extending mine life, increasing mineable reserve using new technology, or reducing cost, Barrick is creating value to shareholders, employees and local government.
Recent Debt Crisis
While acquisition is a good strategy for establishing its leader position in resources/reserve base, Barrick ran into debt issue due to past blundered acquisitions and capex overruns (Reference 1). It has the highest Debt/Equity ratio among the major gold miners as shown below.
Source: http://marketrealist.com/2014/10/barrick-financially/
In reaction to shareholders starting to lose confidence, Barrick has been optimizing its portfolio by divesting some non-core assets to repay debt. For example, the company sold half of its Child mine to Antofagasta Plc for $1 billion in July 2015 (Reference 3) and sold half of its stake in the Porgera mine in Papua New Guinea to Zijin Mining for $298 million (Reference 4). The company plans to reduce debt by $3 billion by 2015 (Reference 2).
The company also tried to reduce cost by making its management structure leaner (Reference 2).
Conclusion
Despite that the gold price slump made many previously attractive assets less appealing nowadays, forcing Barrick to sell its assets to optimize its balance sheet, overall, Barrick grew from a startup to the world’s largest gold miner in under three decades. In my opinion, Barrick’s operation is in line with its business strategy of creating value by developing and operating high quality mines and growing its reserve/resource base. I conclude that Barrick’s operation is effective.
References
Reference 1: Koven P, 2013. Barrick rebellion: With gold miner’s stock in the dumps, investors push back. Available at http://business.financialpost.com/investing/barrick-gold-agm-wednesday
Reference 2: Koven P, 2015. Barrick Gold Corp chairman John Thornton lays out strategy to focus on gold and improve returns. Available at http://business.financialpost.com/news/mining/barrick-gold-corp-chairman-john-thornton-lays-out-strategy-to-focus-on-gold-and-improve-returns
Reference 3: Koven P, 2015. Barrick Gold Corp to sell half of Chile mine to Antofagasta Plc for US$1 billion. Available at http://business.financialpost.com/news/mining/barrick-gold-corp-to-sell-half-of-chile-mine-to-antofagasta-plc-for-us1-01-billion
Reference 4: Koven P, 2015. Barrick Gold Corp, Ivanhoe Mines Ltd sell stakes to China’s Zijin in Papua New Guinea, Congo mines. Available at http://business.financialpost.com/news/mining/barrick-gold-corp-sells-50-stake-in-papua-new-guinea-mine-to-china-in-bid-to-forge-closer-ties
Reference 5: Unknown, 2001. Barrick buying Homestake. Available at http://edition.cnn.com/2001/BUSINESS/06/25/barrick.homestake/
Reference 6: Unknown, 2006. Barrick completes takeover of Placer Dome. Available at http://www.globeinvestor.com/servlet/ArticleNews/story/GAM/20060316/RTICKER16-3
Reference 7: Unknown, 2014. Barrick Gold Corporation Annual Report 2014. Available at www.barrick.com
Reference 8: Unknown, 2015. Barrick Gold Corporate website www.barrick.com
Reference 9: Unknown, 2015. Barrick Gold Corporation History. Available at http://www.fundinguniverse.com/company-histories/barrick-gold-corporation-history/
Z, this extremely interesting – in particular, in light of our recent related cases (Cynthia Carroll in LEAD and Kerr McGee in FIN1)! I agree based on your analysis analysis, Barrick Gold’s business model seems to capture value for its shareholders. However, I’m curious to learn more about your thoughts on how the company is evolving its operating model to serve the business value proposition of building ‘high quality mines’ and providing value to employees. As we discussed in our Anglo American case, what may drive revenues/profits in the short-term may not necessarily align with the longer-term sustainability of a company (e.g., social/global pressures to change the working environment for miners)
Hey Michele,
Sorry for the late reply.
On a high level, I think the operation model of mining companies pretty straightforward. They need to find resources and develop them into mines to generate revenue. In this case, I believe it is the quality of management decision that leads to performance. According to Reference 1, the reason why Barrick is a not-so-good position today is because it made a $7.3 billion acquisition of copper miner Equinox Minerals Ltd which resulted in a $4.2 billion write-down and its Pascua-Lama that straddles Chile-Argentina border saw soaring capital cost and faced environmental charges because Barrick decided to build the mine themselves instead of relying on contractors.
Because of the capital intensive nature of the mining industry, the volatility of commodity price, and it is hard to find a true “high quality assets”, one project can often change the fate of a company. Many things could go wrong. The geological and engineering models may not truly reflect the underground condition causing extra cost. Commodity price drop may turn a positive cash flow project into a negative one. Development cost could turn out to be higher than expected. The challenge for the management is to evaluate all these factors and make the right acquisition decision.
It seems Barrick’s the management made some poor acquisition and operation decisions causing Barrick to be overly leveraged financially. Its Chairman recently said Barrick is going to just focus on Gold now. Sounds like Barrick was trying to grow aggressively by tapping into other commodities but lacked caution.
I am not sure about how much of a role the social/global pressure plays in this scenario. Definitely the environmental charges against Barrick’s Pascua-Lama project doesn’t look good. To what degree it affects Barrick’s performance in addition to the damage caused by the bad acquisition and poor operation judgement is something to explore. Generally, there is an increasing awareness of corporate responsibility, environmental standard, and sustainability in the mining industries these days.
Best regards,
Z
Z – As you make very clear, Barrick Gold seems to be quite adept at both core aspects of the gold-mining value chain: exploration and extraction. I think both of these facts are especially interesting since, as you note, “Barrick grew from a startup to the world’s largest gold miner in under three decades.” I would have guessed that gold mining would have excessive barriers to entry. How did Barrick break in? Were they very well capitalized from their previous life as an oil and gas company? I know you were limited by space, but I would be curious to know what makes their finding costs so low? And, with such a low finding costs, why they pursue acquisitions so aggressively.
Hey Brian,
Thank you for the question.
Yes you are right that gold mining have excessive barriers to entry. Reference 8 implied that “Barrick Oil” made some discoveries and became successful, enabling Barrick to acquire established gold mines. I think it is fair to say that it is well capitalized from its previous life as an oil & gas company.
There are mineral exploration companies and mining companies. The mineral exploration companies does mostly the exploration and pride themselves as the explorer. The mining companies usually focus on mining and spend smaller amount of budget on early-stage exploration. When a mineral exploration company finds something, usually the large mining companies will come acquire the projects from the exploration company.
Without any data support, I suspect the reason why Barrick’s finding cost is low is that Barrick 1) conducts exploration around existing mines where the possibility of discovery is high, 2) acquires late-stage exploration properties and further spending on these properties count towards finding costs.
(I will update this section if I find more data).
They still pursue acquisitions aggressively even though the finding cost is low is because
1) exploration is not its core business. If it purely does on exploration, its finding cost wouldn’t be so low.
2) it takes years to develop a exploration property into a mining property. Barrick doesn’t want to explore, spend lots of time on the project, and may be 1 out of 10 (or higher) projects can turn into a mine.
3) to generate more revenue, Barrick needs to grow as a producer. Therefore, it needs to keep acquiring resources and turn them into mines, or acquire mines. However, it is this very aggressive acquisition that got Barrick into the trouble today.
Best regards,
Z