Barrick Gold Corporation (ABX), the largest gold producer in the world, reported its first quarter results on April 24. Revenues at $3.44 billion came in lower than last year’s comparable figure of $3.64 billion and profits at $847 million declined by 18% from $1.04 billion. The production of both copper and gold remained essentially flat but lower realized gold prices hurt revenues. The company was successful in bringing down all-in sustaining cash costs by focusing on cost reduction, offsetting the negative impact of lower prices to some extent. The all-in sustaining cash cost measure includes the total cash cost, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. 
Barrick expressed its readiness to suspend the Pascua Lama project altogether if its alternative strategies don’t work out. The mine straddles both Chile and Argentina and operations have had to be suspended in Chile due to an adverse court ruling by a local court. The suspension of the project may have implications for future growth of the company and its cost metrics since Pascua Lama is expected to produce gold at a very low all-in sustaining cash cost.
Not surprisingly, in the face of tumbling gold prices, the management tried to make a strong case for the long term value of gold and copper. It invoked familiar arguments about the fickle nature of paper currencies and demand from emerging countries like India and China. 
Operational Performance In Q1
The production of gold for the quarter was reported at 1.79 million ounces, marginally lower than the previous year’s comparable period figure of 1.88 million ounces. The production of copper stood at 127 million pounds, a bit higher than the previous year’s 117 million pounds.
A noteworthy feature was the reduction in costs of mining gold. Its first quarter all-in sustaining costs of $919 per ounce benefited from low total cash costs on strong performances at the Goldstrike, Cortez and Veladero mines. The 2013 cost all-in sustaining cash cost guidance has been reduced by $50 from $1,000-1,100 per ounce to $950-1,050 per ounce. This is due to expected savings from labor and energy costs. 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 like fuel, field tires and explosive cyanide are beginning to decline.
On the other hand, the costs in the copper business rose. Barrick reported cash costs of $2.46 per pound of copper produced. The higher cost at the Lumwana mine was primarily due to the higher processing and labor costs in the wet season. While steps are being taken to reduce costs and increase productivity, the benefits are expected to be realized only in the second half of the year.
The North America region contributed just over 870,000 ounces of gold or about half of Barrick’s total production this quarter at all-in sustaining cost of $770 per ounce due to strong performances at Barrick’s two largest mines, Cortez and Goldstrike in Nevada. South America produced 370,000 ounces of gold at all-in sustaining cash cost of less than $640 per ounce thanks to higher silver byproduct credits from increased recoveries at Veladero. The Australia Pacific segment produced 450,000 ounces of gold at all-in sustaining cost of less than $1,100 per ounce and the share of African Barrick Gold’s production was 108,000 ounces at all-in sustaining cost of about $1,560 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 produced 60% of its total gold at a combined all-in sustaining cost of just $590 per ounce.
Update On Pascua Lama
Operations in Chile have been suspended in accordance with a court order. (Barrick to Suspend Construction on Chilean Side of Pascua-Lama, Barrick Gold Press Release) However, the Argentinian side of operations have not been affected. By the end of the first quarter, Barrick spent $4.8 billion on the project.
Barrick is currently exploring alternatives such as accelerating the development of another smaller pit in Argentina as a source of initial ore for first production. However, it is still at the early stages of this evaluation. If the cost turns out to be prohibitive and the Chile situation is not resolved in a certain time frame, it may suspend the project.
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.
Apart from a reduction in cost estimates, the guidance has remained largely unchanged. Production guidance for 2013 is intact at 7-7.4 million ounces of gold and 480-540 million pounds of copper. The company lowered its capital expenditure guidance from $5.7-6.3 billion to $5.2-$5.7 billion. Lower capital expenditure plans for Pascua Lama accounted for $100 million of the total target reduction while other regions accounted for the rest. 
Barrick’s management struck a confident note on the long term fundamentals of gold and copper. It argued that factors which have historically caused investors to favor gold as a hedge against the fickle value of paper currencies remain intact. It also said that demand from the growing middle class and emerging economies like China and India will provide a floor to gold prices in the future. Even the demand for copper will be driven by these economies as they will need copper to build infrastructure.
Even if these arguments are true, Barrick still needs to contend with some headwinds in the short term. It has no new mining projects on the anvil and Pascua Lama is stuck in an imbroglio, which raises questions about the company’s growth over the next few years. The share prices of gold mining companies, including Barrick, have performed poorly over the last few years despite rising gold prices. The inability to rein in costs, inflation in capital expenditures, and ill-timed, overpriced acquisitions have undone the industry. Barrick needs to buck the trend if it wants to find favor with the investors.
Our price estimate for Barrick Gold is $26, which will be revised shortly in view of the recent results.
- Barrick Gold Q1 2013 Report, Barrick Website
- Barrick Gold Q1 2013 Earnings Conference Call, Seeking Alpha
- Barrick Gold Q1 2013 Earnings Presentation, Barrick Website
Disclosure: No positions