Weekly Metals And Mining Notes: U.S. Steel And Barrick Gold

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United States Steel

The metals and mining space had a fairly quiet week with only U.S. Steel and Barrick Gold witnessing significant activity. U.S. Steel announced the idling of a steel plant in response to weak market conditions. Barrick Gold announced that it has received a favorable ruling from Chile’s Supreme Court pertaining to its stalled Pascua-Lama project. Here are the details pertaining to these major events from this week.

U.S. Steel

U.S. Steel (NYSE:X) announced plans to idle its Granite City Works steel plant located in Granite City, Illinois. [1] The Granite City Works plant produces flat-rolled steel and accounts for 2.8 million tons out of the company’ 24.4 million tons of raw steel production capability. [2] The company has idled the Granite City Works plant in response to weak market conditions for steel. Capacity utilization at the company’s U.S. Flat-rolled operations stood at 80% of full capacity in 2014. [2] Idling the Granite City Works plant will more closely align production rates with market demand.

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We have a $23 price estimate for U.S. Steel, which is around 6% below the current market price. We estimate revenues of $14.7 billion in 2015 for the company.

Barrick Gold

Barrick Gold Corporation (NYSE:ABX) announced that it has received a favorable ruling from Chile’s Supreme Court pertaining to its stalled Pascua-Lama gold project. [3] The Supreme Court ruled that the Pascua-Lama project has not damaged glaciers within the project’s area of influence. Chile’s environmental regulator, known as the SMA, fined Barrick $16 million in May 2013 for not complying with some of the country’s environmental requirements for its Pascua-Lama project. Barrick announced the temporary suspension of construction activities at its Pascua-Lama project in 2013, except for those required for environmental and regulatory compliance. The suspension of the project was due to a combination of legal and regulatory complications, cost overruns, and an environment of falling gold prices, which impacted the viability of the project.

As per estimates in the company’s 2012 annual report, the mine was expected to average 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of production, at all-in sustaining cash costs of $50-200 per ounce. [4] To put this into context, Barrick’s gold production in 2014 stood at 6.25 million ounces at all-in sustaining cash costs of $864 per ounce. [5] Thus, the Pascua-Lama mine is a low-cost gold asset for Barrick Gold. The company has stated that the resumption of construction activities at Pascua-Lama would be contingent upon an increase in gold prices and greater clarity on the legal and regulatory issues that have dogged the project. [6] Though the ruling does not guarantee the resumption of construction activities at Pascua-Lama, it is a positive development for the company towards the resumption of the stalled project and would lessen some of the legal hurdles in front of Barrick Gold.

We have a $12 price estimate for Barrick Gold, which is around 2% above the current market price. We estimate revenues of $9.5 billion in 2015 for the company and an EPS of $0.65, as compared to a consensus estimate of $0.69.

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Notes:
  1. U.S. Steel idling Granite City Works in flat-rolled consolidation, Pittsburgh Business Times []
  2. U.S. Steel’s 2014 10-K, SEC [] []
  3. Chile’s Environmental Court Rejects Claims that Pascua-Lama has Damaged Glaciers, Barrick Gold News Release []
  4. Barrick Gold’s 2012 40-F, SEC []
  5. Barrick Gold’s 2014 40-F, SEC []
  6. Barrick Gold’s 2013 40-F, SEC []