Barrick Gold Corporation (NYSE:ABX), the largest gold producer in the world, reported a dismal Q3 2012 performance. The adjusted net earnings sunk 55% year-over-year to $2.72 billion from $3.5 billion. Revenues declined year-over-year from $3.97 billion to $3.43 billion. Gold production decreased to 1.78 million ounces from 1.92 million ounces and copper production decreased to 112 million pounds from 140 million pounds year-over-year.
Production and cost pressures at Barrick’s Australia Pacific and African businesses were primarily responsible for the poor performance of the gold segment. The Australia Pacific region was primarily impacted by lower equipment availability and lower tonnage from the underground mine at Porgera. The lower production of copper can be attributed to problems at Barrick’s Jabal Sayid mine in Saudi Arabia. 
The company once again increased the capital expenditure planned for the Pascua Lama project by nearly $1 billion. This increase of $1 billion comes on top of a 50-60% increase announced just in the previous quarter. The total capital expenditure planned for the project now stands at $8-8.5 billion and even this may not be the final figure. Even the first production from the mine has been delayed a bit.
Barrick operates mines in North America, South America, Australia and Africa. The company has mainly gold and copper in its portfolio and competes with other mining companies such as Newmont Mining (NYSE:NEM), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).
Pascua Lama Continues To Give Nightmares
Apart from revising its capital expenditure figures, Barrick revised the schedule for the first production of gold. It now aims to start producing gold in the second half of 2014 instead of mid-2014.
According to CEO Jamie Sokalsky, the increase in total construction cost at Pascua Lama can be split approximately equally between the impact of the delay of first gold production to the second half of 2014, increased labor hours and installation rates. It also had to make additional payments to Fluor, the company now handling the project management, as an incentive to bring the project online on time. Barrick has spent $3.7 billion on this project so far.
In the last quarter, Barrick Gold had announced a 50-60% increase in capital costs for its Pascua-Lama gold mine from the top end of the previously announced estimate of $4.7-$5.0 billion. At that time, increased costs were attributed to a combination of high inflation in Argentina and Chile, lower-than-expected contractor productivity, schedule extension and engineering and planning gaps. The constant increase in capital expenditure at Pascua Lama has had a negative impact on Barrick’s stock price. Barrick said that it has cut or deferred around $3 billion in capital expenditures previously budgeted over the next five years but this doesn’t seem to have assured investors in the market.
Estimated to have a long life of 25 years, Pascua-Lama is crucial to Barrick Gold’s future. Barrick claims that Pascua-Lama will be one of the world’s cheapest gold mines once production begins. Given the rising cost of production in the industry, we think that Pascua Lama has the potential to grant Barrick significant competitive advantage if it lives up to its potential.
The African business of the company performed poorly this quarter, reporting a 72% drop in profits year-over-year. Total cash costs for 2012 here are expected to be about $900 to $950 per ounce compared to the previous guidance range of $790 to $860 per ounce. These figures are much higher than Barrick Gold’s overall total cash cost of $592 per ounce incurred thus far in 2012. The company is still in talks with China National Gold to sell the African business and declined to provide much update on the same in the earnings conference call. 
Problems In The Copper Business
Barrick’s copper production at Lumwana in the third quarter was impacted by equipment availability, maintenance issues and lower ore grades, but it expects ore grade to improve going forward. Barrick began processing ore from the Chimiwungo pit at Lumwana on schedule and completed infrastructure improvements to mitigate the effects of the rainy season. The company thinks that this operation will deliver improved results next year.
Barrick was notified this quarter that its Jabal Sayid copper project was not in compliance with standards for safety and security in Saudi Arabia. Therefore, it was unable to commence production in the second half of 2012 as originally expected. Production is now expected to commence in 2014. The mine will add approximately 130 million pounds of copper annually to Barrick’s production. You can read more about this in our earlier article here.
Barrick now expects gold production for 2012 to be between 7.3-7.5 million ounces, which is within its original guidance range of 7.3-7.8 million ounces. Its total cash costs for 2012 are anticipated to be about $575-585 per ounce, about $10 an ounce higher than the top end of the previous guidance of $550-575 per ounce, primarily due to higher costs from Australia Pacific and African Barrick Gold. Copper production for 2012 is anticipated to be about 450 million pounds as a result of the delay in first production at Jabal Sayid.
The annual gold production is expected to be about 8 million ounces by 2016 and copper production is anticipated to be about 600 million pounds by 2015.
Barrick Gold has strong long-term productive assets and once Pascua-Lama comes online, we expect it to perform well. Despite rising costs, Barrick’s cost profile is much better than the industry average. In the short term, Barrick remains dependent on Goldstrike, Cortez Hills, and Veladero mines to generate attractive returns at prevailing prices. Rising energy costs will continue to put pressure on margins in the short-term.
We have a Trefis price estimate of $52 for Barrick Gold. We are currently in the process of updating our estimates in light of recent earnings.Notes: