Barrick Gold Corporation (ABX), the largest gold producer in the world, reported its Q4 2012 and annual results on February 14. The company took a hefty impairment charge of $4.2 billion primarily on account of its copper business, which dragged down net profits. Its operating performance, however, met expectations. The production of gold (7.4 million ounces) and costs ($584 per ounce) were in line with guidance estimates. Barrick also replaced its gold reserves and doubled its resources at the Goldrush mine in Nevada to about 14 million ounces of gold. One should note, however, that resources are not the same as reserves and economic feasibility of extraction needs to be established first to upgrade the classification of assets from resources to reserves.
Barrick reiterated its business focus on generating returns and free cash flows rather than increasing production. Falling free cash flows in the gold mining sector are discouraging investors. As a result, the performance of gold miners’ equities has lagged the performance of gold as a physical commodity.
Apart from completing the Pascua Lama project, the focus in the future will be on advancing projects in Nevada. This region alone accounts for around 50% of Barrick’s gold production and nearly 40% of its reserves. Almost half of Barrick’s 2013 exploration budget of $400-440 million has been allocated to Nevada. Apart from these, Barrick doesn’t intend to build any new mines in the foreseeable future. Though it has a number of properties which have economic potential, they currently don’t meet its investment criteria.
Finally, Barrick is looking for a buyer for its energy business to get rid of non-core assets w with short lives and high operating costs.
Impairments In The Copper Business
Barrick acquired Equinox in 2011 and with it came Jabal Sayid, a project in construction in Saudi Arabia, and Lumwana with a producing mine in Zambia. Lumwana is comprised of an original smaller pit Malundwe and an adjacent much larger undeveloped ore body called Chimiwungo. The major value of Equinox lies in the potential at Chimiwungo.
At the time of acquisition, drill results for the ore body at Chimiwungo indicated significant potential for copper. Barrick drilled the ore body further to establish the full extent of its potential. While results confirmed an exceptional amount of copper, Barrick had to revise its cost estimates drastically higher. A large portion of high grade reserves are much deeper underground than originally expected which will need a significant amount of expensive waste stripping. The revised cost estimates are due to higher expected future costs, the new life-of-mine plan, and the doubling of royalties by the Zambian government.
Under present copper price assumptions, Barrick reduced its production expectations and hence profitability over the life of the mine. On account of this, it took a $3 billion impairment charge on Lumwana. Another $800 million goodwill impairment charge for the copper business took the total copper related impairment to $3.8 billion. Impairments resulted in a net loss of $665 million n 2012 as against a profit of $4.5 billion in 2011. Adjusted for impairments, income in 2012 stood at $3.8 billion compared to the 2011 figure of $4.7 billion.
Change In Cash Cost Measure
Current operating measures used in the gold industry do not capture all of the sustaining expenditures incurred to produce gold, and therefore do not reflect a complete picture of operating performance, the ability to generate free cash flow from operations, or the expenditures that would be included in the valuation of a gold mining company.
Barrick has come up with a new all-in sustaining cash cost measure that will include the total cash cost, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. It is hoped that this measure will help in gauging Barrick Gold’s performance in a better manner. The World Gold Council is expected to make this a standard reporting metric in mid-2013.
In 2012, Barrick reported an all-in sustaining cash cost of $945 per ounce of gold produced. The figure in 2013 is expected to be around $1,000-1,100, which makes cutting overhead costs all the more essential for the company. The alternative is simply to hope for higher gold prices, which may or may not happen. Since the gold production target for next year is 7.0-7.4 million ounces, which isn’t greater than 2012, profits may be hit due to higher costs. The company is assuming gold prices of $1,700 per ounce for 2013, as against an average realized price of $1,688 per ounce in 2012.
Outlook For 2013
Apart from gold prices and production costs, the catalysts for 2013 will be production ramp-up at the Lumwana copper mine and the Pueblo Viejo gold mine, reduction in overhead costs, and reduction in costs due to disposition of non-core assets.
Barrick aims to incur capital expenditures of $5.7-$6.3 billion in 2013, as against $6 billion incurred in 2012.
As 2013 rolls ahead, we will be watching Barrick for the performance of its African business unit, a potential sale of the energy business, and further updates on Pascua Lama and Lumwana.
Our price estimate for Barrick Gold is $51, which we will revise shortly in light of Q4 2012 results.
Disclosure: No positions.