Barrick Gold Corporation (NYSE:ABX) operates mines in North America, South America, Australia and Africa. The company has mainly gold and copper in its portfolio and competes with other mining companies such as Newmont Mining (NYSE:NEM), Goldcorp Inc. (NYSE:GG) and Freeport McMoran Copper (NYSE:FCX).
In this article, we take a closer look at Barrick Gold’s Cortez and Goldstrike mines in the Nevada region of North America. These are Barrick’s two largest mines in terms of gold production. In 2012, they together constituted 34% of Barrick’s total gold production. In the North American region, which itself accounts for almost 50% of Barrick’s total production, gold from these two mines amounts to more than 70% of Barrick’s production.
We’ll take a look at the cost of production, the significance of the mines for Barrick’s overall portfolio and future, the quantity of reserves and the likely production trajectory going forward.
The all-in sustaining cash cost (AISC) is a newly adopted cost measure in the gold mining industry. It includes total cash costs, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. In 2012, Goldstrike’s production stood at 1.17 million ounces of gold at an AISC of $670 per ounce. In the same year, Cortez produced 1.37 million ounces of gold at an AISC of $543 per ounce. Considering that Barrick’s overall production in 2012 was 7.4 million ounces at an AISC of $945 per ounce, it can be said that without the low costs incurred at Cortez and Goldstrike the overall costs would be much higher. 
In the first quarter this year, Cortez reported an AISC of $411 per ounce while Goldstrike reported a figure of $817 per ounce. Barrick’s overall reported AISC figure was $919 per ounce. Players like Kinross, Newmont and Goldcorp had production costs in the range of $1,038-1,135 per ounce in the same period. Thus, Cortez and Goldstrike are crucial to sustaining Barrick’s cost advantage over rivals. (What is the Cost of Mining Gold?, Visual Capitalist)
Advantage Of Low Costs
In 2012, Barrick’s entire gold production was delivered into the spot market. The company realized an average price of $1,669 per ounce. For 2013, Barrick assumed a price of $1,700 per ounce initially. Looking at the steep decline witnessed in gold prices in the last few months and assuming a modest recovery, we think that the average realized price would hover around $1,400 per ounce. The company is likely to present its revised estimate while releasing the Q2 earnings report. (Gold Price Charts, Kitco)
At the presently prevailing price levels of ~$1,250 per ounce, most small and medium scale miners are hemorrhaging owing to their high costs of production. We think that if these prices last for a few months, high cost mines will be shut down and prices will rise.
Some Important Terms
Before delving into a discussion on the production potential of the two mines, it would be useful to have clarity on a few important terms first. Mining companies generally measure their future production prospects in terms of proven and probable reserves. Firstly, there is a distinction between reserves and resources. The classification of assets as reserves indicates that the inherent economic value of resources can be captured. The classification of assets as resources merely indicates their presence, the possibility of economic extraction can be reasonably, but not conclusively established.
Measured mineral resources are those for which quantity, grade or quality, density, shape and physical characteristics can be estimated with a level of confidence that permits economically viable extraction. Inferred mineral resources are those for which these parameters have been reasonably assumed on the basis of limited sampling, but haven’t been verified. Proven reserves are the economically mineable part of measured mineral resources, as demonstrated by at least a preliminary feasibility study. Probable reserves are, for the most part, the economically mineable part of inferred mineral resources, as demonstrated by at least a preliminary feasibility study. 
Reserves And Production Potential
At the end of 2012, Goldstrike had proven mineral reserves of 65.75 million tonnes, containing 6.77 million ounces of gold. Probable mineral reserves stood at 43.42 million tonnes, containing 5.57 million ounces of gold. Thus, overall reserves stood at 12.3 million gold ounces. On the other hand, Cortez had proven mineral reserves of 31.86 million tonnes which contained 2.09 million ounces of gold, and probable reserves of 274.33 million tonnes which contained 12.97 million ounces of gold.
One may notice that although Cortez contains nearly half the proven mineral reserves at Goldstrike, the quantity of gold contained is disproportionately lower. The difference arises due to the grade of ore, a parameter measured simply as gold ounces per tonne of ore. While the grade of ore at Goldstrike is 0.103 ounces/tonne, that at Cortez is just 0.066 ounces/tonne. A similar explanation holds forth for probable mineral reserves. For these, the grade of ore for Goldstrike is 0.128 ounces/tonne, while at Cortez it stands at 0.047 ounces/tonne. The grade of ore at both mines is superior to Barrick’s company-wide grade of 0.045 ounces/tonne for proven reserves and 0.038 ounces/tonne for probable reserves. Even rival miner Newmont has an overall ore grade of 0.037 ounces/tonne for proven reserves and 0.026 ounces/tonne for probable reserves. 
One should note, however, that figures for the grade of ore at these mines are not the realized grades in any given year. Ore bodies are never homogeneous. Therefore, we observe the grade of mined ore varying year-over-year. For some years it may be greater than the overall grade, and for others it may be lower. The lack of uniformity should be evident from the following tables taken from Barrick’s 2012 annual report filed with the SEC:
|Year ended December 31, 2012||Year ended December 31, 2011|
|Tons mined (000’s)||110,361||118,523|
|Tons of ore processed (000’s)||8,253||7,798|
|Average grade processed (ounces per ton)||0.172||0.166|
|Recovery rate (%)||82.8||%||84.1||%|
|Ounces of gold produced (000’s)||1,174||1,088|
|Average total cash costs per ounce (1)||$||541||$||511|
|Year ended December 31, 2012||Year ended December 31, 2011|
|Tons mined (000’s)||120,203||119,021|
|Tons of ore processed (000’s)||9,870||11,502|
|Average grade processed (ounces per ton)||0.150||0.136|
|Ounces of gold produced (000’s)||1,370||1,421|
|Average total cash costs per ounce (1)||$||282||$||245|
According to Barrick, based on existing reserves and production capacity, the expected remaining mine life at Goldstrike is 13 years for underground mining, 14 years for open pit mining and 16 years for processing operations (reflecting additional underground ores as well as additional toll ores purchased from third-party vendors). For Cortez, the expected remaining mine life is approximately 13 years for underground mining, nine years for open pit mining and 13 years for processing operations. The company is likely to have arrived at these figures based on its own models, taking into account the geological composition of the mine, the grade of ore at different layers in the ore body, and internal demand projections.
1) Goldstrike and Cortez are Barrick’s most productive gold mines and account for nearly one-third of Barrick’s total production.
2) These mines are also among its lowest cost mines which gives Barrick a crucial competitive advantage, especially in the present circumstances when market headwinds are threatening the survival of many peers.
3) The grade of ore at Goldstrike and Cortez is superior to Barrick’s overall average, which helps in bringing down the company’s overall cost of production because more gold can be recovered per tonne of ore mined. It also generates higher free cash flow for each tonne of ore extracted.
4) Given the present level of reserves at these mines, they are likely to remain productive for another 10-15 years. However, the level of production each year can’t be expected to be the same as previous because it depends on the grade of ore, which is not uniform throughout the deposit. As the mines approach the end of their lives, production will show a declining trend.
We have a price estimate for Barrick Gold of $19.
- Barrick Gold Q4 2012 Earnings Presentation, Barrick Gold
- Barrick Gold 2012 10-K, SEC
- Newmont 2012 10-K, SEC
Disclosure: No positions