Barrick Gold Corporation (NYSE:ABX) operates mines in North America, South America, Australia and Africa. The company has mainly gold and copper in its portfolio and competes with other mining companies such as Newmont Mining (NYSE:NEM), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).
In this article, we take a closer look at Cortez and Goldstrike mines that are located in Nevada and are Barrick Gold’s two largest mines in terms of gold production. In 2012, they together constituted 34% of the company’s total gold production. In the North American region, which accounts for almost 50% of Barrick’s total production, gold from these two mines amounts to more than 70% of Barrick’s production.
Let’s take a look at the cost of production, the significance of the mines for Barrick’s overall portfolio and future, the quantity of reserves and the likely production trajectory going forward.
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The all-in sustaining cash cost (AISC) is a newly adopted cost measure in the gold mining industry. It includes total cash costs, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. In 2012, Goldstrike’s production stood at 1.17 million ounces of gold at an AISC of $670 per ounce. In the same year, Cortez produced 1.37 million ounces of gold at an AISC of $543 per ounce. Considering that Barrick’s overall production in 2012 was 7.4 million ounces at an AISC of $945 per ounce, excluding the low costs incurred at Cortez and Goldstrike, the overall costs would be much higher. 
In the second quarter this year, Cortez reported an AISC of $376 per ounce while Goldstrike reported a figure of $1,226 per ounce. The higher AISC at Goldstrike reflects the processing of lower grade ore at the autoclave facility, which is currently undergoing modifications to enable about 3.5 million ounces to be brought forward in the mine plan through the thiosulphate project. The AISC is expected to come down significantly in the second half of 2013. Goldstrike’s AISC in the first quarter was $817 per ounce. 
Barrick’s overall reported AISC was $919 per ounce. Players like Kinross, Newmont and Goldcorp have production costs in the range of $1,000-1,200 per ounce. Thus, Cortez and Goldstrike are crucial to sustaining Barrick’s cost advantage over rivals. ((What is the Cost of Mining Gold?, Visual Capitalist))
Advantage Of Low Costs
In 2012, Barrick’s entire gold production was delivered into the spot market. The company realized an average price of $1,669 per ounce. For 2013, Barrick assumed a price of $1,700 per ounce initially but revised it to $1,500 per ounce later. Looking at the steep decline in gold prices in April-July this year and assuming a modest recovery, we think that the average realized price would hover around $1,400 per ounce. The company is likely to present its latest estimate while releasing the Q3 earnings report next month. 
At the presently prevailing price levels of ~$1,300 per ounce, many small and medium scale miners are hemorrhaging owing to their high costs of production. We think that if prices don’t cross $1,400 per ounce soon, high cost mines will be shut down and prices will rise.
Reserves And Production Potential
Mining companies generally measure their future production prospects in terms of proven and probable reserves. At the end of 2012, Goldstrike had proven mineral reserves of 65.75 million tonnes, containing 6.77 million ounces of gold. Probable mineral reserves stood at 43.42 million tonnes, containing 5.57 million ounces of gold. Thus, overall reserves stood at 12.3 million gold ounces. On the other hand, Cortez had proven mineral reserves of 31.86 million tonnes which contained 2.09 million ounces of gold, and probable reserves of 274.33 million tonnes which contained 12.97 million ounces of gold. ((Barrick Gold 2012 10-K, SEC))
One may notice that although Cortez contains nearly half the proven mineral reserves at Goldstrike, the quantity of gold contained is disproportionately lower. The difference arises due to the grade of ore, a parameter measured simply as gold ounces per tonne of ore. While the grade of ore at Goldstrike is 0.103 ounces/tonne, that at Cortez is just 0.066 ounces/tonne. A similar explanation holds forth for probable mineral reserves. For these, the grade of ore at Goldstrike is 0.128 ounces/tonne while at Cortez it stands at 0.047 ounces/tonne. The grade of ore at both mines is superior to Barrick’s company-wide grade of 0.045 ounces/tonne for proven reserves and 0.038 ounces/tonne for probable reserves. Even rival miner Newmont has an overall ore grade of 0.037 ounces/tonne for proven reserves and 0.026 ounces/tonne for probable reserves. 
One should note, however, that figures for the grade of ore at these mines are not the realized grades in any given year. Ore bodies are never homogeneous. Therefore, we observe the grade of mined ore varying year-over-year. For some years it may be greater than the overall grade, and for others it may be lower. The lack of uniformity should be evident from the following tables taken from Barrick’s 2012 annual report filed with the SEC:
|Year ended December 31, 2012||Year ended December 31, 2011|
|Tons mined (000’s)||110,361||118,523|
|Tons of ore processed (000’s)||8,253||7,798|
|Average grade processed (ounces per ton)||0.172||0.166|
|Recovery rate (%)||82.8||%||84.1||%|
|Ounces of gold produced (000’s)||1,174||1,088|
|Average total cash costs per ounce (1)||$||541||$||511|
|Year ended December 31, 2012||Year ended December 31, 2011|
|Tons mined (000’s)||120,203||119,021|
|Tons of ore processed (000’s)||9,870||11,502|
|Average grade processed (ounces per ton)||0.150||0.136|
|Ounces of gold produced (000’s)||1,370||1,421|
|Average total cash costs per ounce (1)||$||282||$||245|
According to Barrick, based on existing reserves and production capacity, the expected remaining mine life at Goldstrike is 13 years for underground mining, 14 years for open pit mining and 16 years for processing operations (reflecting additional underground ores as well as additional toll ores purchased from third-party vendors). For Cortez, the expected remaining mine life is approximately 13 years for underground mining, nine years for open pit mining and 13 years for processing operations. The company is likely to have arrived at these figures based on its own models, taking into account the geological composition of the mine, the grade of ore at different layers in the ore body, and internal demand projections.
1) Goldstrike and Cortez are Barrick’s most productive gold mines and account for nearly one-third of Barrick’s total production.
2) These mines are also among its lowest cost mines which give Barrick a crucial competitive advantage, especially in the present circumstances when market headwinds are threatening the survival of many peers.
3) The grade of ore at Goldstrike and Cortez is superior to Barrick’s overall average, which helps in bringing down the company’s overall cost of production because more gold can be recovered per tonne of ore mined. It also generates higher free cash flow for each tonne of ore extracted.
4) Given the present level of reserves at these mines, they are likely to remain productive for another 10-15 years. However, the level of production each year can’t be expected to be the same as the year before because it depends on the grade of ore, which is not uniform throughout the deposit. As the mines approach the end of their lives, the production will show a declining trend.
We have a price estimate for Barrick Gold of $15.Notes: