A double whammy of lowered earnings expectations and a sagging bullion price sent shares of
The company’s issue opened the day $2.42, or 8.6%, lower in Toronto, and by mid-afternoon was trading at $25.07, $3 off its previous close.
Before the markets opened, Barrick announced that third-quarter profits had been lowered to US5-6 per share, before recovering to US10-11 per share in the fourth quarter. For the full year, earnings estimates were cut to US33-35 per share, well off the previous guidance of US42-47 a share. Both revised estimates are based on a gold price of US$315 per oz.
Barrick says it expects slightly lower gold sales and higher depreciation expense than previously forecast.
In early October, Barrick’s chief executive officer, Randall Oliphant, told the audience at the Denver Gold Group’s Mining Investment Forum that the revised earnings forecast arose from communication issues rather than management-related ones. He added he is confident in the management team currently in place.
Oliphant, who admits that senior management should have been better-informed about operational performance, said the company will continue to issue earnings predictions but that, under new procedures, it will do so more carefully. Part of the plan is to meet more frequently with senior operating managers.
“We do not plan on making it a habit of appearing at the Denver Gold Show to talk about why we missed our forecast for the year,” he added. “I think we’ve learned a lot from this, and I believe we’ll emerge a much stronger company.”
Fuelling the drop in projected earnings are lower gold production and higher costs at a handful of Barrick’s mines, including the Meikle mine in Nevada, the Hemlo mine in northern Ontario, Bulyanhulu in Tanzania, and Eskay Creek in British Columbia. Managers at Meikle and Eskay Creek have been replaced.
At Meikle, Barrick encountered fewer tonnes and lower-than-expected grades while mining some remnant ore during the third quarter. Production is 27,000 oz. lower and cash costs US$12 per oz. higher than originally thought, owing to lower grades (off 2%) and throughput (down about 3%). The overall impact from Meikle is about minus US2 per share on an earnings basis.
The company has re-balanced Meikle’s mining schedule, counting on much lower tonnage from the remnant areas, and making up the tonnage from the Rodeo deposit and other parts of the complex.
Barrick’s third-quarter share of production from Hemlo came in 20,000 oz. lower — and costs, US$20 per oz. higher — than expected, owing to a 4% drop off in grade and a decline of 3% in mill throughput. Higher cash costs are entirely due to the lower grades, which are a result of seismic and ground-control issues occurring late last year. Hemlo’s negative impact on earnings per share comes to US1.
Bulyanhulu
At Bulyanhulu, gold production totalled 12,000 oz. lower — and cash costs, US$8 per oz. higher — than originally pegged, owing mostly to lower grades. The production shortfall cut about US1 per share from earnings.
John Carrington, Barrick’s vice-chairman and chief operations officer, classifies the problem at Bulyanhulu as “an ore recovery issue,” particularly from a 6-to-8-inch seam right on the hangingwall. The seam can carry up to 25% of the active stope’s gold. Head grades have improved in recent weeks, after stope outlines were redesigned to ensure the seam is incorporated.
Meanwhile, an ongoing 3-month-long strike at
Carrington said, in a prepared statement: “Certain operations experienced lower-than-anticipated grades and recovery rates, resulting in lower production and higher costs. While our third-quarter has been disappointing, we expect our fourth-quarter results to improve as we mine better grades at several operations.”
Despite the setback, the company says it is still on pace to meet its production goal of 5.7 million oz. gold for the year, and expects cash costs to average US$178 per oz., US$6 per oz. higher than originally estimated. During the third quarter, cash costs are projected at US$180 per oz. Barrick still figures to generate a record US$370 million in free cash for the year.
Swiss sale
Adding to the misery on Sept 26, the price of gold, which has been enjoying a resurgence the past few months, fixed at US$319.60 per oz. in the afternoon in London, off US$5.55 per oz. from the previous day’s afternoon fix. That same day, the Swiss National Bank announced plans to sell another 283 tonnes (9.1 million oz.) gold by the end of September 2003. The sales are part of a larger plan to sell a total of 1,300 tonnes of gold.
Looking into 2003, Barrick expects production and costs to be little-changed from 2002.
The revised 2002 earnings outlook came just nine days after Barrick unveiled an ambitious US$2-billion growth strategy aimed at doubling the company’s earnings by 2006. Oliphant says the plan will go ahead unabated.
Under the scheme, four wholly owned projects — Alto Chicama in Peru, Cowal in Australia, Veladero in Argentina, and Pascua-Lama in Chile – will come on-stream in the next five years. The projects are expected to churn out 2 million oz. of attributable gold at a combined cash cost of US$125 per oz.
By 2006, net production is expected to rise by 1.2 million oz., or 21%, to 6.9 million oz. at lower costs.
The company also plans to trim its forward sales position to 12 million oz. by the end of 2003, down from 17.9 million oz. at the end of June. By 2004, 15% of reserves will be hedged, compared with 22% at present. Proven and probable reserves stand at 82.3 million oz. gold. The reduction will come via the fulfilment of existing contracts.
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