Barrick Gold Earnings Preview: Lower Gold Prices To Weigh On Q4 Results

February 17th, 2015 by Trefis Team

Barrick Gold Corporation (NYSE:ABX) will release its fourth quarter results on February 18 and conduct a conference call with analysts the next day. We expect lower gold prices in Q4 2014, as compared to the corresponding period last year, to negatively impact Barrick’s results. The company has divested a number of high-cost, non-core assets since the middle of 2013. The sale of non-core assets will help lower the company’s cost structure and put it in a better position to operate in a subdued gold pricing environment. However, these asset sales are expected to lower the company’s year-over-year gold shipments for the fourth quarter. Barrick’s adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell sharply from $577 million in Q3 2013 to $222 million in Q3 2014, primarily due to a fall in gold prices. [1] In this article, we will take a look at what to expect from Barrick’s Q4 results.

Gold Prices

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. The tapering of QE implied strengthening U.S. economic growth. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and led to a fall in prices of the metal. London PM Fix gold spot prices, which averaged close to $1,300 per ounce in Q4 2013, have averaged close to levels of $1,200 per ounce in Q4 2014. [2] Revenues from gold sales accounted for around 85% of Barrick’s total revenues in 2013. [3] Lower gold prices are expected to negatively impact the company’s revenues and profitability in Q4 2014, as compared to the corresponding period a year ago.

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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 sometime in 2015. [4] However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [5] An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets.

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. [6] 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 also sold a 10% equity stake in its subsidiary, African Barrick Gold. [7] Lastly, the company also sold off its oil and gas business, namely Barrick Energy, in 2013. The combined proceeds of these asset sales total approximately $1 billion. [6] As a result of these asset sales, the company’s gold production in the fourth 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. [1] [8]

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. [8]

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 are expected to collectively account for over 60% of Barrick’s gold production in 2014. [8] 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, were the major components of its minesite expansion capital expenditures in 2014. [8] This indicates that the emphasis for Barrick lies on its core assets going forward.

Cost Reduction

The company’s portfolio optimization efforts have already resulted in divestitures of non-core mining assets totaling $1 billion since mid-2013. [9] In addition, the company had announced earlier on in the year that it was targeting $500 million in cost savings for 2014. [10] It would be interesting to note whether the company has been able to realize its targeted cost savings for 2014. We would also like to know if the company management has identified any other opportunities for portfolio optimization or cost-cutting and the specific areas identified for the same. This will throw some light on the road ahead for Barrick Gold.

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Notes:
  1. Barrick Gold’s Q3 2014 Earnings Release, Barrick Gold Website [↩] [↩]
  2. Gold Price Charts, Kitco [↩]
  3. Barrick Gold’s 2013 10-K, SEC [↩]
  4. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters [↩]
  5. Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal [↩]
  6. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website [↩] [↩]
  7. Barrick Completes Partial Divestment Of African Barrick Gold Plc Holding, Barrick Gold News Release [↩]
  8. Barrick’s Gold 2013 40-F, SEC [↩] [↩] [↩] [↩]
  9. Barrick Completes Divestiture of Kanowna in Australia, Barrick Gold Website [↩]
  10. Barrick Gold’s Q2 2014 Earnings Call Transcript, Seeking Alpha [↩]