Barrick Gold: Depressed Prices And Project Uncertainty

Jun. 4.13 | About: Barrick Gold (ABX)

Barrick Gold (NYSE:ABX), the largest gold producer in the world, recently reported quarterly results showing a decline in profits because of lower prices and reduced volumes. The company is, however staying with its production guidance of 7 million to 7.4 million oz. for the year. The company has also announced plans to identify and sell non-core assets which should provide shareholders with some cheer. All the gold producers now have to learn to live with lower gold prices of approximately $1,400 per ounce in the short term and there are pessimists who believe that prices could go as low as $1,300 per ounce. The strengthening of the dollar is also depressing earnings. At these prices, gold producers will have to show a dramatic reduction in costs and operational efficiency or reduce production by temporarily shutting down mines.

2013 first-quarter results

Net earnings and adjusted net earnings for the quarter were $847 million ($0.85 per share) and $923 million ($0.92 per share), respectively, compared with net earnings and adjusted net earnings of $1.04 billion ($1.04 per share) and $1.10 billion ($1.10 per share) in the same quarter of the previous year. The decrease in net earnings and adjusted net earnings was largely due to lower realized prices, lower sales volumes and a higher cost of sales which were partially offset by lower income tax payments. First quarter of 2013 cash generated from operations was $1.1 billion compared with $1.4 billion in the first quarter of the previous year. The adjusted operating cash flow of $1.2 billion eliminates the impact of the Australian dollar hedge settlement and compares to adjusted operating cash flow of $1.5 billion in the prior year.

Gold production for the quarter was 1.8 million ounces with all-in sustaining and total cash costs of $919 per ounce and $561 per ounce respectively, compared with total cash costs of $610-$660 per ounce. All-in sustaining cost guidance for the full year has been slashed to $950-$1,050 per ounce from the previous guidance of $1,000-$1,100 per ounce. Copper production touched 127 million pounds at cash costs of $2.46 per pound and fully allocated costs of $3.00 per pound. Production at Lumwana was 57 million pounds at cash costs of $3.41 per pound and at Zaldívar, 70 million pounds at cash costs of $1.54 per pound. The company expects 2013 copper production to be around 480-540 million pounds at cash costs of $2.10-$2.30 per pound and fully allocated costs at $2.60-$2.85 per pound.

Pascua-Lama update

This is one of the largest gold and silver deposits in the world and contains nearly 18 million ounces of proven and probable gold reserves, 676 million ounces of silver contained in the gold reserves and an expected life of over 25 years. In the first five years, it is expected to produce an average of around 850,000 ounces of gold and 35 million ounces of silver at all in sustaining costs in the range of $50 to $200 per ounce and negative cash costs. Regulatory restrictions have been placed on the project because of water management concerns in Chile and the completion of measures to address these concerns is expected in the first quarter of 2014. Construction activity has been suspended in Chile following a temporary injunction relating to environmental requirements. Construction in Argentina which houses the bulk of the critical infrastructure has not been affected. The company cannot at this stage evaluate the impact of this suspension. As of the end of the quarter, against budgeted expenditure of $8.5 billion, roughly $4.8 billion has been spent.

Cost reduction measures

The company has targeted a number of key expenses to be reduced in 2013 as a measure of discipline in the allocation of capital. A companywide review conducted in the first quarter has resulted in a reduction of $100 million for the full year and another $500 million in potential cost savings have been identified. Total capital expenditures have been reduced from the previous guidance of $5.7 billion to $6.3 billion to the range of $5.2 billion to $5.7 billion and exploration expenditures would be reduced to $300 million to $340 million from the earlier guidance of $400 million to $440 million. All in sustaining costs would be reduced to $950-$1,050 per ounce from previous guidance of $1,000-$1,100 per ounce. There are no plans to build any new mines.

The bottom line

These are tough times for gold producers and Barrick, being one of the largest, has more than its fair share. Moreover, the Pascua-Lama project has a millstone around its neck with large budgeted capital expenditures yet to be incurred and no definite indications of when production may be expected. All in all, it appears investors may be best served selling the stock now with the expectation of buying back when prospects improve.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.