Barrick Gold Earnings: What We're Watching

| About: Barrick Gold (ABX)
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Barrick Gold (NYSE:ABX) is set to announce its fourth-quarter earnings on Thursday, Feb. 14. We expect the company to report slow growth in revenues and a decline in earnings on a year-over-year 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.

In Q3 2012, gold production decreased to 1.78 million ounces from 1.92 million ounces and copper production decreased to 112 million pounds from 140 million pounds year over year. In the fourth quarter, Barrick started commercial production at its Pueblo Viejo project in the Dominican Republic, which is expected to have a lower cost of production. Barrick owns a 60% stake in this project, and the remaining 40% is owned by Goldcorp (NYSE:GG).

The company also suffered a few setbacks. The Supreme Court of Pakistan declared its mining lease in the Baluchistan province to be invalid and not in accordance with laws. Also, Barrick's talks with China National Gold over sale of its African business broke down due to disagreement over valuation.

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 (GG), and Freeport-McMoRan Copper (NYSE:FCX).

Last quarter, Barrick reported total cash costs of $584 per ounce for production of gold. It also said that total cash costs for the year were expected to be in the range of $575-585 per ounce. This implies that the company expected relatively lower costs in Q4. We will be keen to see if this expectation has been met.

Commercial Production Commences at Pueblo Viejo

Barrick's Pueblo Viejo gold project in the Dominican Republic began production this quarter, 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 and for 2013 it is expected to be between 500,000 and 650,000 ounces. 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. The lower anticipated cost figure at Pueblo Viejo could be one reason for Barrick's expectation of lower overall costs in the fourth quarter.

Impact of Reko Diq Lease Cancellation

For a thorough background on the controversy surrounding this project, you can read our previous article here. The carrying value of Barrick's investment in Reko Diq is only $121 million. Therefore, if Barrick has to take a writedown on the project from an immediate financial standpoint the damage will be minimal. Also, since the resources have not yet been classified as reserves so far, the valuation of the company will not suffer. Mining companies, including Barrick Gold, explicitly state that mineral resources not classified as mineral reserves have not demonstrated economic viability, and investors take this into account when valuing mining companies. We will look for any updates on the future course of action planned by the company.

While the financial damage on Barrick's balance sheet and its valuation are likely to be minimal, one cannot ignore that it deprives the company of a significant growth opportunity. The Reko Diq project was supposed to give Barrick access to one of the world's richest copper-gold deposits.

Talks for Sale of African Barrick Gold Break Down

The primary reasons for wanting to sell are poor performance of the African business as well as problems Barrick faces in other regions of the world, which has caused capital to become scarce. Barrick's African mines have faced problems due to security issues, illegal mining, and power blackouts, leading to production shortfalls.

Due to the high cost of production, African Barrick Gold doesn't meet Barrick Gold's criteria as far as rates of return are concerned. The company has adopted a policy of prioritizing projects that provide decent rates of return rather than those that result in the largest production by volume.

Operational issues and the high costs of production ($900-$950 per ounce of gold produced) are believed to be the primary reasons why China National Gold was unwilling to give a high valuation to African Barrick Gold. Barrick has now ordered a full operational review of the African business to improve operational efficiency. It would otherwise be difficult for it to unlock the true value of these assets in a sale. Meanwhile, high production costs here will continue to be a drag on Barrick's overall costs in Q1 2013.

We will also be looking for updates on the sale of its Barrick Energy unit as well as operating review results for African Barrick Gold and the Lumwana copper mine, if available. The sale process for the energy unit was started earlier this month.

Our price estimate for Barrick Gold is $51, which we will revise once the results for Q4 2012 are declared.

Disclosure: No positions.