Weak Gold Prices Reduce Barrick’s Profits Despite Higher Production

Barrick Gold Corporation (NYSE:ABX), the largest gold producer in the world, reported its third quarter results on October 31. Revenues at $2.98 billion came in much lower than last year’s comparable figure of $3.4 billion. The company reported a net profit of $172 million, compared to $649 million in Q3 2012.

The production of both copper and gold increased compared to last year but lower realized prices hurt revenues. The company was successful in bringing down all-in sustaining cash costs by focusing on cost reduction, thereby offsetting the negative impact of lower prices to some extent. The all-in sustaining cash cost measure includes total cash cost, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. ^[1]

Barrick highlighted its success in lowering production costs from last year and said that it intends to continue reduction in the percentage of high cost mines in its portfolio. The big news was the company’s decision to suspend work at the troubled Pascua Lama mine indefinitely. ((Barrick Gold Q3 2013 Earnings Conference Call, Seeking Alpha))

We have a price estimate for Barrick Gold of $15, which will be revised shortly now that the third quarter earnings results are out.

See Full Analysis for Barrick Gold Here

Operational Performance In Q3

The production of gold for the quarter was reported at 1.85 million ounces, marginally higher than the previous year’s comparable period figure of 1.78 million ounces. The production of copper stood at 139 million pounds, higher than the previous year’s 112 million pounds. The average realized price for gold in the quarter was $1,323 per ounce, and that for copper was $3.4 per pound. These were lower than last year’s figures of $1,655 per ounce of gold and $3.52 per pound of copper.

A noteworthy feature was the reduction in the cost of mining gold. Barrick’s third quarter all-in sustaining costs of $936 per ounce benefited from the low total cash costs on strong performances at the Goldstrike, Cortez and Veladero mines. The 2013 cost all-in sustaining cash cost guidance had been reduced from $1,000-1,100 per ounce to $900-975 per ounce last quarter and Barrick is on track to meet that target. This is due to expected savings from labor and energy costs and higher sales volumes. With the decline in the global resource environment, labor cost increases are lower as workers are available at lower wages and attrition is decreasing. The prices of raw materials such as fuel, field tires and explosive cyanide are beginning to decline.

The costs in the copper business also declined. Barrick reported cash costs of $1.69  per pound of copper produced, lower than $2.01 per pound incurred in Q2 2012. At the end of the second quarter it had reduced the cost guidance for 2013 to $1.9-2.0 per pound from the initial guidance of $2.1-2.3 per pound.

The North America region contributed just over 901,000 ounces of gold or about half of Barrick’s total production this quarter at all-in sustaining cost of $816 per ounce due to strong performances at Barrick’s two largest mines, Cortez and Goldstrike in Nevada. South America produced 325,000 ounces of gold at all-in sustaining cash cost of $831 per ounce. The Australia Pacific segment produced 497,000 ounces of gold at an all-in sustaining cost of $945 per ounce and the share of African Barrick Gold’s production was 122,000 ounces at all-in sustaining cost of about $1,275 per ounce. Thus, these two regions are a drag on Barrick’s company-wide costs.

Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo are Barrick’s five core, low-cost assets. Together, they produce nearly 60% of its total gold and are expected to have a combined all-in sustaining cost of just $700 per ounce in 2013.

Suspension Of Pascua Lama

Barrick has decided to halt all construction activities at the Pascua Lama project, except those required for environmental protection and regulatory compliance. This was done in view of a prolonged slump in gold prices as well as continued uncertainties and risks associated with the project which has been mired in legal, regulatory and operational troubles. Also, once the project resumes, the company intends to take a phased construction approach to ensure efficient deployment of capital and reduce costs. This would be best achieved by ramping down activities now and re-sequencing them later.

Outlook

Barrick has maintained its 2013 production guidance for gold of 7-7.4 million ounces, but increased guidance for copper to 520-550 million pounds from its initial projection of 480-540 million pounds.

While the company maintained its 2013 capital expenditure guidance at $4.5-5 billion, it reduced its 2014 guidance by $1 billion on account of the Pascua Lama project which has now been delayed following court orders in Chile. Thus, the planned spending will take place in future years now and will depend on whether Barrick still continues with the project. ^[2]

Barrick expects the first ore for processing from Pascua Lama to be available in mid-2016. Pascua Lama has proven and probable reserves of 17.9 million ounces of gold, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. Once production begins, Barrick expects to produce 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. The all-in sustaining cash cost at Pascua Lama is expected to be $50-200 per ounce. Including the depreciation of capital expenditure incurred in mine construction, costs are not expected to exceed $550-700 per ounce.

With Barrick reducing its capital spending target and Pascua Lama being suspended indefinitely, we think that the company’s growth prospects in the medium term don’t look very great.  While it is emphasizing returns over production, prices are not under Barrick’s control, so the best it can do is to optimize its portfolio to reduce the average cost of production.

Barrick also seems to have realized that its sale of non-core assets is proving insufficient in reducing the heavy debt burden. Therefore, it has announced a sale of shares worth $3 billion in the coming days. The company had a debt burden of approximately $15.4 billion at the end of the third quarter. ^[3]

Understand How A Company’s Products Impact Its Stock at Trefis

1. Barrick Gold Q3 2013 Report, Barrick Website [↩]
2. Barrick Gold Q3 2013 Earnings Presentation, Barrick Website [↩]
3. Barrick Announces Plan To Reduce Debt, Launches $3.0 Billion Public Equity Offering, Barrick News Release [↩]