Barrick Gold Corporation Focused on High-Quality, Low-Cost Assets

Barrick Gold (NYSE: ABX) has a strong base of production and reserves. The company is not only the world's largest gold producer, it also has the largest base of resources and reserves in the industry.

Barrick Gold has been aggressively focusing on its free cash flow generating operations and divesting non-core strategic assets. The company has also significantly improved its financial flexibility.

Barrick has underperformed its peers since the news of the proposed merger with Newmont Mining (NYSE: NEM)came out last month (April 18 WSJ report). Since the merger talks between the two companies broke down, Barrick is down more than 9%, while Newmont is down only 2%. Goldcorp (NYSE: GG), on the other hand, gained 3% during the same period. Barrick Gold has also underperformed the Market Vectors Gold Miners ETF (NYSEMKT: GDX) by more than 7% in the last one month. This recent underperformance provides good investment opportunity, particularly in the short to medium term.

Source: Google Finance

High-quality, low-cost assets
Barrick Gold has a large amount of Tier 1 assets compared to its peers. The company is expected to transform into one of the lower-cost producers, as a number of low-cost assets come online in the coming years. The cash flow generation from these new projects should not only drive the company's free cash flow higher but should also help Barrick reduce its large debt balance.

More than half of Barrick's total production comes from five core assets: Lagunas Norte, Pueblo Viejo, Cortez, Goldstrike, and Veladero. Similarly, these assets collectively contribute the biggest chunk of the company's total operating cash flow. Going forward, these five mines are expected to produce 60% of 2014 total output at lower all-in sustaining costs (AISC) of $775 per ounce compared to $950 per ounce for the total company (mid-points of guidance range). 

Portfolio optimization
The Toronto based company has also been proactive in its strategy of portfolio optimization. The company has sold more than $1.2 billion of non-core assets. In the last few months, the company has divested a number of assets. The company sold 13.5% (or 10% of total issued ordinary capital) of its stake in African Barrick Gold (NASDAQOTH: ABGLF) . Moreover, the company divested Barrick Energy as part of its portfolio optimization strategy . As part of the company's renewed focus on its best assets, it has reduced its number of mines to 19 from 27 last year. The company also completed the sale of its Kanowna and Plutonic assets. 

Barrick Gold is expected to continue its portfolio optimization strategy and should continue to divest its non-core assets whenever an opportunity arises. The market has reacted positively to previous non-core asset sales and any such successful transaction in the future should also be received positively by the markets.

Solid results
Barrick Gold reported adjusted first quarter EPS of $0.20, topping Wall Street estimates of $0.19 by 5%. Stronger gold results were offset by weaker copper production and margins. The headlines EPS of $0.08 was adjusted for FX transaction losses ($0.10 per share) and ~ $0.03 per share in costs related to the ramp-down of Pascua-Lama among other items. 

The company maintained its 2014 gold production guidance of 6.0-6.5 million ounces at total cash costs of $590-$640 per ounce and all-in sustaining costs of $920-$980 per ounce. However, the company reduced its copper production guidance by 12% (using the midpoints) to 410 million-440 million pounds vs. previous guidance of 470 million-500 million pounds.

The company is also trading at a discount compared to its peers Goldcorp and Newmont. Barrick has a forward price/earnings ratio of 12.0, compared to 21.0 for Goldcorp and 18.1 for Newmont. Similarly, Barrick's price/cash flow ratio of 4.0 is lower than 21.4 for Goldcorp and 9.3 for Newmont. Going forward, Barrick Gold should see its multiples expand, as the company improves its cash flow generation and reduces its net debt.

Bottom line
Barrick Gold delivered solid quarterly results with lower than expected costs the highlight. While the disruption at Lumwana is not ideal, Barrick continues to deliver operationally at its core cash generating mines. The company is still proactive at implementing its portfolio optimization strategy in the new pricing environment. The company has underperformed its peers, since the news of the merger talks came out last month, and presents a good entry point. The company's longer-term focus on risk-adjusted return and free cash flow generation should improve the company's flexibility to optimize performance in a volatile gold price environment.

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