Earnings Preview: Barrick Gold

Oct.31.12 | About: Barrick Gold (ABX)

Barrick Gold (NYSE:ABX) is set to announce its third quarter earnings on Thursday. We expect the company to report slow growth in revenues and a decline in earnings on a y-o-y basis, as expected lower gold production could offset gains from higher average realized prices of gold. We will look closely at profit margins, since its cost of production has been rising, while average prices in Q3 were higher than the previous quarter. Also, Barrick started production at its Pueblo Viejo mine this quarter, which is expected to have a lower cost of production. Last week, African Barrick Gold -- Barrick’s African subsidiary -- reported a 72% y-o-y drop in profits due to disruption in operations, which resulted in a lower output.

In Q2 2012, gold production decreased to 1.74 million ounces from 1.98 million ounces and copper production increased to 109 million pounds from 93 million pounds year-over-year. (Source: Barrick Announces Second Quarter 2012 Results, Barrick Gold Press Release, July 26 2012)

Barrick 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).

See Full Analysis for Barrick Gold Here

At the end of the previous quarter, Barrick said that total cash costs would be lower in the second half of the year, since lower cost mines would contribute to a greater share of total company production. We will look for signs to indicate whether the company has made good on its promise. A failure to bring production from low-cost gold mines into the production mix will put pressure on margins in the short term. (Source: Barrick Gold Management Discusses Q2 2012 Results – Earnings Call Transcript, SeekingAlpha)

Status Of Key Gold Projects

Barrick’s Pueblo Viejo gold project in the Dominican Republic began production this quarter, thus bringing some good news for the company, whose stock has been on a downward trajectory despite rising bullion prices. Barrick’s 60% share of 2012 production from Pueblo Viejo is expected to be 100,000-125,000 ounces at a total cash cost of $400-$500 per ounce. In its first full five years of operation, Barrick’s share of production is anticipated to be 625,000-675,000 ounces at an expected total cash cost of $300-$350 per ounce.

Pueblo Viejo is a world-class asset, and is among the very few mines that are expected to produce more than a million ounces of gold per year. What makes it even more attractive is the fact that it is expected to produce gold at a low cost for decades to come. In the short term, low-cost production at Pueblo Viejo will help Barrick bring down its overall production cost for the remaining part of the year, thus helping to shore up margins. Although Barrick’s cost profile is still among the lowest in the industry, its costs have been gradually rising for some time. The production from Pueblo will help it in regaining its cost advantage in the long term.

At the end of Q2, Barrick Gold announced a 50-60% increase in capital costs for its Pascua-Lama gold mine from the top end of the previously announced estimate of $4.7-$5 billion, with first production expected in mid-2014 instead of mid-2013, as estimated earlier. This delay and cost escalation came as a huge setback to the company, which claims that Pascua-Lama will be one of the world’s cheapest gold mines once production begins. Estimated to have a long life of 25 years, Pascua-Lama is crucial to Barrick Gold’s future.

The company attributed increased costs to a combination of high inflation in Argentina and Chile, lower-than-expected contractor productivity, schedule extension and engineering and planning gaps. Project execution had been tardy due to the challenging physical environment at high altitudes, and the company’s decision to use in-house capabilities rather than outsourcing the work to external partners. The management was being put under the microscope for not having detected such serious problems earlier. The latest presentation available on the company’s website informs that Barrick is currently working towards strengthening the project management structure and trying to mitigate cost pressures. (Source: HSBC Global Natural Resources Conference Presentation, Barrick Gold Investor Relations)

Status Of Key Copper Projects

The $400 million Jabal Sayid copper project in Saudi Arabia, with an estimated 1.2 billion pounds of copper, was supposed to start production in the second half of 2012. The mine will add approximately 130 million pounds of copper annually. Thankfully, the total cash costs are expected to be much lower at $1.50-$1.70 per pound as compared to the average cost of $2.28 per pound this quarter. The latest presentation available on the company’s website informs that Barrick is currently working towards achieving safety and security compliance to enable production.

Barrick had informed last quarter that its Lumwana copper mines were not in good shape. It blamed previous owners Equinox for following practices that were less than satisfactory. Barrick says that it is currently trying to address waste stripping concerns and improve the infrastructure at the mine.

We will be watching figures for production volumes, cost of production and profit margins. We will also keep a look out for Barrick’s comments on its various ongoing and planned projects. The company is currently in talks with a Chinese firm for the sale of its African business. We expect Barrick to provide a status update on the same.

Our price estimate for Barrick Gold is $52, which will be revised once the results for Q3 are declared.

Disclosure: No positions