Barrick Gold’s Q3 Earnings Preview: Lower Gold Prices To Negatively Impact Results

Barrick Gold Corporation (NYSE:ABX) will release its third quarter results on October 28 and conduct a conference call with analysts the next day. ^[1] We expect the fall 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 mines over the past couple of years in response to the decline in gold prices. The sale of high-cost assets will help lower Barrick’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 gold production for the third quarter on a year-over-year basis. The company’s adjusted net earnings declined by nearly 62% year-over-year to $60 million in Q2 2015, 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 Q3 results.

Gold Prices

Gold prices have declined over the course of the last year or so, mainly due to fears of an interest rate hike by the Fed. Gold as an investment is generally considered a safe haven asset and investments are primarily made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions and rising interest rates generally lower the investment demand for gold. With an increase in interest rates, investors tend to shift towards interest-bearing assets, which give higher yields as compared to gold, which does not offer returns besides capital gains. The strengthening of the U.S. economy and fears over an interest rate hike reduced the investment demand for gold and led to a fall in the prices of the metal. London PM Fix gold spot prices, which averaged roughly $1,280 per ounce in Q3 2014, averaged around $1,120 per ounce in Q3 2015. ^[3] Since revenues from gold mining account for nearly 90% of Barrick’s total mining revenues, the decline in gold prices is expected to negatively impact the company’s revenues and profitability in Q3. ^[4] With the Fed holding interest rates steady in its September meeting, gold prices have recovered somewhat. An interest rate hike in the near future is contingent upon the rates of employment growth, inflation, and economic growth. The following chart illustrates the trajectory of gold prices so far this year.

Gold Prices in 2015, Source: Kitco

Portfolio Optimization and Debt Reduction

In response to the weakness in gold prices over the past couple of years, Barrick has divested a number of high-cost mines in order to lower its average production costs. As a result of these asset sales, Barrick’s gold production and shipments in Q3 2015 are likely to be lower than in the corresponding period of 2014, with higher production from Barrick’s other mines unlikely to offset the loss in production from asset sales. Barrick’s gold production certainly suffered as a result of asset sales in the first half of 2015, totaling 2.84 million ounces as compared to 3.07 million ounces in the corresponding period of 2014. ((Barrick Gold Q2 2015 Earnings Release, SEC))

In addition to lowering average costs of production, Barrick’s management had committed to reducing the company’s debt by $3 billion over the course of 2015, in order to improve the company’s financial position in an environment of weak gold prices. ^[5] Through a combination of stake sales and a streaming agreement, the company has achieved almost 90% of its stated target. ^[6] We would be looking out for more announcements in the Q3 earnings call from the company management pertaining to debt reduction. We would also be interested in knowing the management’s take on the likely trajectory of gold prices, post the Fed’s decision to keep interest rates steady, and the implications for Barrick’s gold mining operations going forward. More information on this front will shed some light on the future path  for Barrick Gold.

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1. Third Quarter 2015 Results Release on October 28, Barrick Gold Website [↩]
2. Barrick Gold Q2 2015 Earnings Release, SEC [↩]
3. Gold Price Charts, Kitco [↩]
4. Barrick Gold’s 2014 40-F, SEC [↩]
5. Barrick Gold’s Q2 2015 Earnings Call Transcript, Seeking Alpha [↩]
6. Barrick Announces Streaming Agreement With Royal Gold, Barrick Gold Website [↩]