Healthy operating cash flow in Q1, Barrick says

Barrick Gold (ABX-T, ABX-N) has reported operating cash flow in the first quarter of 2013 at US$1.1 billion, down from US$1.4 billion in the first quarter of 2012, while net earnings totalled US$847 million, or US85¢ per share, down from US$1 billion, or US$1.04 per share, in the first quarter of 2012. (Adjusted net earnings tallied US$923 million, or US92¢ per share, down from US$1.1 billon, or US$1.10 per share.)

“We generated — again — healthy operating cash flow of about US$1.1 billion, and these solid numbers were driven by a solid and strong operational performance,” CEO Jamie Sokalsky told shareholders gathered at Barrick’s annual general meeting (AGM) in downtown Toronto in late April.

All-in sustaining costs in the first quarter reached US$919 per oz. with total cash costs of US$561 per oz., and Barrick forecasts that all-in sustaining costs for the full year will be in the range of US$950 to 1,050 per oz., down from its previous guidance of US$1,000 to 1,100 per oz.

“It’s rewarding to see that our disciplined capital-allocation framework — with its sharp focus on cost reduction — has been incorporated into our day-to-day operations,” Sokalsky said.  “And our regional presidents and mine managers have embraced this mandate. They’re running the business the way the business should be run to produce solid results.”

Barrick has trimmed its 2013 capital expenditure (capex) guidance to US$5.2 billion to US$5.7 billion from its previous guidance of US$5.7 billion to US$6.3 billion, while exploration guidance has been whittled down to US$300 million to US$340 million from US$400 million to US$440 million.

Full-year production is forecast in the range of 7 million to 7.4 million oz. gold at cash costs of US$610 to US$660 per oz.

For copper, Barrick forecasts 2013 production will be 480 million to 540 million lb. at a C1 cash cost of between US$2.10 and US$2.30 per lb. In the first quarter, Barrick produced 127 million lb. at a C1 cash cost of US$2.46 per lb.

In his remarks at the AGM, Sokalsky conceded that 2012 had been a difficult year for Barrick and that the company “faced significant challenges — some out of our control, some within our control.”

He added that “we were also not immune to the broader investor disillusionment with the gold sector, which has stemmed from a growing disconnect between gold equities and the rising gold prices we had seen prior to this year,” he explains. “The message from investors on this disconnect has been clear, and rightfully so: the industry needs to do things differently, and Barrick recognized the need for fundamental change last year. I believe we were among the first in the industry to shift course and take action.”

Last July, the company says it adopted a disciplined capital allocation framework that prioritizes shareholder value creation. This framework is focused on two objectives: risk-adjusted returns and free cash flow.

“Following this, we recalibrated our long-term production targets, determined we would not build any new mines, launched a portfolio-optimization process and made significant reductions to our capital and operating costs,” he says.

While Sokalsky admits the company faced challenges last year, it also posted achievements, including “strong operating results and record operating cash flow.”

“We completed our Pueblo Viejo mine in the Dominican Republic — a long-life, low-cost operation — and we doubled the resource for the second year in a row at our Goldrush discovery in Nevada, located right next to our world-class Cortez mine.”

Last year Barrick reported strong adjusted net earnings of US$3.8 billion, which were the second-highest in the company’s history, and operating cash flow of US$5.4 billion, which he says was a company record.  In 2012 the company produced 7.4 million oz. gold at all-in-sustaining costs of just over US$900 per oz., and total cash costs of less than US$560 per oz., which were “the lowest of the senior group.” And for the tenth consecutive year, he adds, Barrick met its gold production guidance.

Looking ahead, Sokalsky remarks that the company has a solid investment-grade balance sheet and sufficient financial liquidity, including access to debt markets to meet objectives. He affirms that “our business is solid.”

As for Barrick’s troubles at its large Pascua-Lama project, where construction was suspended two weeks ago on the Chilean side of the border, Sokalsky says that “although it’s still too early to assess the impact on the capex and the schedule, I can assure you we will not continue to spend capital if we do not have a strong indication of the required time frame to address these issues in short order.”

Alex Kodatsky of CIBC World Markets says that uncertainty at Pascua-Lama “will keep the shares in check, given the $4 billion in capex that hangs in the balance.”

He adds that “management would consider shelving the project, if needed, and it seems a near-term resolution is possible, although we anticipate start-up has been pushed to 2015.”

Given the anticipated delay at Pascua-Lama and “the recent compression of gold multiples,” Kodatsky has lowered his 12- to 18-month price target on the stock from $43 per share to $33 per share.