Barrick Gold Q4 2015 Earnings Preview: Lower Gold Prices To Weigh On Results

February 16th, 2016 by Trefis Team

Barrick Gold Corporation (NYSE:ABX) will release its fourth quarter results on February 17 and conduct a conference call with analysts the next day. [1] We expect the decline in gold prices over the course of 2015 to negatively impact the company’s results. Barrick Gold has sold off a number of high-cost, non-core mines over the past couple of years and has also instituted a number of measures to reduce costs and boost the productivity of is operations. A combination of asset sales and more efficient operations will help lower Barrick’s cost structure and partially offset the impact of weaker gold prices on the company’s Q4 results. The company’s adjusted net earnings, which exclude the impact of non-recurring items on profits, declined by around 41% year-over-year to $131 million in Q3 2015. [2] In this article, we will take a look at what to expect from Barrick’s Q4 2015 results.

Gold Prices

Gold Prices in 2015, Source: Kitco

The chart shown above illustrates the decline in gold prices over the course of 2015. Gold prices declined over the course of 2015, mainly due to fears of an interest rate hike by the Fed. Gold is considered a safe haven asset from an investment point of view, with investments in the yellow metal generally made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions and rising interest rates usually negatively impact 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 any returns besides capital gains. The strengthening of the U.S. economy and concerns over an interest rate hike drove down gold prices in Q4 2015. Barrick Gold expects realized prices for its gold sales to average $1,105 per ounce in Q4 2015, around 8% lower than in the corresponding period of 2014. [3] Since gold mining accounts for roughly 90% of Barrick’s total revenues, the decline in gold prices is expected to negatively impact the company’s profits in Q4. [4]

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Gold prices have recovered somewhat so far this year (as illustrated by the chart shown below), with global economic uncertainty increasing the appetite for investment in safe haven assets. Further, the Fed has taken a more dovish stance with respect to interest rates hikes in the backdrop of weak global economic conditions. [5] If weak global economic conditions persist, gold prices are likely to get a boost.

Gold Prices in 2016, Source: Kitco

 

Cost and Debt Reduction

In response to the decline in gold prices over the past couple of years, Barrick Gold has sold off a number of high-cost mines and instituted measures to boost the productivity of its operations. These have translated into a reduction in the company’s all-in sustaining costs (AISC) metric, which is a comprehensive measure of the costs associated with a company’s ongoing mining operations. Barrick’s AISC stood at $771 per ounce in Q3 2015, as compared to $834 per ounce in the corresponding period the previous year. [6] It would be interesting to note whether the company is able to maintain the AISC at similar levels in Q4 2015 as well.

In addition to lowering average costs of production, Barrick Gold has achieved its $3 billion debt reduction target for 2015 largely through a combination of stake sales and the signing of a streaming agreement. [3] We would like to know the management’s take on the likely trajectory of gold prices going forward in the earnings conference call, and the implications for Barrick’s gold mining operations, specifically, if more cost reduction initiatives are in the works. More information on this front will shed some light on the path ahead for Barrick Gold.

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Notes:
  1. Fourth Quarter 2015 Results Release on February 17, Barrick Gold Website [↩]
  2. Barrick Gold’s Q3 2015 Earnings Release, SEC [↩]
  3. Barrick Achieves 2015 Production Guidance, Barrick Gold News Release [↩] [↩]
  4. Barrick Gold’s 2014 40-F, SEC [↩]
  5. Weaker Dollar Spurs Rise in Gold Prices, Wall Street Journal [↩]
  6. Barrick Gold’s Q3 2015 Earnings Presentation, Barrick Gold Website [↩]