Lower Gold Prices And Shipments Weigh On Barrick’s Q2 Results

Barrick Gold Corporation (NYSE:ABX), the world’s largest gold producer, released its second quarter results on August 30 and conducted a conference call with analysts on August 31. Lower realized gold prices as well as lower gold and copper shipments negatively impacted the company’s Q2 results. Revenues stood at $2.43 billion in the second quarter, lower than the $3.20 billion in revenues reported in the corresponding period last year. Adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell from $663 million in Q2 2013 to $159 million in Q2 2014. ^[1] The company reported a net loss of $269 million in Q2 2014, as compared to a net loss of $8.55 billion in the corresponding period last year. However, the company’s results were impacted by impairment charges totaling $514 million and $9.32 billion in Q2 2014 and Q2 2013 respectively. ^[1]The impairment in Q2 2014 related to the Jabal Sayid copper project, which included $316 million attributable to impairment of goodwill. ((Barrick Gold’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha))

The company reported significantly lower all-in sustaining costs (AISC) per ounce of gold, signifying tangible success in its cost reduction efforts through the sale of non-core assets and a reduction in operating costs. The AISC metric includes operating costs, sustaining capital expenditures, selling, general and administrative 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 guidance for both copper and gold. However, it lowered its AISC guidance for gold. It reaffirmed its commitment to cost reduction and portfolio optimization, and lowered its guidance for capital expenditure.

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Gold Prices

Average realized gold price for the second quarter stood at $1,289 per ounce, down from $1,411 per ounce in the corresponding period last year. ^[2] 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. ^[3] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

Operational Performance

As expected, Barrick’s second quarter gold production of 1.48 million ounces was lower than the figure of 1.81 million ounces for the corresponding period a year ago. ((Barrick Gold’s Q2 2014 Earnings Release, Barrick Gold Website)) This was primarily because of the company’s portfolio optimization efforts, which has resulted in a reduction in its portfolio of mines from 27 to 19, over the course of the last year or so.((Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website)) Barrick’s AISC figure stood at $865 per ounce in Q2 2014, lower than the figure of $910 per ounce reported in Q2 2013. ^[4] The divestment of high-cost assets as well as cost savings and reduced capital expenditure contributed to the decrease in AISC. The company is targeting $500 million in cost savings for 2014. ^[5]

Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo are Barrick’s five core mines. These mines are the company’s low-cost assets. They collectively produced 0.896 million ounces, approximately 60% of the company’s Q2 production. These mines are expected to report an AISC of $750-800 per ounce in 2014, which is lower than the expected AISC of $900-940 per ounce for the company’s overall gold mining operations. ((Barrick Gold’s Q2 2014 Earnings Release, Barrick Gold Website))

Production at the Cortez mine fell from 417,000 ounces in Q2 2013 to 217,000 ounces in Q2 2014, due to the mining of lower than expected grades. Production at the Lagunas Norte mine fell from 131,000 ounces in Q2 2013 to 115,000 ounces in Q2 2014, due to a construction delay on the Phase 5 leach area. The other core mines reported a year-over-year increase in production. Production at Goldstrike rose form 187,000 ounces to 214,000 ounces due to mining of higher grade ores and higher recoveries. At Pueblo Viejo, production increased form 122,000 ounces  to 161,000 ounces as the autoclaves at the mining complex achieved targeted and sustainable run rates. Production at the Veladero mine rose form 140,000 ounces to 189,000 ounces. ((Barrick Gold’s Q2 2014 Earnings Release, Barrick Gold Website))

Barrick’s copper production stood at 67 million pounds in Q2 2013, 50% lower than the production figure of 134 million pounds for Q2 2014. This was primarily due to the partial collapse of the terminal end of the main conveyor at its Lumwana copper mining operations, early on in the second quarter. ((Barrick Gold’s Q2 2014 Earnings Release, Barrick Gold Website))

Outlook

The company maintained its previous guidance for gold production of 6-6.5 million ounces for the full year. However, as a result of the company’s efforts at cost management, improvements in operational efficiency and disciplined capital allocation, it has lowered its AISC guidance for 2014 from $920-980 per ounce to $900-940 per ounce. The company also lowered its capital expenditure guidance from $2.4-2.7 billion to $2.2-2.5 billion for 2014. With normal operations resuming at the Lumwana copper mine earlier on in the third quarter, the company maintained its previous production guidance of 410-440 million pounds of copper in 2014. ^[5]

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1. Barrick Gold’s Q2 2014 Earnings Release, Barrick Gold Website [↩] [↩]
2. Barrick Gold’s Q2 2014 Earnings Release, Barrick Gold Website [↩]
3. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
4. Barrick Gold’s Q2 2014 Earnings Presentation, Barrick Gold Website [↩]
5. Barrick Gold’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha [↩] [↩]