Barrick Gold: Weak Gold Prices Lead To Losses And Hefty Impairment Charges

Barrick Gold Corporation (NYSE:ABX), the largest gold producer in the world, reported its second quarter results on August 1. Revenues at $3.20 billion came in marginally lower than last year’s comparable figure of $3.24 billion. The company reported a net loss of $8.56 billion owing to hefty impairment charges of $8.7 billion.

Without the unusual and one-time items, net profit stood at $663 million, lower than the Q2 2012 figure of $787 million. The production of both copper and gold increased compared to last year but lower realized prices hurt revenues. The company was successful in bringing down all-in sustaining cash costs by focusing on cost reduction, offsetting the negative impact of lower prices to some extent. The all-in sustaining cash cost measure includes the total cash cost, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. ^[1]

Barrick highlighted its success in lowering production costs from last year and said that it intends to reduce the percentage of high cost mines in its portfolio. It also gave some update on revised capital expenditure plans but said that more details will be provided at the end of Q3. Finally, the management mounted a strong defense of its Pascua Lama project that has seen multiple delays and cost overruns. ^[2]

See Full Analysis for Barrick Gold Here

Operational Performance In Q2

The production of gold for the quarter was reported at 1.81 million ounces, marginally higher than the previous year’s comparable period figure of 1.74 million ounces. The production of copper stood at 134 million pounds, higher than the previous year’s 109 million pounds. The average realized price for gold in the quarter was $1,411 per ounce, and that for copper was $3.28 per pound.

A noteworthy feature was the reduction in costs of mining gold. Its second quarter all-in sustaining costs of $919 per ounce benefited from low total cash costs on strong performances at the Goldstrike, Cortez and Veladero mines. The 2013 cost all-in sustaining cash cost guidance has been reduced from $1,000-1,100 per ounce to $900-975 per ounce. This is due to expected savings from labor and energy costs and higher sales volumes. With the decline in the global resource environment, labor cost increases are lower as workers are available at lower wages and attrition is decreasing. The prices of raw materials like fuel, field tires and explosive cyanide are beginning to decline.

The costs in the copper business also decreased. Barrick reported cash costs of $2.27 per pound of copper produced, lower than $2.78 per pound incurred in Q2 2012. It reduced the cost guidance for 2013 to $2.5-2.75 per pound from the initial guidance of $2.6-2.85 per pound.

The North America region contributed just over 928,000 ounces of gold or about half of Barrick’s total production this quarter at all-in sustaining cost of $797 per ounce due to strong performances at Barrick’s two largest mines, Cortez and Goldstrike in Nevada. South America produced 296,000 ounces of gold at all-in sustaining cash cost of $821 per ounce. The Australia Pacific segment produced 465,000 ounces of gold at an all-in sustaining cost of $1,033 per ounce and the share of African Barrick Gold’s production was 122,000 ounces at all-in sustaining cost of about $1,416 per ounce. Thus, these two regions are a drag on Barrick’s company-wide costs.

Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo are Barrick’s five core, low-cost assets. Together, they produce nearly 60% of its total gold and are expected to have a combined all-in sustaining cost of just $650-700 per ounce in 2013.

Impairments

Barrick recorded $8.7 billion in impairment charges in the second quarter. Based on a sharp decline in gold prices over a period of 2-3 months since April, the company was forced to revise its price assumptions for impairment testing. Of the $8.7 billion, Pascua Lama alone accounted for $5.1 billion in impairments and goodwill impairment amounted to $2.3 billion. The remaining $1.3 billion comprised of asset impairments worth $500 million in its African business, $400 million at its Jabal Sayid business and $100 million at the Pierina mine which is approaching the end of its operations. Another $100 million worth of impairments were related to explorations and miscellaneous items accounted for the remaining $200 million.

Turning to our impairment charges with a substantial decline in metal prices this year, we revised our gold, copper, and silver price assumptions used from impairment testing to $1,300 per ounce, $325 per ounce, $303.25 per ounce and $23 per ounce respectively. The $8.7 billion of charges are comprised of $5.1 billion for Pascua-Lama; $2.3 billion in goodwill impairments, of which $1 billion relates to the Copper unit and $1.3 billion to Australia Pacific, Capital Projects and ABG segments; and $1.3 billion in other impairment charges, of which approximately $500 million relates to ABG assets, $400 million to Jabal Sayid, $100 million to Pierina which is approaching the end of its operations, $100 million to explorations, and $200 million split between the rest.

Outlook

Barrick has maintained its 2013 production guidance for gold of 7-7.4 million ounces, but increased guidance for copper to 500-540 million pounds from its initial projection of 480-540 million pounds.

However, the company reduced its cost and capital expenditure guidance for the year quite substantially. Total capital expenditure for the year is now expected to be $4.5-5.0 billion rather than $5.7-6.3 billion expected earlier. The reduction was made largely on account of the Pascua Lama project which has now been delayed following court orders in Chile. Thus, the planned spending will take place in future years now. ^[3]

Barrick expects the first ore for processing from Pascua Lama to be available in mid-2016. Pascua Lama has proven and probable reserves of 17.9 million ounces of gold, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. Once production begins, Barrick expects to produce 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. The all-in sustaining cash cost at Pascua Lama is expected to be $50-200 per ounce. Including the depreciation of capital expenditure incurred in mine construction, costs are not expected to exceed $550-700 per ounce.

With Barrick reducing its capital spending target and Pascua Lama not scheduled to enter production for three more years, we think that the company’s growth prospects in the medium term don’t look very great.  While it is emphasizing returns over production, prices are not under Barrick’s control, so the best it can do is to optimize its portfolio to reduce the average cost of production. This may also necessitate selling off certain mines which don’t fit its desired cost profile.

We have a price estimate for Barrick Gold of $19, which will be revised shortly now that the second quarter earnings results are out.

Understand How A Company’s Products Impact Its Stock at Trefis

1. Barrick Gold Q2 2013 Report, Barrick Website [↩]
2. Barrick Gold Q1 2013 Earnings Conference Call, Seeking Alpha [↩]
3. Barrick Gold Q2 2013 Earnings Presentation, Barrick Website [↩]