Barrick Gold Earnings Preview: Lower Gold Prices to Weigh on Results


Barrick Gold Corporation (NYSE:ABX) will announce its second quarter results on July 30 and conduct a conference call with analysts the next day. We expect lower gold prices in the second quarter, as compared to the corresponding period last year, to negatively affect Barrick’s results. The company has divested a number of high-cost, non-core assets over the last 12 months or so. This will help lower the company’s cost structure and better position it to operate in subdued gold pricing environments. These asset sales are expected to lower the company’s year-over-year gold shipments for the second quarter . Barrick’s copper production is also expected to be lower year-over-year in the second quarter this year due to operational disruptions at the company’s Lumwana copper mining operations.

See our complete analysis for Barrick Gold

Gold Prices

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Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. However, the timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [1] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

Gold prices averaged roughly $1,400 per ounce in Q2 2013. Prices have averaged roughly $1,300 per ounce in the second quarter this year. ((Gold Price Charts, Kitco)) Revenues from gold sales accounted for around 85% of Barrick’s total revenues in 2013. ((Barrick Gold’s 2013 10-K, SEC)) Lower gold prices are expected to negatively impact the company’s revenues in the second quarter, as compared to the corresponding period a year ago.

Portfolio Optimization

With gold prices expected to remain subdued in the near-term, Barrick has divested non-core assets in order to lower its average production costs. Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. [2] These include the sales of the Darlot, Granny Smith, Lawlers, Plutonic and Kanowna mines in Australia, the Tulawaka mine in Tanzania, the Marigold mine in Nevada and the closure of the Pierina mine in Peru. Further, the company recently sold a 10% equity stake in African Barrick Gold. [3] Lastly, the company also sold off its oil and gas business, namely Barrick Energy in 2013. The combined proceeds of these assets sales total approximately $1 billion. ((Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website)) As a result of these asset sales, the company’s gold production in the second quarter and the full year 2014 is expected to be lower than the corresponding periods last year. The company is expecting 6-6.5 million ounces of gold production for 2014, as compared to 7.166 million ounces last year. ((Barrick Gold’s Q1 2014 Earnings Release, SEC))

The focus of the company’s portfolio optimization efforts has been getting rid of high-cost mines. This is reflected in the All-in Sustaining Cost (AISC) metric for these mines. The AISC metric includes the total cash cost, sustaining capital expenditures, general and administrative costs, minesite exploration and evaluation costs, mine development expenditures and environmental rehabilitation costs. It provides a comprehensive view of costs related to a company’s current mining operations. In 2013, the AISC figures for the Australia Pacific mines segment, African Barrick Gold and Pierina stood at $994 per ounce, $1,362 per ounce and $1,349 per ounce respectively. The reportable segment of North American mines, which includes the Marigold mine, reported an AISC of $1,235 per ounce. All of these figures are higher than the company-wide AISC of $915 per ounce for Barrick’s gold mining operations. Asset sales helped lower Barrick’s AISC for its gold mining operations from $1,014 per ounce in 2012 to $915 per ounce in 2013. [4]

The Cortez and Goldstrike mines in Nevada, the Pueblo Viejo mine in the Dominican Republic, the Lagunas Norte mine in Peru and the Veladero mine in Argentina are Barrick’s core, low-cost mines. These mines collectively had an AISC of $668 per ounce in 2013, as compared to $915 per ounce for all of Barrick’s gold mines. These mines will collectively account for over 60% of Barrick’s gold production in 2014. ((Barrick’s Gold 2013 40-F, SEC))

Apart from the construction of a Carbon In Leach (CIL) plant at its Bulyanhulu mine in Africa, the company’s minesite expansion capital expenditure for 2014 is focused on its core assets. The construction of the Goldstrike Thiosulfate Technology project, and feasibility and development expenditures related to the Cortez Hills Lower Zone expansion, which will extend the life of the Cortez mine by around 7 years, are the major components of its minesite expansion capital expenditure in 2014. ((Barrick’s Gold 2013 40-F, SEC)) This indicates that the emphasis for Barrick lies on its core assets going forward.

Other Developments

The company recently announced the formation of a joint venture with Saudi Arabian Mining Company (Ma’aden) to operate the Jabal Sayid copper mine, located near Medina, Saudi Arabia. Ma’aden will acquire its 50% interest in Barrick’s Jabal Sayid project for cash consideration of $210 million. The acquisition is expected to be completed in the fourth quarter of 2014. Jabal Sayid is expected to commence production in late 2015 and when fully operational, is anticipated to produce approximately 100-130 million pounds of copper concentrate per year during its first full five years of operation. The life of the mine is expected to be around 15 years on the basis of its proven and probable reserves, which stood at 1.4 billion pounds as on December 31, 2013. [5]

Barrick’s second quarter copper shipment volumes are expected to be significantly lower year-over-year. This is primarily due to the partial collapse of the terminal end of the main conveyor at its Lumwana copper mining operations in the second quarter. Copper production at Lumwana is expected to resume in the third quarter. The company has revised down its copper production forecast for 2014 from 470-500 million pounds to 410-440 million pounds. [6]

Expectations from Conference Call

The company’s portfolio optimization efforts have already resulted in divestitures of non-core mining assets totaling $1 billion since mid-2013. In addition, the company is targeting $500 million in cost savings for 2014. [7] We would like to know if the company management has identified any other opportunities for portfolio optimization or cost-cutting. The specific areas identified by the company for its cost-cutting efforts would also be of interest to us. This will throw some light on the road ahead for Barrick Gold.

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Notes:
  1. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []
  2. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website []
  3. Barrick Completes Partial Divestment Of African Barrick Gold Plc Holding, Barrick Gold News Release []
  4. Barrick’s Gold 2013 40-F, SEC []
  5. Barrick Partners with Ma’aden to Form Jabal Sayid Joint Venture, Barrick Gold News Release []
  6. Barrick Gold’s Q1 2014 Earnings Release, SEC []
  7. Barrick Gold’s Q1 2014 Earnings Presentation, Barrick Gold Website []