Barrick Gold’s Q1 Results Suffer Due To Lower Gold Prices


Barrick Gold Corporation (NYSE:ABX), the world’s largest gold producer, reported its Q1 earnings and conducted a conference call with analysts on April 30. The company reported lower revenues of $2.6 billion versus $3.4 billion in the corresponding period a year ago. Net income fell sharply to $88 million from $847 million in the corresponding period a year ago. This is primarily due to lower year-over-year realized gold prices and shipment volumes as well as lower realized copper prices.

The company reported significantly lower all-in sustaining costs (AISC) per ounce of gold, signifying tangible success in the company’s cost reduction efforts. The AISC metric includes the total cash cost, sustaining capital expenditures, G&A costs, mine site exploration and evaluation costs, mine development expenditures and environmental rehabilitation costs. It provides a comprehensive view of costs related to the company’s current mining operations.

The company maintained its production and AISC guidance for gold. However, it lowered its production guidance for copper due to the disruption in operations at its Lumwana mine. It maintained its guidance for cash costs related to copper production. It reaffirmed its commitment to cost reduction and portfolio optimization and maintained its guidance for capital expenditure.

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You can check out our complete analysis for Barrick Gold here:

 

Operational Performance

Gold production declined to 1.62 million ounces, 12% lower than the corresponding period last year. Production was lower at the Cortez, Laguna Norte and Veladero mines, partially offset by higher production at the Goldstrike, Pueblo Viejo, Turqoise Ridge mines and African Barrick Gold. Sales of a number of high cost mines by the company in the intervening period also contributed to lower production. Copper production stood at 104 million pounds, down 18% from the corresponding period last year due to lower production at Zaldivar and Lumwana mines. [1]

Realized gold prices for this quarter stood at $1,285 per ounce as against $1,629 per ounce last year. The price of gold has fallen, reacting to cues regarding QE tapering by the Federal Reserve. Going forward, the expected strengthening of the US economy is likely to result in further QE tapering and continued pressure on gold prices.

Realized copper prices this quarter stood at $3.03 per pound as against $3.56 per pound in the corresponding period last year. Copper prices are largely determined by macroeconomic factors. China is the largest consumer of copper in the world, accounting for nearly 40% of the total world consumption of copper. The prices of the metal are to a large extent influenced by Chinese demand for it. Slower economic growth in China has led to a moderation in copper prices. According to data from China’s National Bureau of Statistics, growth in investment, factory output and retail sales has slowed to multi-year lows in the first two months of the year. The Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from an investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for copper in the long run.  Lower demand for copper has resulted in an oversupply situation which is likely to keep prices depressed.

The company reported an AISC metric of $833 per ounce of gold, down $100 per ounce from the corresponding period last quarter. This was mainly due to lower mine development and mine-site sustaining capital expenditures. Copper cash costs fell to $2.11 per pound this quarter as compared to $2.46 per pound in the corresponding period a year ago. This was primarily due to lower direct mining costs at the Lumwana mines.((Barrick Gold Q1 2014 Earnings Presentation, Barrick gold Website))

Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo are Barrick’s five core mines. These mines are the company’s low cost assets. They produced 0.94 million ounces, approximately 60% of the company’s Q1 production at an AISC of $672 per ounce. The AISC figure for these mines is much lower than the company-wide AISC of $833 per ounce.

Other Developments

Merger talks between Barrick Gold and Newmont Mining recently broke off. The merger would have resulted in cost savings of approximately $1 billion for the two companies. Most of the savings would have resulted from combining operations at Nevada, where the two companies produce more than a third of their gold. As per Barrick’s management, Newmont broke off the deal as the company felt its interests were best served by remaining independent. [2]

Outlook

The company maintained its original 2014 guidance for gold. It expects production of 6.0-6.5 million ounces for the full year at an AISC of $920-980 per ounce. It reduced its 2014 production guidance for copper from 470-500 million pounds to 410-440 million pounds. The reduction in guidance is due to a processing interruption at its Lumwana mine due to a partial collapse of the terminal end of the main conveyor. It maintained its guidance for copper cash costs per pound of $1.90-$2.10. It also maintained its capital expenditure forecast at $2.4-2.7 billion. The company stressed on discipline in capital allocation going forward. [3]

We have a Trefis price estimate of $15.15 for Barrick Gold. We will revise this in the light of the earnings announcement.

 

Notes:
  1. Barrick Gold Q1 2014 Report, Barrick Gold Website []
  2. Newmont Ends Barrick Merger Talks To Stay Independent, Bloomberg []
  3. Barrick Gold Q1 2014 Earnings Conference Call Transcript, Seeking Alpha []