Lower Gold, Copper Prices And Shipments Weigh On Barrick’s Q3 Results


Barrick Gold Corporation (NYSE:ABX), the world’s largest gold producer, released its third quarter results on October 29 and conducted a conference call with analysts on October 30. Lower realized gold and copper prices as well as lower gold and copper shipments negatively impacted the company’s Q2 results. Revenues stood at $2.60 billion in the second quarter, lower than the $2.99 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 $577 million in Q3 2013 to $222 million in Q3 2014. [1]

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 raised its production guidance for copper and maintained it for gold. It lowered its AISC guidance for gold. The company management reaffirmed its strategy of focusing upon its core gold assets and developing low-cost gold mines that create the best value for shareholders.

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See our complete analysis for Barrick Gold

Gold Prices

Barrick’s average realized gold price for the third quarter stood at $1,285 per ounce, down from $1,323 per ounce in the corresponding period last year. ((Barrick Gold’s Q3 2014 Earnings Release, Barrick Gold Website)) Revenues from gold sales accounted for around 85% of Barrick’s total revenues in 2013. ((Barrick Gold’s 2013 10-K, SEC)) Thus, the fall in gold prices was majorly responsible for the deterioration in the company’s year-over-year quarterly results.

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. [2] 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 third quarter gold production of 1.65 million ounces was lower than the figure of 1.85 million ounces for the corresponding period a year ago. ((Barrick Gold’s Q3 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. [3] Barrick’s AISC figure stood at $852 per ounce in Q3 2014, lower than the figure of $934 per ounce reported in Q3 2013. ((Barrick Gold’s Q3 2014 Earnings Release, Barrick Gold Website)) The divestment of high-cost assets as well as cost savings and reduced capital expenditure contributed to the decrease in AISC.

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 1 million ounces, approximately 60% of the company’s Q3 production. These mines are expected to report an AISC of $730-780 per ounce in 2014, which is lower than the expected AISC of $880-920 per ounce for the company’s overall gold mining operations. ((Barrick Gold’s Q3 2014 Earnings Presentation, Barrick Gold Website))

Production at the Cortez mine fell from 333,000 ounces in Q3 2013 to 273,000 ounces in Q3 2014, mainly due to the mining of lower than expected grade ores. The other core mines reported a year-over-year increase in production. Production at the Lagunas Norte mine rose from 136,000 ounces in Q3 2013 to 157,000 ounces in Q2 2014, due to the processing of higher grade ores. Production at Goldstrike rose form 233,000 ounces to 239,000 ounces due to the processing of higher grade ores. Production at the Veladero mine rose form 154,000 ounces to 178,000 ounces due to the mining of higher than expected grade ores. At Pueblo Viejo, production increased form 113,000 ounces  to 168,000 ounces. [1]

Barrick’s copper production stood at 131 million pounds in Q3 2014, slightly lower than the production figure of 139 million pounds for Q3 2013. The average realized price for Q3 2014 fell to $3.09 per pound from $3.40 per pound in the corresponding period a year ago. Copper production rebounded to normal levels after the main conveyor at the Lumwana copper mining operations was repaired and normal operations resumed in July. The partial collapse of the terminal end of the main conveyor early on in the second quarter led to a sharp fall in Barrick’s copper production in Q2. [1]

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 $900-940 per ounce to $880-920 per ounce. With normal operations resuming at the Lumwana copper mine earlier than expeceted, the company raised its production guidance to 440-460 million pounds of copper in 2014, up from the previous guidance of 410-440 million pounds. [1]

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Notes:
  1. Barrick Gold’s Q3 2014 Earnings Release, Barrick Gold Website [] [] [] []
  2. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []
  3. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website []