Barrick Gold's 2Q15: How Fast Can the Miner Turn Things Around?
Barrick Gold (ABX) is taking several steps to reduce costs and increase its free cash flow, or FCF, in 2015. First, the firm is reducing its dividends by 60% to $0.02 per share to conserve cash and increase its financial flexibility.
Barrick’s dividend cut is similar to the percentage cut announced by Goldcorp (GG) in its 2Q15 earnings. Gold miners are bracing for a tighter gold price environment ahead of time by preserving cash wherever they can. The miners’ thinking is to allocate the freed-up cash to higher-return opportunities. Barrick will save close to $140 million annually by reducing its dividend.
Second, Barrick Gold is cutting capex (capital expenditure) by $300 million in 2015. It’s also reviewing its capex plans for 2016 based on its capital allocation objectives.
The company reduced sustaining capital by $100 million in 2Q15. During the earnings call, management said this is being done by optimizing stripping and by deferring big overhauls as well as the purchase of capital equipment.
Third, the company had set a target of $30 million savings in general and administrative, or G&A, costs for 2015. By 2Q15, it had already surpassed that target, so now it’s planning on $50 million in savings. In light of this better-than-expected progress, management raised the G&A cost savings target for 2016 from $70 million to $90 million.
Free cash flow
Barrick Gold generated $23 million in FCF in 2Q15. In contrast, it burned free cash worth $128 million in 2Q14. All of its operating and capital savings are flowing to FCF. Management maintains that all of its mines are free-cash positive given a gold price of $1,100 per ounce.
Cost reductions have allowed Newmont Mining (NEM) to report positive FCF for the fifth consecutive quarter in 2Q15. The company’s FCF was $119 million in 2Q15 compared to $124 million in 2Q14.
Investors can get access to the gold sector by investing in the Market Vectors Gold Miners ETF (GDX), which invests in intermediate and senior gold producers. Goldcorp makes up 7.6% of its holdings. The SPDR Gold Trust (GLD) tracks spot gold prices.
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