Barrick Gold Earnings Review: Lower Gold Prices And Shipments Weigh On Q1 Results


Barrick Gold Corporation (NYSE:ABX), the world’s largest gold producer, released its first quarter results on April 27 and conducted a conference call with analysts the next day. As expected, lower realized gold and copper prices, as well as lower gold shipments, negatively impacted the company’s Q1 results. The company’s adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell from $238 million in Q1 2014, to $62 million in Q1 2015. [1] Revenues stood at $2.25 billion in Q1 2015, lower than the $2.65 billion in revenues reported in the corresponding period of 2014. [1]

Barrick’s  management announced plans to strengthen its balance sheet by reducing its debt. Through a combination of divestments and operating cash flows, the company intends to lower its debt by around $3 billion in 2015. [2] The company management reiterated is commitment to disciplined capital allocation, with a reduction in capital expenditure for 2015 and the potential sale of non-core assets. Furthermore, the company announced that it had put on hold plans to idle its Lumwana copper mine in Zambia, following a breakthrough in negotiations with the Zambian government over the country’s new mining tax regime. The company management had earlier announced plans to idle the Lumwana mine in March, if negotiations with the Zambian government did not yield positive results. [3] Following these developments, Barrick has raised its copper production guidance for 2015.

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Gold Prices

Barrick’s average realized gold price for Q1 2015 stood at $1,219 per ounce, down from $1,285 per ounce in the corresponding period of 2014. [1] Revenues from gold mining accounted for around 88% of Barrick’s total mining revenues in 2014. [4] Thus, the fall in gold prices was primarily 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 pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The tapering of QE implied strengthening U.S. economic growth, which reduced the investment demand for gold and led to a fall in prices of the metal. 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. [5] However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [6] An interest rate hike is likely to limit the upside to gold prices, as investors shift towards higher yielding assets.

Operational Performance

As expected, Barrick’s Q1 2015 gold production of 1.39 million ounces was lower than the figure of 1.59 million ounces for the corresponding period a year ago. [1] 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 and a half. [7] The company has divested a number of non-core, high-cost mines in order to operate more competitively in an environment of lower gold prices.

Out of Barrick’s portfolio of core mines, only the Lagunas Norte mine reported higher year-over-year production figures in Q1 2015. Production at the Lagunas Norte mine rose around 33% year-over-year to 178,000 ounces in Q1 2015, due to higher throughput and the processing of higher grade ores. [1] Production declined at the Cortez, Goldstrike, Pueblo Viejo, and the Veladero mines, which constitute Barrick’s other core mines. Production fell 41% year-over-year to 133,000 ounces at the Cortez mine due to the mining of lower grade ores. [1] Production declined 21% year-over-year to 207,000 ounces at the Goldstrike mine, as the mine ramps up production post the commissioning of a thiosulfate circuit, which is expected to significantly boost processing rates and production in the second half of the year. [1] Production declined 15% year-over-year to 135,000 ounces at the Pueblo Viejo mine and 6% year-over-year to 149,000 ounces at the Veladero mine, primarily due to the mining of lower grade ores. [1]

Barrick’s copper production stood at 118 million pounds in Q1 2015, 13% higher year-over-year. [1] The increase in Barrick’s copper production was primarily due to higher production at Lumwana due to favorable weather conditions and the company’s efforts to boost operational efficiency. [1] The company’s average realized price fell to $2.55 per pound in Q1 2015, as compared to $3.03 per pound in Q1 2014. [1] The fall in realized prices was mainly due to weakness in demand for the metal, particularly from China — the world’s largest consumer of copper, where slowing economic growth has dampened demand for the metal.

Barrick’s all-in sustaining costs (AISC) figure for Q1 2015 stood at $927 per ounce, around 11% higher year-over-year. [1] This was primarily because of a fall in gold production, which declined 12% year-over-year and negatively impacted unit costs. [1] 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’s AISC is expected to fall in the second half of the year, as the company’s gold production ramps up. The company expects an AISC of $865-900 per ounce for the full year 2015. [1]

Other Developments and Outlook

The company management announced that it has shelved plans to idle production at the Lumwana copper mine. Post negotiations between Barrick Gold and the Zambian government over changes to the country’s mining tax regime, the government has proposed amendments to the new law that took effect at the start of the year. The amendment would replace the 20% royalty rate on open-pit mines with a lower royalty of 9%, which makes the operations of the Lumwana mine economically feasible at current copper prices. [2]

Barrick Gold also announced a new gold discovery, known as Alturas, located in Chile’s El Indio belt. [8] Though the company has not revealed any more details at this stage, it expects the Alturas deposit to constitute low-cost, high grade ore.

Going forward, the company management stressed that disciplined capital allocation and debt reduction will continue to be the strategy for Barrick. As a part of its target to reduce its debt by $3 billion in 2015, the company intends to sell off its Porgera and Cowal mines, located in the Australia-Pacific region. The company is currently engaged in talks with potential buyers. [2] In addition, the company also intends to sell a minority stake in the Zaldivar copper mine. [2] The company also announced a $100 million reduction to its capital expenditure for 2015 from its previous guidance of $1.9-2.2 billion. [2] Given the prevailing environment of relatively subdued gold prices, a strategy of disciplined capital allocation will position Barrick Gold to operate more competitively in 2015.

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Notes:
  1. Barrick Gold’s Q1 2015 Earnings Release, SEC [] [] [] [] [] [] [] [] [] [] [] [] [] []
  2. Barrick Gold’s Q1 2015 Earnings Call Transcript, Seeking Alpha [] [] [] [] []
  3. Barrick Gold’s Q4 2014 Earnings Call Transcript, Seeking Alpha []
  4. Barrick Gold’s 2014 40-F, SEC []
  5. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters []
  6. Investor Expectations for Fed Rate Increase at June 2015 Meeting Slip, Wall Street Journal []
  7. Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website []
  8. Barrick Gold’s Q1 2015 Earnings Presentation, Barrick Gold Website []