Barrick Gold Corporation: An Analysis Of 2015 Gold Mining Operation Results

| About: Barrick Gold (ABX)

Summary

Why I think the price of gold will not substantially increase in 2016: insights from Barrick's operating results.

The stock maintains the same dividend to its shareholders, but analysts' estimates on growth are negative.

Maybe it is suitable for a short position.

Barrick Gold Corporation (NYSE:ABX) released its 4Q 2015 and full year 2015 results on February 17, 2016.

Barrick Gold Corporation (Barrick) is a gold mining company. The company is engaged in the production and sale of gold and copper, as well as related activities, such as exploration and mine development. The company operates in segments: eight individual gold mines, Acacia and Pascua-Lama project. The remaining operating segments have been grouped into two other categories: its remaining gold mines and its two copper mines. The company sells its production in the world market through distribution channels: gold bullion is sold in the gold spot market, gold and copper concentrate is sold to independent smelting companies, and copper cathode is sold to various manufacturers and traders. The company has 14 producing gold mines, located in Canada, the United States, Peru, Argentina, Australia, the Dominican Republic and Papua New Guinea. It also holds a 63.9% equity interest in Acacia Mining PLC (OTC:ABGLF) (Acacia) that owns gold mines and exploration properties in Africa.

Financial results of the gold stock, a summary:

In Millions of USD

12 months ending 2015-12-31

12 months ending 2014-12-31

12 months ending 2013-12-31

12 months ending 2012-12-31

12 months ending 2011-12-31

Revenue

9,029.00

10,239.00

12,527.00

14,394.00

14,236.00

Gross Profit

2,122.00

3,409.00

5,198.00

7,137.00

7,996.00

Net Income

-2,838.00

-2,907.00

-10,366.00

-538.00

4,484.00

Cash and Short Term Investments

2,455.00

2,699.00

2,404.00

2,093.00

2,745.00

Total Assets

26,308.00

33,879.00

37,448.00

47,282.00

48,884.00

Total Debt

9,968,00

13,081.00

13,080.00

13,943.00

13,369.00

Total Liabilities

16,853,00

23,632.00

23,915.00

25,437.00

25,521.00

Total Equity attributable to Barrick Gold Corporation shareholders

7,178.00

10,247.00

13,533.00

21,845.00

23,363.00

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Revenues and gross profit decreased from 2014 to 2015, respectively, by 11.8% and 37.8%.

The company improved its financial flexibility by reducing debts.

"In 2015, the company's total debt was reduced by $3.1 billion, or 24 percent; our debt reduction target for 2016 is at least $2 billion," the company said in its earnings release.

The company initiated a program to reduce its net debt by at least $3 billion in 2015.

Operating results:

Since the company says that there is still a lot of lifting to do in 2016, this is, in my opinion, a clear sign that the gold producer (one of the larger Canadian gold mining stocks) isn't relying on a substantial increase in the gold price in 2016.

"The company's five core mines, which are expected to account for approximately 70 percent of our production in 2016, have an average reserve grade of 1.88 grams per tonne, more than double that of our peer group average. The majority of our reserves and resources are also situated in regions where we have proven operating experience, a critical mass of infrastructure, technical and exploration expertise, and established partnerships with suppliers, host governments, and communities. Based on these factors, we believe our reserves and resources continue to offer an attractive risk-reward proposition with significant opportunities for value creation." (here).

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As you have noticed, the average grade of (proven) resources of the gold company increased as well as the costs-to-sales ratio.

The average grade includes those ore bodies that can be "economically" mined at current costs and gold price levels.

The gold price fell by 8.40% in 2015, $1,160.062 per troy ounce in 2015 from $1,266.402 per troy ounce in 2014.

A fall in gold price (London bullion market) in 2015 by 11% (annual average) would have led to a -46% drop in the earnings, if production and costs were constant over the period.

The income of the company decreased by 2.4% only, from -$2,907.00 in 2014 to -$2,838.00 in 2015.

But ABX decreased production by 2% in 2015 (13% in 2014), from 6.25 million ounces of gold produced in 2014 to 6.12 million ounces of gold produced in 2015. All-in sustaining cash costs per ounce also fell. The average grade of reserves (very important information) was higher in 2015. The average grade of (proven) reserves was 1.63 g Au/t in 2014 (1.41, 1.39 and 1.41 g Au/t, respectively, in 2013, 2012 and 2011).

Therefore, against a fall in the price of gold by 8.40% from 2014 to 2015, the gross profit of the company fell by 37.8% instead of 46% if production and operating costs were constant. The company managed to neutralize, let's say, falling prices of the precious metal, by increasing operations at higher grade mines (less gold production) and reducing operations at lower grade mines, in which costs of extractions are of course higher than those of higher grade mines.

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2015 operating results at each mine (from ABX highlights):

Cortez

"Cortez produced 999,000 ounces of gold at all-in sustaining costs of $603 per ounce in 2015, exceeding expectations as a result of improved underground productivity, higher grades from the open pit, and higher recoveries."

Sixteen percent of total gold production in 2015 with an all-in sustaining costs item of $603 (below $831), 27.4% less than the average item for full year 2015.

Goldstrike

"Production at Goldstrike was in line with expectations for 2015 at 1.053 million ounces of gold. All-in sustaining costs of $658 per ounce came in below guidance, reflecting improved underground mining costs, optimized haulage, and lower contractor costs."

Seventeen percent of total gold production in 2015 with an all-in sustaining costs item of $658 per ounce (below $831), 20.8% less than average item for full year 2015.

Pueblo Viejo (60 percent)

"Barrick's 60 percent share of production from the Pueblo Viejo mine for the year was 572,000 ounces of gold at all-in sustaining costs of $597 per ounce."

Nine percent of total gold production in 2015 with an all-in sustaining costs item of $597 per ounce (below $831), 28% less than average item for full year 2015.

Lagunas Norte

"Lagunas Norte contributed 560,000 ounces of gold at all-in sustaining costs of $509 per ounce in 2015. All-in sustaining costs were lower than expected, primarily driven by lower sustaining capital spending, fuel and labor cost savings, and a decrease in royalty expenses."

Nine percent of total gold production in 2015 with an all-in sustaining costs item of $509 per ounce (below $831), 39% less than average item for full year 2015.

Veladero

"The Veladero mine performed in line with expectations in 2015, producing 602,000 ounces of gold at all-in sustaining costs of $946 per ounce. The mine is expected to produce 630,000-690,000 ounces in 2016 at lower all-in sustaining costs of $830-$900 per ounce, driven by higher production and sales volumes, and depreciation of the Argentina Peso. Increased production in 2016 reflects mining of higher grades and improved equipment availability […]".

Almost 10% of total gold production in 2015 with an all-in sustaining costs item of $946 per ounce (over $831), +13.8% more than average item for full year 2015.

Argentina President Macri, who took office in December on a platform of repealing government intervention that had choked investments, announced in late 2015 the government of Argentina's decision to lift restrictions on imports and to eliminate a five percent export duty.

Of course, Barrick will benefit from this decision for mining companies operating in the country.

Turquoise Ridge (75 percent)

"The Turquoise Ridge mine exceeded production and cost expectations in 2015, contributing 217,000 ounces of gold (75 percent basis) at all-in sustaining costs of $742 per ounce. […] Production in 2016 is expected to be 200,000-220,000 ounces at all-in sustaining costs of $770-$850 per ounce. All-in sustaining costs in 2016 are expected to be higher than 2015 as a result of higher sustaining capital related to water treatment, and timing of equipment replacement."

About 3.5% of total gold production in 2015 with an all-in sustaining costs item of $742 per ounce (below $831), -10.7% less than average item for full year 2015.

The company will provide an update on plans for the expansion of underground mining at Turquoise Ridge on February 22.

Porgera (47.5 percent)

"The Porgera mine contributed 436,000 ounces of gold in 2015 at all-in sustaining costs of $1,018 per ounce, reflecting Barrick's reduced interest of 47.5 percent following the sale of 50 percent of Barrick (Niugini) Ltd. to Zijin Mining Group Ltd. In 2016, Porgera is expected to contribute 230,000-260,000 ounces (Barrick's 47.5 percent share) at all-in sustaining costs of $990-$1,080 per ounce."

Seven percent of total gold production in 2015 with an all-in sustaining costs item of $1,018 per ounce (over $831), +22.5% more than average item for full year 2015.

One year ago Porgera production was expected to be higher than 2014 mainly due to the change in the mine plan which focused on the increasing underground mining rates and mining of higher grade open pit material.

Other Mines

"Barrick's other mines - consisting of Bald Mountain, Round Mountain, Ruby Hill, Golden Sunlight, Hemlo , Cowal, and KCGM - contributed 1.16 million ounces of gold at average all-in sustaining costs of $931 per ounce in 2015."

Almost 19% of total gold production with an all-in sustaining costs item of $1,018 per ounce (over $831), +12% more than average item for full year 2015.

Barrick divested the Cowal mine in 2015 and completed the sale of Bald Mountain and Round Mountain in January 2016.

Cowal (Australia Pacific) had an average grade of 0.97 (gm/t), while Bald Mountain and Round Mountain (50.00%) (North America) had an average grade, respectively, of 0.96 (gm/t) and 0.84 (gm/t).

Production from the company's remaining portfolio of other mines (Golden Sunlight, Hemlo, and KCGM) in 2016 is expected to be 580,000-630,000 ounces of gold at average all-in sustaining costs of $740-$780 per ounce.

Acacia Mining (63.9 percent)

"Barrick's 63.9 percent share of production from Acacia in 2015 was 468,000 ounces of gold at all-in sustaining costs of $1,112 per ounce."

About 7.65% of the total gold production with an all-in sustaining costs item of $1,112 per ounce (over $831), +25% more than average item for full year 2015.

Pascua-Lama

"Expenditures at the Pascua-Lama project in Chile and Argentina are expected to be $80-$100 million in 2016, compared to $188 million in 2015. Lower spending reflects the implementation of a temporary suspension plan approved by Chilean and Argentine regulators in late 2015. Our focus in 2016 will remain on further reducing holding costs at the project in line with the temporary suspension plan, while advancing an optimized project plan. Implementation of the temporary suspension plan could require adjustments resulting from regulatory and legal actions and weather conditions, which could increase costs associated with the plan."

A summary:

Ore mines

% of total gold production in 2015

Less than the average AISC for full year 2015

AVG GRADE as of Dec. 2014

Cortez

16%

-27,40%

2.3

Goldstrike

17%

-20,80%

3.48

Pueblo Viejo (60 percent)

9,40%

-28%

3.17

Lagunas Norte

9,20%

-39%

1.42

Veladero

10%

13,80%

0.80

Turquoise Ridge (75 percent)

3,50%

-10,70%

17.39

Porgera (47.5 percent)

7,12%

22,50%

8.50

Cowal

19%

12%

0.97

Bald Mountain

0.96

Round Mountain

0.84

Ruby Hill

0.46

Golden Sunlight

1.43

Hemlo

2.26

KCGM

0.94

Acacia Mining (63.9 percent)

7,65%

25%

TOTAL

99%

Total avg grade

1,63

Tot. Avg Gr. 2015

1,88

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I perceive this as another sign that the company doesn't expect a significant increase in the price of the precious metal in 2016. The mines with a higher than 1.63 (2014) average gold grade together make 45.90% of the total gold produced in 2015, with a subtotal AISC which is 31.48% less than the average AISC of 2015. The company expects gold production at higher grade mines to be in line with 2015 gold production at each of them.

It could mean that the company may reduce production at lower grade mines where expectations on costs were exceeded in 2015.

Creation of value:

The company believes that its reserves and resources offer an attractive risk-reward proposition with significant opportunities for value creation.

Shareholders receive economic value from gold mining companies through the distribution of profits via dividends.

"Barrick Gold (ABX) declares $0.02/share quarterly dividend, in line with previous" dividend (here).

Company name

Exchange

Currency

Mkt Cap

Dividend

AEM

Agnico Eagle Mines

NYSE

USD

7.61B

0.32

AUY

Yamana Gold Inc.

NYSE

USD

2.55B

0.06

NEM

Newmont Mining Corp.

NYSE

USD

13.42B

0.1

EGO

Eldorado Gold Corp.

NYSE

USD

2.12B

0.02

GG

Goldcorp Inc.

NYSE

USD

13.23B

0.24

ABX

Barrick Gold Corp.

NYSE

USD

15.11B

0.24

Click to enlarge

As of February 17, 2016.

But next 5 years (per annum) growth estimate is negative:

Overview and expectations on gold price:

Starting June 2014, crude oil prices began to fall, and at the end of December 2015, the price of crude oil was $37.24230 per barrel, lower than the price recorded during the recession. As of today, the price per barrel is $29.44 and 1-year forecast says $33 per barrel, -70% starting June 2014.

The stock market (S&P 500) started its downtrend about one year ago. It fell by 8.78% year to date, -10.86% over the last 6 months and about -2.99% over the last month.

The price of gold per troy ounce fell by 38.85% from $1,747.011 per troy ounce (October 2012, the highest peak) to $1,068.253 per troy ounce (December 2015). Thereafter, the price of gold per troy ounce started to "recover" and the price is $1,239.750 per troy ounce, +16.05%, as of February 12, 2016.

Fig. 1 illustrates the monthly historical trend of nominal oil price, nominal gold price and the price of S&P 500 adjusted for dividends and splits.

Fig. 1.

What is happening at the moment looks to me to be similar to what happened in 2008. During the 2008 financial crisis, when the gold price increased by 6%, many key mineral prices fell and other equities dropped by around 40% (WGC, 2009). The unique and diverse drivers of gold demand and supply did not correlate highly with changes in other financial assets.

Expectation on the gold price is that during the following two years, gold prices will tend to recover, reaching an annual average of around $1,500 in 2017, the same level reached and overcasted by the gold price in May 2011.

It is an optimistic target unless there are extreme short-term movements. In a period where global financial markets crash, gold prices may increase if the global economy is in recession and investors switch to speculation.

My point of view:

At the current prices, I would not suggest the stock for a long-term position, even if it will be able to maintain the same level of dividend for its shareholders

Also because, as I have explained before by illustrating the company's operating results, I have some insights that the price of the underlined precious metal won't substantially increase during 2016 (read also these articles here, here and here).

For short position: it may be an interesting opportunity if there are significant and substantial jumps in the price of the precious metal during 2016. The gold stock is slightly more volatile than the gold price, and in a period where global financial markets crash, gold prices may increase if the global economy is in recession.

Mean Recommendation (this week) is 2.5 and the mean target price is $11.03. Yesterday, the stock closed at $12.63 per share (here).

Disclosure: I/we 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.