Barrick’s earnings slump as costs rise

Whereas most gold companies saw their bottom lines strengthened during the first quarter, Barrick Gold (ABX-T) suffered shrinking profits and revenue as production fell and costs rose at many of its biggest mines around the world.

The world’s third-largest gold producer turned a profit of US$29 million (or US5 per share) on US$459 million in gold sales during the 3-month period, compared with earnings of US$46 million (US9 per share) on sales revenue of US$478 million in the corresponding period of 2002. In the fourth quarter of 2002, the major earned US$54 million on revenue of US$526 million.

The earnings drop is attributed to a US$17-million accounting change in the amortization of development costs of underground mines and overall reclamation costs. Contributing to the decline were lower gold production (resulting from the closure of five mines), lower grades at the Betze-Post mine in Nevada, and higher energy, royalty and exploration costs.

Another earnings killer was a US$5-million expense for severance costs, which caused administration costs to soar to US$22 million. Much of the US$5 million likely relates to the February firing of president and CEO Randall Oliphant, who received US$6.4 million in severance pay.

Barrick expects to spend US$70 million on administration costs this year, assuming there isn’t a raft of new firings of upper management.

On the positive side, operating cash flow between the two first quarters rose US$7 million, to US$131 million, and the company recorded a US$36-million non-hedge derivative gain relating to declines in gold prices and lease rates.

First-quarter gold output fell to 1.3 million oz. at a total cash cost of US$194 per oz. and a total production cost of US$285 per oz., down from 1.4 million oz. gold mined a year earlier at US$175 per oz. and US$263 per oz.

Next to the Holt-McDermott mine in Ontario, which is less than two years away from the end of its life, Barrick’s highest-cost mine is Betze-Post. Total cash costs at the Nevada operation amounted to US$266 per oz. in the quarter, up from US$219 a year earlier, while production fell to 285,296 oz., compared with 341,438 oz. (nonetheless, the mine still produces more than twice as much gold as any other Barrick mine).

Total production costs in the recent quarter were US$326 per oz. at Betze-Post and US$329 per oz. overall at the Goldstrike complex, which includes both Betze-Post and the smaller Meikle mine.

Betze-Post continues to have problems with autoclave recovery rates, owing to the metallurgical variability of the ore types in the pit’s western end and in stockpiles. However, Barrick believes it can remedy the problems.

For the rest of the year at Betze-Post, Barrick expects production to rise and costs to fall as mining moves into higher-grade zones. For all of 2003, the mine is expected to produce 1.5 million oz. gold at a cash cost of US$228 per oz.

Meanwhile, Holt-McDermott’s total production costs rocketed 52% to US$404 per oz. in the first quarter, making it the only Barrick mine to be producing at a cost above the company’s realized gold price. Contributing to the costs are grades that are 10-15% lower than planned.

Eskay and Pierina

At the other end of the spectrum are Barrick’s two lowest-cost producers: Eskay Creek mine, in British Columbia, and Pierina, in Peru. These are the company’s only two mines with cash costs below US$100 per oz.

Eskay Creek’s production held steady at 84,230 oz. gold during the quarter, while total cash costs were US$69 per oz., up from US$33 per oz. a year earlier, reflecting higher smelting and transportation costs.

Barrick also blames the cost rise on changes in the production mix of various ores, as well a 7% drop in silver grades, which lowered byproduct silver credits.

Pierina is in its last year of production in the 900,000-oz. range before it drops to lower levels as mining proceeds into lower-grade areas of the open pit. For 2003, the mine is expected to produce 908,000 oz. gold at a total cash cost of US$86 per oz. However, costs have been increasing as a result of higher energy expenses and more profit-sharing with employees.

Overall for 2003, Barrick expects its gold production to slump to 5.4-5.5 million oz., while total cash costs are projected to be US$180-190 per oz.

Last year, the company produced 5.7 million oz. gold at a total cash cost of US$177 per oz.

Thumbing its nose at the critics of its hedging program, Barrick demonstrated flexibility by deferring its hedge contracts and selling gold into the spot market in January, February and the first half of March.

The company realized an average US$355 per oz. gold, even with spot prices averaging US$352 per oz., and even managed to outdo the staunchest anti-hedger, Goldcorp, which sold its first-quarter production at US$343 per oz.

Still, Barrick says it would like to see its hedging program become both “simpler and smaller.”

Hedging

At the end of the quarter, the major had 17.3 million oz. hedged at an average of US$337 per oz., down from 24 million oz. at a similar amount a year earlier. While the most recent hedge number represents 20% of Barrick’s 86.9-million-oz. reserve base, it represents 35% of reserves at its operating mines, or more than three years of production.

Barrick would like to reduce its hedge to 20% of reserves at its operating mines, or about two years of production.

(Receiving less attention is Barrick’s silver hedge, which stands at 40.4 million oz. at an average price of US$5.11 per oz.)

At of March 31, Barrick’s gold hedge book was valued at negative US$489 million, its silver contracts at positive US$17 million, and its foreign currency contracts at positive US$78 million.

At quarter’s end, Barrick’s cash position stood at US$1.1 billion, while its long-term debt was US$761 million.

For all of 2003, the company expects to earn US$25 million in interest income and spend US$60 million in interest costs.

Barrick spent US$29 million on gold exploration during the recent quarter, with much activity focused on advancing the Veladero project in Argentina. There, the company has submitted its environmental impact statement and has begun building an access road and camp facilities.

Next door, at the Pascua-Lama project in Chile, Barrick has hired SNC-Lavalin (SNC-T) to update a previous feasibility study, partly in order to account for the devaluation of the Argentine peso. SNC’s new study is due in early 2004.

In Peru, at the promising Alto Chicama project, near Pierina, Barrick expects to have a final feasibility study completed by mid-year.

At the Cowal project in Australia, it has almost completed an optimized feasibility study and continues to drill for resource definition. Construction is to start in the second half of the year, with startup slated for mid-2005.