“I’m not mad. I’m just disappointed.” As a child, you know when you hear that phrase from parents, you’ve messed up bad. Your actions have crossed so far over the line of normal misbehaviour for a child that they can’t even muster the strength to yell.
After watching what played out at Barrick Gold (TSX: ABX, NYSE: ABX) yesterday, that sort of disbelief sums up my reaction to the quarter. I’m not surprised. Halting construction at the company’s key Pascua-Lama mine and diluting shareholders to repair the balance sheet was inevitable. But I’m disappointed because it didn’t have to happen at all.
How Barrick is restructuring itself
In the face of sagging metal prices and saddled by a heavy debt load, Barrick is undertaking a massive reorganization.
First, the company announced that it was suspending construction at its South American Pascua-Lama gold mine. Shelving the project will save the company over $1 billion in capital expenditures next year and buys the company time. This maneuver comes on top of a series of divestitures in the past quarter where management sold several high-cost Australian mines within its portfolio.
Next, to repair its stretched balance sheet, Barrick announced plans to raise over $3.4 billion in one of the largest secondary issues in Canadian history. The company agreed to sell over 163.5 million shares for $18.35 apiece – a 5.4% discount from where shares closed on Thursday – with an option to sell additional shares if demand for the issue is strong.
Finally, Chief Executive Sokalsky announced plans to shave an additional $500 million in annual spending. Much of these savings will be realized through a massive restructuring which involves laying off over 1,800 employees. This comes on top of over $2 billion in promised cost cuts announced last quarter.
Not really surprising…but disappointing
Of course, none of these announcements should have surprised anyone closely following the company. Rather, it’s the inevitable consequence of a decade of overpriced acquisitions and runaway spending.
Only hours before the equity issue bombshell, Chief Financial Officer Ammar Al-Joundi tried to reassure shareholders during the conference call of the Barrick’s ‘excellent financial flexibility’. The whole time I was wondering how could a company with only $2 billion in cash finance a combined debt load and capex budget of $23 billion. But I didn’t expect a resolution to that question only a few hours after the quarter.
What’s frustrating is that so many of Barrick’s troubles are self-inflicted. When Barrick’s board approved construction of Pascua-Lama in 2009, it was expected to cost $3 billion to construct. Today, that estimate has ballooned to $8.5 billion. And while some of that increase is due to industry-wide inflation, much of it is credited to the company’s decision to complete construction in-house and its strained relationship with Chilean regulators.
After spending over $5.8 billion on the mine to date, Pascua-Lama is only 50% complete and Barrick has written off $5.1 billion from the project. Now shareholders are being asked to pick up the tab for this fiasco. Including the equity issued yesterday, since 2007 Barrick has sold over $7 billion in stock. Yet the company only has a market capitalization of $20 billion. Before prospective investors bid on this new issue, they have to ask where all of this money is going?
Foolish bottom line
Unfortunately for Barrick’s management, I think the company’s shareholders will be less disappointed and more angry in their reaction to yesterday’s news. As of Friday morning, Barrick shares have lost over 10% of their value since the close on Wednesday. Activists are already disgruntled with the board’s decision to pay co-chairman John Thornton a $17 million pay package nor are they happy with the board’s cozy relationship with founder Peter Munk.
This quarter could be a catalysts for more changes at Barrick. Expect a rowdy gathering at the company’s upcoming shareholders’ meeting.
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Disclosure: Robert Baillieul has no positions in any of the shares mentioned in this post.
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