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Leading gold miner Barrick Gold (NYSE: ABX) cashed in on rising gold prices during the third-quarter, churning out a robust $674 million in free cash flow, up $400 million from just the prior quarter. Because of that, the company remained on track to hit its full-year debt reduction target. What's remarkable about that is the fact that the miner was able to push closer toward its goal without selling any significant assets.
The inside job
Barrick Gold has been on a mission over the past few years. It wants to get its debt down to $5 billion, which is quite a lofty goal considering it ended 2014 with $13.1 billion of debt. The company is taking a methodical approach by attacking its target in bite-sized pieces. Last year, for example, its aim was to cut debt by $3 billion, which it exceeded after announcing $3.2 billion of asset sales, joint ventures, and partnerships.
This year the company announced another step forward by targeting $2 billion of debt reduction. However, unlike last year, asset sales have not been the preferred method used to achieve that goal. Instead, Barrick has used its growing supply of free cash flow to pay down debt. So far this year the company has generated $1.13 billion in free cash flow, including $647 million last quarter, which funded the bulk of its $1.4 billion in debt reductions. Further, with $2.6 billion of cash on its balance sheet as of the end of last quarter, the company has ample internal capacity to meet its year-end target to get debt down to $8 billion:
Source: Barrick Gold Investor Presentation.
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Cashing in on precious metals
Barrick Gold is one of a handful of miners using its growing free cash flow from improving precious metal prices and falling costs to deliver a meaningful reduction in leverage. Another example is leading U.S. silver producer Coeur Mining (NYSE: CDE), which is turning its balance sheet from a liability to an asset. As the following slide shows, Coeur Mining's total debt is down 65% since June of 2015:
Source: Coeur Mining Investor Presentation.
While equity issuances have contributed the bulk of the cash Coeur used for debt repayment, the company is starting to generate a meaningful amount of free cash flow to push down its debt even further. Last quarter, for example, the company pulled in $14.6 million of free cash flow, which cut the company's net debt by an incremental 5.7%. That cash flow could rise even more even if precious metal prices do not budge because Coeur's annual interest payments are expected to fall from $42 million to $15 million by early next year.
Hecla Mining (NYSE: HL) is another mining stock that used free cash flow to reduce debt in a meaningful way. During the second quarter, for example, Hecla Mining produced $25.1 million in free cash flow, which drove a 33% quarter-over-quarter improvement in its credit metrics. Further, Hecla's interest expenses declined by $1 million last quarter and should continue coming down.
Like Barrick, both companies will likely continue to trim their debt to get down to their ideal balance sheet. In Coeur's case, it is raising money via an at-the-market offering and is on pace to be in a net cash position by the end of the year. That is a similar aim as Barrick Gold, which has a philosophical goal to have zero debt.
Barrick Gold continues to make exceptional progress on its debt reduction targets, due in large part to its ability to generate substantial free cash flow this year. While future cash flow will rise and fall to some extent with precious metal prices, Barrick's debt reduction actually begets more free cash flow because of the decrease in interest expense, which it has reduced by another $75 million this year. Needless to say, the company is putting itself in the position to generate even more cash flow in the future, which will give it plenty of flexibility to create value for investors.
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