The world's largest gold miner
Barrick Gold Corporation
) reported disappointing results for the second quarter of 2012.
The company's adjusted earnings fell to 78 cents per share in the
quarter from $1.12 per share in the year-ago period, and
significantly missed the Zacks Consensus Estimate of 96 cents.
Declining production and escalating costs constricted Barrick's
margins in the quarter and led to a massive drop in profits. As a
result, reported profit dipped 35% to $750 million (or 75 cents per
share) in the second quarter from $1.16 billion, or $1.16 per
share, last year.
Revenues declined 4% from last year to $3,278 million, lagging
the Zacks Consensus Estimate of $3,553 million. Although average
realized price of gold increased 6% year over year to $1,608 per
ounce, a 38% jump in total cash costs offset the effects of better
Gold production fell to 1.74 million ounces in the quarter from
1.98 million ounces last year, which does not come as a surprise
since Barrick had already warned of a production decline in the
quarter. Copper production improved to 109 million pounds from 93
million pounds last year. However, the company expects to perform
better in the second half of the year and thus reiterated its full
year production targets.
Barrick's North American unit produced 0.85 million ounces of gold
at total cash costs of $516 per ounce compared with 0.92 million
ounces at total cash costs of $404 per ounce a year ago. The Cortez
mine turned in a strong performance and exceeded expectations,
driven by better underground grades and higher ore tons from the
Production at Goldstrike was, however, constrained by a
scheduled shutdown for maintenance activities resulting in lower
throughput capacity. However, Goldstrike is expected to do better
in the second half of the year due to increased throughput capacity
as a result of maintenance improvements. For 2012, production for
the North American region is expected to be in the range of
3.425-3.60 million ounces at total cash costs of $475-$525 per
Production from South America in the quarter was 0.33 million
ounces at total cash costs of $458 per ounce compared with 0.45
million ounces at cash costs of $373 per ounce. In 2012, production
from South America is expected to be in the range of 1.55-1.7
million ounces at total cash costs of $430-$480 per ounce.
This business region produced 0.45 million ounces in the quarter,
compared with 0.46 million ounces in the year-ago quarter. Total
cash costs were $844 per ounce in the reported quarter compared
with $611 per ounce last year. Australia Pacific is expected to
produce 1.80-1.95 million ounces this year at total cash costs of
$770-$800 per ounce, up from the previous range of $700-$750 per
African Barrick Gold plc. (ABG):
Attributable production from African Barrick Gold in the quarter
came in at 0.11 million ounces at total cash costs of $950 per
ounce compared with 0.13 million ounces at total cash costs of $652
per ounce in the prior-year quarter. Lower grades from Buzwagi and
increased energy costs led to the surge in costs. Barrick Gold
expects to produce 0.5-0.535 million ounces at total cash costs of
$790-$860 per ounce in 2012.
Cash and cash equivalents stood at $2,330 million as of June 30,
2012, compared with $2,863 million as of June 30, 2011. Operating
cash flow increased to $0.76 billion in the quarter from $0.75
billion last year. The increased cash flow resulted from a decrease
in net working capital outflow and income tax payments. Net debt
stood at $11.3 billion as of June 30, 2012 compared with $10.1
billion as of June 30, 2011.
Barrick has witnessed a tremendous increase in costs as evident
from its various segments. The situation may worsen as the company
expects that development of the Pascua-Lama mine, which is the
highest gold mine in the world, will get costlier.
The company says that the mine's costs will rise by 50-60%,
which might propel costs higher by as much as $3 billion from the
previous range of $4.7 billion to $5 billion. Barrick expects that
production from Pascua-Lama, which is among the biggest mines in
the world, will begin in mid-2014 and not next year, as expected
However, Barrick has almost completed the construction of the
Pueblo Viejo and Jabal Sayid projects and expects capital costs for
these to be within the guided range. Gold production at Pueblo
Viejo is expected to begin next month while first copper production
from Jabal Sayid is expected in the third quarter this year.
Barrick has maintained its full year gold production targets and
expects to produce 7.3-7.8 million ounces this year. However, it
has increased its cost forecast and expects to incur total cash
costs of $550-$575 per ounce, up from the previous range of
$520-$560 per ounce.
The company has slashed its copper production forecast to
460-500 million pounds this year from the earlier guidance of
550-600 million pounds. Also, Barrick now expects copper cash costs
to increase from $1.90-$2.20 per pound to $2.10-$2.30 per pound
Also, Barrick might lower its long-term targets, primarily
driven by economic uncertainties and its capital allocation
strategy. Management believes that a number of projects in the
pipeline are not well-aligned with the company's strategy and needs
to be reviewed. This might result in some projects being put on the
backburner. Barrick now projects its gold and copper production
base to be above 8 million ounces by 2015 and more than 600 million
pounds by 2013.
Our Take and Recommendation
Barrick, with a number of world class mines under its
jurisdiction, is an unhedged producer of gold and enjoys
significant leverage to gold prices. However, as seen in the second
quarter, the advantage arising out of increased prices is
endangered by higher costs. The company expects costs to rise,
which might impact its earnings power going forward.
We currently have a long-term Neutral recommendation on Barrick
Gold. The company, which competes with
AngloGold Ashanti Ltd.
Newmont Mining Corp.
), maintains a Zacks #3 Rank, which translates into a short-term (1
to 3 months) Hold rating.
BARRICK GOLD CP (ABX): Free Stock Analysis
ANGLOGOLD LTD (AU): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis
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