Barrick Gold: Q1 Earnings Review

For Q1 2007 Barrick Gold (ABX) reported a net loss of $159 million or $0.18 per share (see conference call transcript). However, its adjusted earnings, after taking into account the cost of eradicating approximately 2.0 million ounces of hedges, were $398 million ($0.45 per share) and adjusted cash flow were $727 million ($0.83 per share).

Barrick Gold Corporation reported first quarter production of 2.03 million ounces of gold at total cash costs of $313 per ounce compared to 1.96 million ounces produced at total cash costs of $285 per ounce for the prior-year period. Barrick still has approximately 9.5 million ounces of gold hedges in place (in its development stage projects) but that only represents 8% of the company’s total 123 million ounces in reserves. Barrick also produced 100 million pounds of copper in the quarter at cash costs of $0.81 per pound.

"For years now, our shares have lingered," said Peter Munk, Chairman of Barrick Gold. "Barrick is second to none ... and yet still our share price does not move." Barrick Gold has always been mired by its notorious hedge book and has hence been a laggard among gold stocks. By eliminating its near term hedges it can now sell its ounces into the market at spot prices for the next couple of years until its development stage projects are ready to come online and the hedges roll back into place. This is great news especially if it manages it keep its cash costs down (they averaged $313 per ounce in Q1/07) and the spot gold price keeps rising as Mr. Munk, chairman of Barrick and many analysts predict it will.

Barrick is the world’s largest gold producer and is expected to produce 8.3 million ounces of gold by analysts in 2007 and approximately 400 million pounds of copper. If it manages to maintain its cash costs of $330 per ounce for gold and $0.90 per pound of copper, Barrick would cash flow US$2.35 per share in 2007. By simply adding a 13x multiple to Barrick’s 2007 earnings we would get a share price of $30.55

The competency of Barrick’s management is evident in their actions. Realizing that their share price had been lagging due to their hedge book, they have successfully eliminated all their fixed prices sales contracts. They have also managed to integrate the Placer Dome acquisition fairly smoothly and are looking to increase their gold reserves through an aggressive exploration budget of US$170 million. Further confirmation of management’s vision, came on May 2nd, 2007 when they announced an increase to their annual dividend to US$0.30 per share from US$0.22. "The 36% increase in the dividend reflects Barrick's ability to generate substantial cash flows in this strong gold price environment," said Greg Wilkins, President and CEO. "With these strong cash flows and an A-rated balance sheet, the Company has the financial resources to return additional value to shareholders and fund our unrivalled project pipeline." This is all good news for Barrick’s current and future shareholders.

Barrick also has several development projects that could potentially increase its existing production by 1.5 million ounces by 2012. These projects include Cortez Hills in Nevada, Pascua Lama in Chile, Buzwagi in Tanzania, Pueblo Viejo in the Dominican Republic, Donlin Creek in Alaska, Reko Diq in Pakistan and a few others. Barrick’s production pipeline can make any gold producer envious and could eventually make Barrick a 9 million ounce annual producer.

As the U.S dollar continues to come under pressure due to weakening economic conditions, the supply/demand situation in gold continues to tighten and this sounds like a favorable scenario for gold. When the money starts flowing into the gold sector, people will look for companies that have existing ounces in the ground. Barrick is one such company and it also has the ability to grow its production, making it a very juicy magnet for this inflow of money now that it has eliminated its hedges. I expect Barrick’s next quarter earnings to blow investor’s away.

Price Targets on Barrick Gold:

Blackmont Capital: $42

Haywood Securities: $41.50

Royal Bank: $32

ABX 1-yr chart

Disclosure: none