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.
Barrick creates value by developing and operating high quality mines, and growing its reserve/resource base through new mineral reserve discoveries and acquisitions.
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.
- 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.
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.
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).
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.
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/