Barrick Gold Q3 Review - Expecting Margin Expansion

Barrick Gold 3rd Quarter writeup

Stats: 

EPS of $0.40 per share and operating cash flow of $0.64 per share. 

Gold production was 1.93 million ounces at a cash cost of $370 /oz. 

Realized gold sales at a price of $681 /oz. in line with the 3^rd quarter average of $680 /oz.

Copper production of 99 million pounds at cash costs of $0.91 /lb.

Realized copper sales at an average price of $3.49 /lb. 

Entered into an agreement with Arizona Star Resource Corp. to acquire all outstanding shares for C$18/share and purchase from Highlands Pacific attractive exploration licenses and the Kainantu gold mine in Papua New Guinea for $141.5 million.   

Business unit information:

South American unit produced 430,000 /oz. at a cash cost of $219 /oz.

North American unit produced 790,000 /oz. at a cash cost of $381 /oz.

Australia-Pacific unit produced 560,000 /oz. at a cash cost of $471 /oz.

African business unit produced 150,000 /oz. at a cash cost of $364 /oz.

Project update:

Cortez Hills - $23 million was spent on equipment, engineering, and mine development.  Once the recorded decision is made, production should be able to start in approximately 15 months. 

Pueblo Viejo – Discussions with the Dominican government continues and $13 million was spent on design and engineering. 

Pascua-Lama – Still awaiting final permit approvals from the respective government agencies.  Environmental approval has been received for a 34MW power plant in Chile and a 20MW wind farm. 

Buzwagi – Site access and construction began in August.  Initial estimates are in the 250,000 /oz. per year at a cost of $250-280 /oz.

Donlin Creek – Feasibility study is expected to be completed by November 12, 2007.  Discussion are underway with NovaGold about how best to proceed.

Kabanga JV – Pre-feasibility expected by the end of 2007 with a full feasibility study completed by the end of 2008. 

Sedibelo – Feasibility study expected by April 2008.

Exploration update:

Cortez – 9 rigs active and drilling on the property.  The mineralization remains open to the south.

Goldstrike/Banshee – drilling returned positive results and currently being evaluated with programs underway.

Pueblo Viejo – Monte Oculto deposit remains open to the east.  Recent in-fill drilling has demonstrated the potential for additional mineralization outside the resource area. 

Reko Diq – Approval has been given to explore a feasibility study based on a 72,000 tpd operation.

Profits fell in the third quarter due to lower mineral grades mined in South America and Africa along with a higher cost for the ore mined.  Production for the full year is estimated to be 8.1 million ounces at $350 /oz. 

The balance sheet remains to be strong with just under $1.9 billion in cash and an undrawn credit line of $1.5 billion.  Access to debt markets would not be a problem as well. 

CEO Greg Wilkins echoed what most gold bulls have believed for some time at the beginning of the conference call when he stated 'The Fed is actually reducing rates in front of an inflationary environment, and we can see continued weakness in the US dollar.  And all of that continues to bode well for gold, and so we continue to look forward to strong commodity environment for us.' 

The Arizona Star deal will bring one of the world's largest undeveloped gold and copper projects under the Barrick umbrella.

One of Barrick's great strengths is its geographic diversity which can absorb problems as they occur.

The new US mining bill was addressed during conference call.  As the bill is currently structured, the royalty will apply to new mines and existing mines would have a lower royalty rate.  The key point is that the royalty rate applies only to mines located on public land. 

With gold prices averaging $100 /oz. higher in the 4^th quarter so far we can expect generous margin expansion going forward.  Lower margin mines will be coming online in the next few years reducing operating cost pressure.  

Source:  Barrick Gold website, 3^rd quarter conference call (see transcript)