Barrick Gold (
) is set to announce its third quarter earnings on Thursday,
October 31. The average price of gold for the third quarter this
year was much lower than the price in the comparable quarter last
year. This will impact revenues negatively on a year-over-year
basis. Even if production increases, it won't be enough to offset
the impact of lower prices and 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 the production for Q3 2013 is unlikely
to be much higher, if at all.
In the third quarter, Barrick concluded a deal to sell three
gold mines in Australia for $300 million and announced that it was
looking for a buyer for two more. However, the company said that
the sale will have no impact on its production guidance for the
year. Since these assets were sold because of their higher
operating costs, Barrick's cost of production may come down
marginally in the fourth quarter. The third quarter results will
not benefit from the sale since it will be recorded in the
company's financial statements in the fourth quarter.
We have a
estimate for Barrick Gold of $15
, which represents 25% downside to the current market price.
See Full Analysis for Barrick Gold Here
The Price Of Gold
The price of gold this year has been reacting largely to the
Federal Reserve Bank's various pronouncements and hints about
continuing or tapering down monetary stimulus measures, better
known as Quantitative Easing (QE). The first steep fall in price
came in April when the minutes from the Federal Open Market
Committee (FOMC) meetings suggested that the bank may stop its
bond purchasing program well before the end of 2013.
A second steep fall in prices occurred in June when the Federal
Reserve Bank chairman Ben Bernanke announced his intention to
reduce the quantitative easing program or possibly withdraw it
later in the year, if the U.S. economy and job market were to
However, gold prices again started inching upwards in July when
a second announcement from Mr. Bernanke suggested that
economic data continued to remain weak and the Federal Reserve may
continue with monetary easing for the time being. In the wake of
some positive economic data ahead of the monetary policy review
meeting of the Federal Reserve in mid-September, the market largely
expected the bank to begin a gradual QE tapering process.
Accordingly, the price of gold began falling in September. Since
then, the price of gold has been inching upwards gradually as the
Federal Reserve opted not to commence the QE tapering process for
the time being.
On the whole, the average price of gold for the third quarter
this year has been much lower than in the third quarter last year.
Therefore, we expect Barrick to report lower year-over-year profits
for the third quarter. Low gold prices are a problem for Barrick
because it needs to generate enough free cash flow to service its
heavy debt burden (nearly $16 billion at the end of Q2 2013), meet
dividend expectations of shareholders and invest in further growth
to ensure steady future revenues.
A court in Chile upheld Barrick Gold's environmental approval
for the Pasuca Lama project. This brought closure to a
constitutional rights protection action filed against the company
in September 2012 on behalf of four indigenous
communities. Barrick has already been forced to delay the project
till mid-2016 on grounds of non-compliance with environmental
norms. The court has instructed the company to take remedial action
before going ahead with the project.
On October 1, Barrick completed the sale of the Granny
Smith, Lawlers and Darlot mines to Gold Fields
Limited for a total consideration of $300 million. These
mines produce around 450,000 ounces of gold per year. The
all-in sustaining cost (AISC) was reported at $1,145 per ounce
in the first half of 2013. ((
Barrick Completes Divestiture of Three Australian
, Barrick Gold Press Release))
The company's Australian operations are among some of its
costliest. Amid low gold prices, costs have soared by nearly 20%
last year. With cost of production ballooning, the company
wants to reshape its portfolio and focus on generating returns
rather than increasing production. Investors are not happy at the
nosediving stock price of the company and the reduction in dividend
by 75%. Barrick aims to trim $1.5-1.8 billion in costs over the
2013 and 2014 period by cutting capital spending and reducing staff
strength. Capital spending can be reduced optimally by selling off
assets which consume capital without generating commensurate
In addition to the above, Barrick has announced that it is in
talks to sell two more mines in Australia. ((Barrick Gold in
Talks to Sell More Assets in Australia, Bloomberg))
The proceeds from sale of non-core assets will be used for
general corporate purposes, including the repayment of the
company's hefty debt.
In the earnings conference call we will watch out for any
further announcements about sale of non-core assets and Barrick's
view on gold prices going ahead.
A Company's Products Impact Its Stock at Trefis