(ABX) Barrick Gold Disappoints as Costs Jump

The world’s largest gold miner Barrick Gold Corporation (ABX) reported disappointing results for the second quarter of 2012. The company’s adjusted earnings fell to 78 cents per share in the quarter from $1.12 per share in the year-ago period, and significantly missed the Zacks Consensus Estimate of 96 cents.

Declining production and escalating costs constricted Barrick’s margins in the quarter and led to a massive drop in profits. As a result, reported profit dipped 35% to $750 million (or 75 cents per share) in the second quarter from $1.16 billion, or $1.16 per share, last year.

Revenues declined 4% from last year to $3,278 million, lagging the Zacks Consensus Estimate of $3,553 million. Although average realized price of gold increased 6% year over year to $1,608 per ounce, a 38% jump in total cash costs offset the effects of better pricing.

Gold production fell to 1.74 million ounces in the quarter from 1.98 million ounces last year, which does not come as a surprise since Barrick had already warned of a production decline in the quarter. Copper production improved to 109 million pounds from 93 million pounds last year. However, the company expects to perform better in the second half of the year and thus reiterated its full year production targets.

Regional Results

North America: Barrick’s North American unit produced 0.85 million ounces of gold at total cash costs of $516 per ounce compared with 0.92 million ounces at total cash costs of $404 per ounce a year ago. The Cortez mine turned in a strong performance and exceeded expectations, driven by better underground grades and higher ore tons from the open pit.

Production at Goldstrike was, however, constrained by a scheduled shutdown for maintenance activities resulting in lower throughput capacity. However, Goldstrike is expected to do better in the second half of the year due to increased throughput capacity as a result of maintenance improvements. For 2012, production for the North American region is expected to be in the range of 3.425–3.60 million ounces at total cash costs of $475–$525 per ounce.

South America: Production from South America in the quarter was 0.33 million ounces at total cash costs of $458 per ounce compared with 0.45 million ounces at cash costs of $373 per ounce. In 2012, production from South America is expected to be in the range of 1.55–1.7 million ounces at total cash costs of $430–$480 per ounce.

Australia Pacific: This business region produced 0.45 million ounces in the quarter, compared with 0.46 million ounces in the year-ago quarter. Total cash costs were $844 per ounce in the reported quarter compared with $611 per ounce last year. Australia Pacific is expected to produce 1.80–1.95 million ounces this year at total cash costs of $770–$800 per ounce, up from the previous range of $700–$750 per ounce.

African Barrick Gold plc. (ABG): Attributable production from African Barrick Gold in the quarter came in at 0.11 million ounces at total cash costs of $950 per ounce compared with 0.13 million ounces at total cash costs of $652 per ounce in the prior-year quarter. Lower grades from Buzwagi and increased energy costs led to the surge in costs. Barrick Gold expects to produce 0.5–0.535 million ounces at total cash costs of $790–$860 per ounce in 2012.

Financial Position

Cash and cash equivalents stood at $2,330 million as of June 30, 2012, compared with $2,863 million as of June 30, 2011. Operating cash flow increased to $0.76 billion in the quarter from $0.75 billion last year. The increased cash flow resulted from a decrease in net working capital outflow and income tax payments. Net debt stood at $11.3 billion as of June 30, 2012 compared with $10.1 billion as of June 30, 2011.

Project Updates

Barrick has witnessed a tremendous increase in costs as evident from its various segments. The situation may worsen as the company expects that development of the Pascua-Lama mine, which is the highest gold mine in the world, will get costlier.

The company says that the mine’s costs will rise by 50–60%, which might propel costs higher by as much as $3 billion from the previous range of $4.7 billion to $5 billion. Barrick expects that production from Pascua-Lama, which is among the biggest mines in the world, will begin in mid-2014 and not next year, as expected earlier.

However, Barrick has almost completed the construction of the Pueblo Viejo and Jabal Sayid projects and expects capital costs for these to be within the guided range. Gold production at Pueblo Viejo is expected to begin next month while first copper production from Jabal Sayid is expected in the third quarter this year.


Barrick has maintained its full year gold production targets and expects to produce 7.3–7.8 million ounces this year. However, it has increased its cost forecast and expects to incur total cash costs of $550–$575 per ounce, up from the previous range of $520–$560 per ounce.

The company has slashed its copper production forecast to 460–500 million pounds this year from the earlier guidance of 550–600 million pounds. Also, Barrick now expects copper cash costs to increase from $1.90–$2.20 per pound to $2.10–$2.30 per pound this year.

Also, Barrick might lower its long-term targets, primarily driven by economic uncertainties and its capital allocation strategy. Management believes that a number of projects in the pipeline are not well-aligned with the company’s strategy and needs to be reviewed. This might result in some projects being put on the backburner. Barrick now projects its gold and copper production base to be above 8 million ounces by 2015 and more than 600 million pounds by 2013.

Our Take and Recommendation

Barrick, with a number of world class mines under its jurisdiction, is an unhedged producer of gold and enjoys significant leverage to gold prices. However, as seen in the second quarter, the advantage arising out of increased prices is endangered by higher costs. The company expects costs to rise, which might impact its earnings power going forward.

We currently have a long-term Neutral recommendation on Barrick Gold. The company, which competes with AngloGold Ashanti Ltd. (AU) and Newmont Mining Corp. (NEM), maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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