Barrick Gold Corporation
), the largest gold producer in the world, reported its Q4 2012 and
annual results on February 14. The company took a hefty impairment
charge of $4.2 billion primarily on account of its copper business,
which dragged down net profits. Its operating performance, however,
met expectations. The production of gold (7.4 million ounces) and
costs ($584 per ounce) were in line with guidance estimates.
Barrick also replaced its gold reserves and doubled its resources
at the Goldrush mine in Nevada to about 14 million ounces of gold.
One should note, however, that resources are not the same as
reserves and economic feasibility of extraction needs to be
established first to upgrade the classification of assets from
resources to reserves.
Barrick reiterated its business focus on generating returns and
free cash flows rather than increasing production. Falling free
cash flows in the gold mining sector are discouraging investors. As
a result, the performance of gold miners' equities has lagged the
performance of gold as a physical commodity.
Apart from completing the Pascua Lama project, the focus in the
future will be on advancing projects in Nevada. This region alone
accounts for around 50% of Barrick's gold production and nearly 40%
of its reserves. Almost half of Barrick's 2013 exploration budget
of $400-440 million has been allocated to Nevada. Apart from these,
Barrick doesn't intend to build any new mines in the foreseeable
future. Though it has a number of properties which have economic
potential, they currently don't meet its investment criteria.
Finally, Barrick is looking for a buyer for its energy business
to get rid of non-core assets with short lives and high operating
See Full Analysis for Barrick Gold Here
Impairments In The Copper Business
Barrick acquired Equinox in 2011 and with it came Jabal Sayid, a
project in construction in Saudi Arabia, and Lumwana with a
producing mine in Zambia. Lumwana is comprised of an original
smaller pit Malundwe and an adjacent much larger undeveloped ore
body called Chimiwungo. The major value of Equinox lies in the
potential at Chimiwungo.
At the time of acquisition, drill results for the ore body at
Chimiwungo indicated significant potential for copper. Barrick
drilled the ore body further to establish the full extent of its
potential. While results confirmed an exceptional amount of copper,
Barrick had to revise its cost estimates drastically higher. A
large portion of high grade reserves are much deeper underground
than originally expected which will need a significant amount of
expensive waste stripping. The revised cost estimates are due to
higher expected future costs, the new life-of-mine plan, and the
doubling of royalties by the Zambian government.
Under present copper price assumptions, Barrick reduced its
production expectations and hence profitability over the life of
the mine. On account of this, it took a $3 billion impairment
charge on Lumwana. Another $800 million goodwill impairment charge
for the copper business took the total copper related impairment to
$3.8 billion. Impairments resulted in a net loss of $665 million n
2012 as against a profit of $4.5 billion in 2011. Adjusted for
impairments, income in 2012 stood at $3.8 billion compared to the
2011 figure of $4.7 billion.
Change In Cash Cost Measure
Current operating measures used in the gold industry do not
capture all of the sustaining expenditures incurred to produce
gold, and therefore do not reflect a complete picture of operating
performance, the ability to generate free cash flow from
operations, or the expenditures that would be included in the
valuation of a gold mining company.
Barrick has come up with a new all-in sustaining cash cost
measure that will include the total cash cost, sustaining
capital expenditures, G&A cost, mine site exploration and
evaluation costs, and environmental rehabilitation costs. It is
hoped that this measure will help in gauging Barrick Gold's
performance in a better manner. The World Gold Council is expected
to make this a standard reporting metric in mid-2013.
In 2012, Barrick 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, which makes cutting overhead
costs all the more essential for the company. The alternative is
simply to hope for higher gold prices, which may or may not happen.
Since the gold production target for next year is 7.0-7.4 million
ounces, which isn't greater than 2012, profits may be hit due to
higher costs. The company is assuming gold prices of $1,700 per
ounce for 2013, as against an average realized price of $1,688 per
ounce in 2012.
Outlook For 2013
Apart from gold prices and production costs, the catalysts for
2013 will be production ramp-up at the Lumwana copper mine and the
Pueblo Viejo gold mine, reduction in overhead costs, and reduction
in costs due to disposition of non-core assets.
Barrick aims to incur capital expenditures of $5.7-$6.3 billion
in 2013, as against $6 billion incurred in 2012.
As 2013 rolls ahead, we will be watching Barrick for the
performance of its African business unit, a potential sale of the
energy business, and further updates on Pascua Lama and
estimate for Barrick Gold is $51
, which we will revise shortly in light of Q4 2012 results.
A Company's Products Impact Its Stock at Trefis