Barrick Gold (ABX) will be lowering its gold price assumption from $1,500 per oz. to $1,100 per oz. and will calculate its 2013 year-end reserves based on this assumption. At the end of 2012, the company had reported reserves of 140 million ounces, calculated using a long-term price of $1,500 per oz. At a price assumption of $1,100 per oz., some of the company's reserves that contain lower ore grades will become uneconomical to mine. As a result, the company will be reporting a decline in its reserves in the upcoming results.
Using a gold price assumption of $1,200 per oz. would reduce its reserves by less than 10%, but the company will now be using a price assumption of $1,100 per oz., which could lead to a considerable decline in its reserves. In case of a significant fall in the company's reserves, Barrick will be forced to write-down its assets, causing impairment charges. Even though impairment is a non-cash expense, it will impact the company's future performance as it will generate lower cash flows from the impaired assets. For Barrick, asset impairments aren't new, and the company's financials have been negatively impacted in the past by huge write-downs. In the first nine months of 2013, the company reported after-tax asset impairment charges of $6.45 billion, primarily due to a $5.1 billion write-down of the Pascua-Lama project.
The development activities at the Pascua-Lama mine were suspended in October last year, as Barrick faced a number of issues such as completion delays, increasing costs, environmental penalties and declining gold prices. The company has already spent around $5.7 billion on the project, and the project delay is a severe blow to the company's future prospects. Moreover, the project is set to be written down further in the upcoming results which will cause impairment losses.
On the other hand, companies such as Yamana Gold (AUY) and Randgold Resources (GOLD) have used conservative accounting assumptions. Yamana calculates its reserves using a price assumption of $950 per oz. and Randgold uses an assumption of $1,000 per oz. Below, I have compared the net income of these companies over the past three years.
Net income (in million $)
2013 (9 months)
With gold prices declining 28% in 2013, profits posted by gold companies have been on the downside. While Yamana and Randgold have managed to remain profitable, Barrick has struggled with losses due to asset write-downs in the past two years. Moreover, Barrick's stock price has also underperformed during the two-year period compared to Yamana and Randgold.
As a result of using conservative gold price assumptions, both Yamana and Randgold don't run the risk of reporting impairments in the coming quarters. On the contrary, Barrick will possibly record asset impairments in the near future.
A look at the ongoing projects
With development activities suspended at the Pascua-Lama mine, Barrick will have to rely on other projects that will increase its output at lower costs. The Pueblo Viejo mine is one such project, and Pueblo Viejo Dominicana Corp (PVDC), a joint venture between Barrick (60%) and Goldcorp (GG) (40%), operates this mine. The mine commenced commercial production in the beginning of 2013, and it is one of the lower-cost mines owned by Barrick. As compared to the company's overall all-in sustaining costs (AISC) of $919 per oz., the Pueblo Viejo mine reported an AISC of $743 per oz. in the first nine months of 2013. AISC is a common metric used by gold producers to report the cost of producing gold.
For 2013, Barrick expects its production share from the mine to be 500,000 ounces at an AISC of $700-$750 per oz. Going forward, the Pueblo Viejo mine is expected to ramp up to full capacity in the first half of this year. Once the mine begins full production, the AISC of the mine will come down, which will help reduce Barrick's production costs. In terms of costs, Barrick is already in a better position when its nine month AISC is compared with that of its peers.
9M 2013 AISC
$919 per oz.
$950 per oz.
$1,136 per oz.
With a mine life of above 25 years and almost 15 million ounces of gold reserves, I believe the Pueblo Viejo mine will play an important role in Barrick's future success.
The Cortez mine is another high quality mine that operates at a lower AISC compared to Barrick's overall AISC. The AISC reported by Cortez in the first nine months was $416 per oz., much lower than Barrick's AISC of $919 per oz. During this period, the mine contributed nearly 20% of Barrick's total production. However, in the coming quarters, the production from the Cortez mine is expected to decline due to lower ore grades, which will lead to higher costs. As compared to the second quarter AISC of $376 per oz., the mine's AISC increased to $476 per oz. in the third quarter due to lower grades and recoveries. The company anticipates an increase in production costs at the Cortez mine in 2014, which will increase the company's overall AISC.
Due to lowering its gold price assumption, Barrick will be forced to lower its reserves and record asset impairments. In the past, asset write-downs have negatively affected the company's stock performance. However, the company's Pueblo Viejo mine will achieve full production this year and will help reduce production costs. The increase in production from Pueblo Viejo will be offset by lower production from the Cortez mine. I recommend investors not to make any new positions in this stock.