Barrick Unlikely to Sparkle

April 24, 2013 at 07:11


Barrick Gold is set to announce its first quarter earnings on Wednesday, April 24. The average price of gold for the first quarter this year was lower than the price in the comparable quarter last year. This will impact revenues negatively on a year-over-year basis.

If production doesn’t increase enough to offset the impact from lower prices, revenues will decline on a year-over-year basis. Since the gold production target for 2013 has been set at 7-7.4 million ounces compared to 7.4 million ounces produced in 2012, we think that the production for Q1 2013 is unlikely to be much higher, if at all.

Barrick Gold dealt a major blow this quarter when a Chilean court ordered it to suspend work indefinitely on the Pascua Lama mine over environmental irregularities. Pascua Lama has already witnessed multiple cost escalations and delays. This mine is critical to Barrick’s future and the latest ruling might delay it further.

Another bad news was the sudden and heavy downslide in gold prices witnessed in the last couple of weeks. Since the decline took place in April, the first quarter results won’t be impacted, but the results in the subsequent quarters will bear the brunt.

The appeals court in the northern city of Copiapo in Chile charged Barrick with environmental irregularities during the construction of the mine, which straddles the Chile-Argentina border, and is the highest altitude gold and silver mine in the world.

The company said that it would follow the court’s orders and suspend construction work on the Chilean side of the project while working to address environmental and other regulatory requirements to the satisfaction of the Chilean authorities. The company says that it can still continue construction activities in Argentina where the majority of Pascua Lama’s critical infrastructure is located, including a process plant and a tailings storage facility.

According to the latest available figures, Pascua Lama has proven and probable reserves of 17.9 million ounces of gold, 676 million ounces of silver contained within the gold reserves, and a mine life of 25 years. Once production begins, Barrick expects to produce 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. In 2012, the company had a total gold production of 7.42 million ounces of gold. It aims to produce 8 million ounces by 2016, and Pascua Lama is integral to achievement of this target.

Once in operation, Pascua Lama is expected to be one of the world?s largest low cost mines and is expected to contribute significant free cash flow to Barrick for many years to come.

The total capital expenditure planned for the project now stands at $8-8.5 billion, including a 15-20% contingency on the amount that remains to be spent. The escalation has been phenomenal considering that the initial cost estimate was pegged at $3 billion. The construction is approximately 40% complete and around $4.2 billion has been spent so far.

Before the latest ruling, Pascua Lama was supposed to begin production in the second half of 2014, but now even that seems in doubt. The suspension ordered by the court does not specify a time period for the same so it could be days, weeks or even months before work can resume on the Chilean side.

The last few days have been extraordinary for the gold market. The price has plunged dramatically and the panic generated in the market is leading to yet higher selling and lower prices. This phenomenon cannot be explained by a single event, but rather a combination of events occurring in tandem. Broadly, the primary factors driving gold prices are believed to be the Federal Reserve Bank’s monetary policy, European economic woes, inflation data, and the slowing Chinese economy. In a previous article, we explained these factors and their impact on gold prices and mining companies. You can read it here.

There are conflicting opinions in the market over whether the commodity super cycle has come to an end. In either case, the price outlook for most commodities is bearish for the foreseeable future.

Declining gold prices will pose a challenge to Barrick Gold in maintaining profitability. In 2012, the company reported an all-in sustaining cash cost of $945 per ounce of gold produced. The figure in 2013 is expected to be around $1,000-1,100. Also, its gold price assumption of $1,700 per ounce for 2013 is unlikely to bear out, which in turn will impact revenues and profits.

In the earnings conference call, we will look out for the management’s comments and views on the gold market and the Pascua Lama ruling. We will also be keen to hear any updates on its progress in disposing non-core assets such as the sale of its energy business.