Barrick Gold (ABX) Tops Q4 EPS by 3c; Announces Debt Reduction, Asset Sales Plan

Barrick Gold (NYSE: ABX) reported Q4 EPS of $0.15, $0.03 better than the analyst estimate of $0.12. Revenue for the quarter came in at $2.51 billion versus the consensus estimate of $2.45 billion.

TAKING BARRICK 'BACK TO THE FUTURE'

Barrick became the world's leading gold company by pursuing its founding purpose: the generation of wealth for its owners, employees, and the communities with which it partners. Those who founded and first led the company were committed to a culture of partnership and the values underpinning such a culture: trust, transparency, shared responsibility and accountability, and a sense of emotional and financial ownership.

That culture also nurtured a powerful operating model. In its early years, Barrick was lean and nimble, with minimal bureaucracy. A small head office managed the company with a balance of entrepreneurialism and prudence, focusing on only a few core activities: defining and implementing strategy, allocating human and financial capital, and fulfilling the obligations required of a public company. Leaders at the operational level had greater autonomy, responsibility, and accountability, functioning as business owners. Free from bureaucracy and middle management, they focused on maximizing free cash flow, and the head office focused on allocating that cash flow to maximize shareholder returns.

Over the last year, Barrick has been returning to this partnership culture and the operating model that made it so successful. We have cut our head office by close to half and eliminated all management layers between Toronto and the mines. What remains are shared service centers in the field that provide support directly to our mines and projects, with costs charged directly to the relevant operation.

Along with managing financial capital, managing our talent is a central responsibility of Barrick's leaders. Attracting, retaining and developing exceptional people is a fundamental component of our partnership culture. In 2014, Darian Rich was promoted to the role of Executive Vice President, Talent Management, elevating this critical function. Over the last six months we attracted 12 new leaders to Barrick who personify the company's original values and bring vital skills and experience that support our business objectives, such as strengthening the balance sheet, fixing Pascua-Lama, improving efficiency and productivity and building partnerships in China and beyond. This group includes people such as Kevin Thomson (SEVP, Strategic Matters), Shaun Usmar (SEVP & CFO), Sergio Fuentes (Executive Project Director, Pascua-Lama) and Melanie Miller (VP, Supply Chain) to name just a few. We have also promoted top internal talent across the organization to challenging new roles that will strengthen their capabilities. This includes Rich Haddock (SVP & General Counsel), a lawyer who intimately understands all facets of our business, and Calvin Pon (SVP, Finance & Tax) one of the brightest analytical minds in the industry.

Going "back to the future" demands that our leaders be owners. Accordingly, we have extended our innovative partnership plan to 35 leaders across the business. Each year, these leaders will be graded on their collective performance, as measured against a transparent long-term scorecard disclosed to shareholders in advance. A significant portion of their total compensation, if earned, will be long-term in nature, awarded in units that convert into Barrick common shares which cannot be sold until an individual retires or leaves the company. A smaller proportion of total compensation, if earned, will be in the form of annual bonuses, determined for each individual based on a personal scorecard tailored to the individual's specific responsibilities. This plan increases financial and emotional ownership among our senior leaders, and will deepen to include new partners over time.

Our approach to capital allocation ensures that all new investments align with our strategic focus and contribute to maximizing free cash flow in pursuit of industry-leading returns.

Investments in new projects will compete with share buybacks and acquisitions, along with our objective of paying a dividend to our owners. We expect our portfolio to deliver a 10-15 percent return on invested capital through the metal price cycle and, as such, individual projects are assessed against a hurdle rate of 15 percent. We will defer, cancel or sell projects that cannot achieve this target. We will also apply more rigor in monitoring execution to ensure that we meet our cost and schedule commitments. And we will conduct post-investment reviews to evaluate how we have lived up to our original investment promises, using what we learn to improve execution on future projects.

A portion of our capital budget is re-invested in existing mines to sustain or expand them. That capital is not spread evenly across the portfolio and our operations must compete for it. We will focus our investments at mines that meet our overall expectations for returns on invested capital. Assets that are unable to meet our capital allocation objectives over time will be sold.

RESTORING A STRONG BALANCE SHEET

For many years, Barrick had the only A-rated balance sheet in the gold industry. Prudent financial management was a bedrock principle of the company. Our current level of debt is inconsistent with that principle, and that inconsistency is reflected in the company's share price. As we return to our original values, no priority is more important than restoring a strong balance sheet.

We intend to reduce our net debt by at least $3 billion by the end of 2015. The company has a number of options to achieve this target, and we will take only those actions that make sense for the business, on terms we consider most favorable to our shareholders. Our debt reduction strategy includes the following levers:

-- Maximizing free cash flow by implementing a leaner, decentralized operating model that reflects Barrick's original culture; with more efficient capital spending, reduced general and administrative costs, and profitable growth; -- Disciplined non-core asset sales, beginning with a process to sell the Porgera Joint Venture and Cowal mine; -- Joint ventures and strategic partnerships if and where they make sense.

Our strong liquidity means the company can tackle its debt in a disciplined manner. We have less than $1 billion in debt due over the next three years, a $4 billion undrawn credit facility, and $2.7 billion in cash at the end of 2014.

MAXIMIZING FREE CASH FLOW

A return to the lean, decentralized operating model that underpinned Barrick's early success is freeing up our country and mine managers to focus on maximizing free cash flow across the business.

As part of this transformation, we expect to realize $30 million in savings from reduced general and administrative expenditures and overhead costs in 2015. These savings are projected to reach $70 million on an annualized basis in 2016. And we expect more to follow, as our leaders focus on maximizing cash flow without the constraints of bureaucracy and unnecessary management layers.

We are reducing the size of our head office by close to half, from 260 positions in 2014 to 140 positions in 2015. As a result, our corporate administration expense is expected to be about $145 million this year, and even lower in 2016.

We are now reporting G&A with clarity and transparency. We have eliminated all management layers between the head office and our operations; what remains are shared service centers that provide support directly to our mines and projects. These costs will no longer be reported as G&A. They will be charged directly to the mines and projects that use the services, and will be reflected in operating costs, as they should be. Services that are not required will be eliminated, driving further cost savings.

G&A costs at Barrick will now include head office administration, stock-based compensation and administration expense from Acacia Mining Plc.

For a full description of G&A expenses, please read page 34 of the Management Discussion and Analysis.

In addition, we are taking steps to improve the efficiency of our procurement and supply chain practices, freeing up working capital by reducing inventories. We also expect to generate additional free cash flow over the next 12 months through better integration of mine site maintenance programs and our global procurement and logistics system.

Innovation also plays a key role in improving efficiency and unlocking the cash-generating potential of our assets. We see this in action at Goldstrike, where a revolutionary new cyanide-free processing technology developed in-house at Barrick is allowing us to accelerate cash flow from about four million stockpiled ounces of gold (see page 11 for more details). Our in-house research and development team has also developed a patented flotation technology capable of utilizing sea water, reducing demand on scarce fresh water resources. We will continue to develop industry-leading processing technologies, while expanding our focus to include more efficient ways to use water and power at our operations.

For earnings history and earnings-related data on Barrick Gold (ABX) click here.

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