Barrick Gold Earnings Preview: Lower Gold Prices To Weigh On Q1 Results


Barrick Gold Corporation (NYSE:ABX) will release its first quarter results on April 27 and conduct a conference call with analysts the next day. We expect lower gold prices in Q1 2015, 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 could lower the company’s year-over-year gold shipments for the first quarter. Barrick’s adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell sharply from $406 million in Q4 2013, to $174 million in Q4 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 Q1 results.

Gold Prices

Gold prices have fallen over the course of the last year, reacting to cues regarding the 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 Q1 2014, have averaged close to levels of $1,200 per ounce in Q1 2015. [2] Revenues from gold mining accounted for around 88% of Barrick’s total mining revenues in 2014. [3] Lower gold prices are expected to negatively impact the company’s revenues and profitability in Q1 2015, 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 first quarter of 2015 could to be lower than in the corresponding period of 2015. However, higher production from the Goldstrike and the Bulyanhulu mines, post technological upgrades to the processing facilities at these operation in 2014, would partially offset the decrease in production volumes as a result of the previously mentioned asset sales. [3]

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 the Pierina mine, 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 $915 per ounce in 2013, to $864 per ounce in 2014. [1]

Other Developments

Barrick’s Lumwana copper mining operations in Zambia have been affected by an adverse change in the country’s tax regime. Starting in 2015, corporate income taxes on mines have been replaced by increased royalties. The new regulations will result in an increase in the royalty rate from 6% to 20% for Barrick’s Lumwana open-pit copper mining operations. [8] The royalties are applicable on revenues generated by the mine and as per the company management, this increase in royalty rates threatens the viability of the Lumwana copper mine. [9] In an earlier conference call, the company management had stated that it was engaged in negotiations with the Zambian government pertaining to the new tax regulations, and if no compromise were reached, it would start the process of suspending its Zambian mining operations in March. [9]

We would be looking for an update from the company management in its Q1 earnings conference call about the state of its negotiations with the Zambian government and the fate of the Lumwana mine. More clarity on this front would throw some light on the road ahead for Barrick Gold.

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Notes:
  1. Barrick Gold’s Q4 2014 Earnings Release, Barrick Gold Website [] []
  2. Gold Price Charts, Kitco []
  3. Barrick Gold’s 2014 40-F, 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 Said to Plan Suspending Zambian Mine After Tax Changes, Bloomberg []
  9. Barrick Gold’s Q4 2014 Earnings Call Transcript, Seeking Alpha [] []