Barrick’s Pascua Lama project in Chile and Argentina: over budget and suffering delays.
Peter Munk could not have anticipated what lay before his company when he publicly berated the management team at Barrick Gold Corp.'s annual meeting last May for failing to boost the company's share price, despite six years of record profits.
Fast-forward a year and shareholders might have their own harsh words at this year's meeting on Wednesday for Mr. Munk and for Barrick, the Toronto-based company he built into the world's largest gold miner.
The past 12 months have been some of the hardest in Barrick's 30-year history. The company has changed CEOs, shuffled its board and been hit with project delays and multibillion-dollar cost overruns and writedowns. It's also facing some anger by institutional shareholders over its decision to pay an $11.9-million (U.S.) signing bonus to co-chairman John Thornton, a former Goldman Sachs executive.
Just as the company looked to be getting its finances under control, it has been whacked by a tectonic shift in the gold price, which last week dropped as low as $1,361 an ounce from highs of $1,900 in 2011.
Analysts are now asking how the Toronto-based miner would cope if the outlook worsened further.
"They have to give comfort that they have considered what happens at lower prices," said George Topping, an analyst with Stifel Nicolaus in Toronto who will attend the annual meeting, even though he normally prefers not to.
"What is their 'Plan B' in the event that gold prices stay low? That might look at stripping out costs through budget cuts, department cuts, as well as exploration and projects … taking out marginal ounces."
Barrick stock is trading at its lowest level in at least 20 years, closing at $18.65 (Canadian) on Friday, compared to $38.80 a share on the day of the last annual shareholders meeting, shortly before Mr. Munk replaced Aaron Regent as chief executive officer with long-time executive Jamie Sokalsky.
The price of gold saw its sharpest reversals in nearly three decades last week as major banks slashed price forecasts and fears mounted that European central banks could sell bullion to bolster reserves.
Even as gold bulls said the fall was exaggerated, Canadian banks sharply reduced their outlooks for the year. RBC Dominion Securities cut its outlook for the year by 15 per cent, and slashed its outlook for major gold producers by 26 per cent.
Barrick's balance sheet is considered safe in the meantime, and the company has said that at $1,400 (U.S.) an ounce, its mines continue to generate substantial operating cash flow.
However, analysts and investors fear even lower prices could threaten liquidity and see Barrick forced to allocate a large portion of its cash flow to servicing debt.
Analysts and investors do not expect any blockbuster announcements at the annual meeting this year, which occurs on the same day the company reports its first-quarter results. But they are hoping to see signs of further cost cuts, whether in sustaining, operating or expansion capital.
"Hopefully, they will outline all the levers they can pull to avoid any kind of liquidity problems should gold prices fall significantly further," said Pawel Rajszel of Veritas Investment Research in Toronto.
"They could monetize hedges, they could cut exploration, they can defer capital spending, and then Pascua Lama becomes a question," said Mr. Rajszel, referring to the massive gold mine between Chile and Argentina that is Barrick's flagship project – but is already billions of dollars over budget and at least a year delayed.
Earlier this month, even as the market was getting used to the new vision for Pascua, a court ruled all work suspended on the Chilean side as it reviewed complaints by local communities that the project is polluting groundwater and rivers in the Atacama desert region.
Analysts say that could mean another six months' delay, as well as adding up to $500-million more in costs to the $8.5-billion (Canadian) project.
Shortly after he was appointed Barrick's new CEO in June of last year, Mr. Sokalsky announced plans to shelve some $4-billion worth of new mines and optimize its portfolio, including selling non-core assets.
In January, the company walked away from talks to sell its African unit to state-owned China National Gold Group, unwilling to accept fire-sale prices in wobbly commodity markets, but analysts say other assets could be sold.
A Bloomberg report last week said the miner was working on the possible sale of higher-cost gold mines in Western Australia.
And in February, the company said it was considering the sale of its energy unit – which analysts say would be worth about $1-billion – as it focuses its efforts on a strategy to boost returns and free-cash flow, and not on building output as it has in recent years.