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Barrick Is Adjusting To Low Gold Prices

Summary

Barrick is aiming to adjust to low gold prices by reducing its debt levels via selloffs of assets and forming joint ventures.

The company also reached a streaming agreement with Royal Gold.

But the company will still need to find ways to improve its cost structure.

Shares of Barrick Gold (NYSE:ABX) have lost more than 40% of their value since the beginning of the year, even though the price of gold fell by only 5%. This puts into question whether the stock could bounce if gold prices were to recover. Some may consider the high debt burden is at fault for the big selloff, but other big gold producers with lesser debt burden have also experienced sharp fall in their stocks. Even though the high debt is an issue that company has been cutting, it will still need to improve its cost structure to adjust to even lower gold prices.

In terms of reducing debt, ABX is on its way to reach its own goal of slashing its debt by $3 billion by the end of the year through selling assets and forming joint ventures (it has reached 90% of its goal so far). Barrick also announced its plans to buy back as much as $750 million of its outstanding debt. But that's not all.

The company also recently reached streaming agreement with Royal Gold (NASDAQ:RGLD) for its gold and silver output in the Pueblo Viejo mine. The terms of the deal seem, at first glance, favorable for Barrick and according to one analyst here in Seeking Alpha, Royal Gold may not see any gain from this deal or a very modest ROI at best. This is based on the assumptions of gold prices at $1,200 and silver at $15. If prices continue to fall, Barrick Gold will receive less per ounce of precious metal: 30% of the prevailing prices for the first 550 thousand ounces of gold and 23.1 million ounces of silver and 60% for subsequent ounce of gold and silver.

Despite these changes, the company will still need to further improve its operations. Sure, cutting debt and improving cash flow is important, but it won't be enough for the stock. But Barrick Gold has been working towards reducing its production costs: It has revised down its annual all-in sustaining costs to a mid-point of $860 per ounce. In comparison, Goldcorp (NYSE:GG), another leading gold producer, has an annual guidance AISC of around $912 per ounce. So ABX is moving in the right direction, but if gold prices keep falling, Barrick will need to further reduce its AISC. After all, the grim outlook of gold is dragging down ABX, even though gold hasn't plummeted so far this year.

The chart below presents the progress of shares of Barrick Gold and SPDR Gold (NYSEARCA:GLD), which follows the price of gold.

Source: Google Finance

As you can see, the price of gold slipped by only 5%, while ABX plummeted by 42%. And in case you think it's because of the high debt burden of ABX in times when the gold market is weak, then a quick look at shares of Goldcorp - the company has a much lower debt burden on its balance sheet with a debt-to-equity ratio of 0.2 compared to 1.26 for ABX - shows it has also experienced a tumble of 33%, year to date. These companies continue to suffer over the grim outlook of the gold market.

Cutting down the debt is likely to improve its balance sheet, but that won't be enough. Barrick will need to improve its operations by improving its cost structure to adjust to the soft gold market. In any case, as long as the gold market isn't progressing, the stock isn't going to rally. But reducing production costs is a step towards improving the profit margins and partly offset the possible adverse impact of falling gold prices down the line. For more please see: Does Barrick Have a Silver Lining?


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