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Lower Year-Over-Year Gold Prices Will Dull Barrick Gold's Results

Posted
10/29/2013 3:26:00 PM
By: Trefis
Referenced Stocks:ABX;FCX;NEM;VALE

Barrick Gold ( ABX ) 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 price 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 improve.

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.

Notable Developments

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 Mines , 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 returns.

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.

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