Barrick Gold Earnings Preview: Lower Gold Prices To Negatively Impact Q2 Results


Barrick Gold Corporation (NYSE:ABX) will release its second quarter results on August 5 and conduct a conference call with analysts the next day. [1] We expect the decline in gold prices over the course of the last twelve months to negatively impact the company’s results. Barrick 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 likely to lower the company’s year-over-year gold shipments for the second quarter as well. Barrick’s adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell sharply from $238 million in Q1 2014 to $62 million in Q1 2015, primarily as a result of lower gold prices and shipments. [2] In this article, we will take a look at what to expect from Barrick’s Q2 results.

Gold Prices

Gold prices have fallen over the course of the last twelve months, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program and expectations of an interest rate hike. 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 Q2 2014, have averaged close to levels of $1,200 per ounce in Q2 2015. [3] Revenues from gold mining accounted for around 88% of Barrick’s total mining revenues in 2014. [4] 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.

Relevant Articles
  1. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  2. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  3. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  4. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?
  5. Will UPS Stock Recover To Its Pre-Inflation Shock High of $230?
  6. Should You Pick Boeing Stock At $190?

Going forward, a potential interest rate hike by the Fed is likely to weigh on gold prices. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. [5] Whereas the exact timing of an interest rate hike is unclear, a rate hike is likely to lead to a decline in gold prices, as investors shift towards higher yielding assets. The downward trajectory of gold prices, so far this year, is illustrated in the chart shown below.

Gold Prices in 2015, Source: Kitco

Portfolio Optimization and Debt Reduction

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 divested a number of gold mines. The focus of the company’s portfolio optimization efforts has been getting rid of high-cost mines. 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. ((Barrick Gold’s Q4 2013 Earnings Presentation, Barrick Gold Website)) Further, the company also sold a 10% equity stake in its subsidiary, African Barrick Gold. [6] As a result of these asset sales, the company’s gold production and shipments in Q2 2015 are likely to be lower than in Q2 2014, with higher production from Barrick’s other mines unlikely to offset the loss in production from assets sales.

In response to the downturn in gold prices, Barrick’s management had committed to reducing the company’s debt by $3 billion over the course of 2015. [7] In order to accomplish this objective, Barrick has announced transactions over the last month or so, which would help lower the company’s debt burden by $1.85 billion. [8] These include the sale of the Cowal gold mine and 50% stakes in both the Porgera gold mine and the Zaldivar copper mine. [8] Since the company is still some way short of its stated debt reduction target for the year, we will be looking out for more announcements from the company management pertaining to debt reduction in the Q2 earnings conference call. With gold prices expected to remain subdued in the near term, these actions taken by the management will better align the company’s operations with the realities of the present business environment.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

 

 

Notes:
  1. Second Quarter 2015 Results Release on August 5, Barrick Gold Website []
  2. Barrick Gold’s Q1 2015 Earnings Release, SEC []
  3. Gold Price Charts, Kitco []
  4. Barrick Gold’s 2014 40-F, SEC []
  5. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters []
  6. Barrick Completes Partial Divestment Of African Barrick Gold Plc Holding, Barrick Gold News Release []
  7. Barrick Gold’s Q1 2015 Earnings Call Transcript, Seeking Alpha []
  8. Barrick Announces Sale of 50 Percent of Zaldívar Mine, Formation of New Partnership with Antofagasta Plc, Barrick Gold News Release [] []