Barrick’s Regent Sees Broader Mandate

Increasing profits to US$492 million would be good news for many miners. But for Barrick Gold (ABX-T, ABX-N), the bar is set a little higher — and while its second-quarter profits were up from US$485 million for the same period last year, higher costs stopped the market from enthusiastically endorsing the major’s financial results.

The increase in profits is also slightly tarnished by the figure that emerges when one-time items are excluded. Adjusted earnings came in at US$431 million, less than the adjusted earnings for the same period last year of US$442 million.

On the positive side, sales did move in the right direction, rising to US$2.02 billion from US$1.97 billion the year previous. That coincided nicely with a US$9-peroz. increase in the average realized gold price to US$931 per oz. Such metrics boosted operating cash flow by 42% to US$718 million in the second quarter compared with US$505 million in the year-earlier period.

Gold production for the quarter came in at 1.87 million oz. at a total cash cost of US$452 per oz. — higher than the US$434 per oz. Barrick managed in last year’s second quarter.

The company blamed higher costs on changes in production mix, lower average grades, higher labour and energy costs, and the higher taxes and royalties that come with rising gold prices.

But Barrick’s chief executive Aaron Regent said on a conference call that the higher cost trend will start to reverse as lower input costs — sparked by the global recession –will begin to work their way into the system after the company gets through its current contracts and inventories.

In fact, according to Regent, focusing on the future rather than the past quarter is the key to understanding the company.

Barrick, he said, will be able to drive costs down further as its next generation of mining projects — which will boast lower cash costs than the current roster — start to come online.

Looking at the nearer term, the company gave guidance on next year’s production of between 7.7 million and 8.1 million oz.

More efficient energy use and lower labour costs are expected to clip overall costs. Regent said the latter will come as inflationary pressure reduces employee wage expectations. Labour costs currently make up 25-30% of Barrick’s costs.

Another factor in its cost-cutting strategy is the renegotiation of contracts with its suppliers to reflect current market conditions. Regent says Barrick is in a better position than most in such talks.

“Because of the scale of the company and our level of activity, with the number of projects we’re constructing now and the number we’re looking to develop, we represent a lot of potential business, so something we have been able to do is lever that into getting better pricing and getting the best teams working for us,” Regent said.

During the quarter, the company also managed to get the go-ahead on construction for its massive Pascua Lama project on the Argentine- Chilean border.

Barrick expects to have the mine in production by 2012, churning out an average of 750,000 to 800,000 oz. of gold and 35 million oz. of silver per year for the first five years.

Most importantly, cash costs at the mine are expected to be a very low US$20-50 per oz., largely due to silver credits generated by the mine.

Regent hinted that the massive silver production might be a glimpse into the company’s future. With large-scale gold projects being harder and harder to find, Regent said the company is open to generating new revenue streams from both silver and copper going forward. Currently, roughly 10% of the company’s revenues come from base metal production.