Barrick to halve hedge book

With fewer writedowns and a merger under its belt, Barrick Gold (ABX-T) finished 2001 with modest earnings in contrast to the loss it took in 2000. But the big gold producer had other news to deliver: it is reducing its annual hedging volume by half.

Pointing to the “more positive tone in the gold market,” Jamie Sokalsky, Barrick’s chief financial officer, told New York and Toronto news conferences that, starting in 2002, Barrick would deliver half of its production into hedge contracts and sell the other half at the spot price. The move is a major departure for the company, which had based much of its profitability on the successful management of an 18.2-million-oz. hedge book.

Sokalsky said the company would meet the goal of selling half of its production at 2002 spot prices by adjusting the delivery schedule for some of its production. The other half, which would be delivered into the hedges, will fetch an average US$365 per oz.

A rise in spot gold prices could make a significant difference to Barrick’s 2002 results. Sokalsky estimated a US$25 increase in spot would translate into US$70 million in earnings.

Barrick’s decision to increase its exposure to the spot gold price is in line with moves by several other major gold producers. South African mining house AngloGold (AU-N) bought heavily near the end of 2001 in order to reduce its net hedge position, and Normandy Mining (NDY-T) has been unwinding a large hedge book as part of its integration with Newmont Mining (NEM-N) and Franco-Nevada Mining (FN-T).

Barrick, now consolidated with Homestake, made US$96 million, or US18 per share in 2001, on total revenue of US$2 billion.

By comparison, the consolidated results of the two companies for 2000 show a net loss of US$1.2 billion on revenue of US$1.9 billion, largely as a result of US$1.6 billion in writedowns against the carrying value of mineral properties. On its own, Barrick lost US$766 million on revenue of US$1.3 billion in 2000, after taking US$1.1 billion in writedowns. Homestake reported a loss of US$104 million in 2000, on US$666 million in revenue.

The Homestake merger had a cost of about US$117 million, higher than Barrick had expected, but Randall Oliphant, Barrick’s chief executive, said the up-front costs should be justified by annual cost savings. The merger has “generated a lot more value a lot sooner,” said Oliphant, with savings expected to be about US$60 million in 2002.

Consolidation

Chief Operating Officer John Carrington said the Hemlo camp of northern Ontario, where Barrick now holds 50% interests in the Williams and David Bell mines, was ripe for asset consolidation. There is still value to be found in a consolidation, Carrington said, though “not as much as there would have been twenty years ago.”

He said Barrick would consider either buying out other producers or selling its interest to either its partner, Teck Cominco (TEK-T), or to Newmont, the sole owner of the adjoining Golden Giant mine. “I’ll do either under the right circumstances.”

Earlier problems in the mill at the Bulyanhulu gold mine in Tanzania appear to have been fixed by modifications to the gravity circuit, bringing recoveries up to 86%, just below expectations. Further work on the flotation circuit, which will cost about US$5 million, is expected to bring recoveries to the design figure of 89%.

Bulyanhulu produced 242,000 oz. at an average cash cost of US$186 per oz. over the year, though early-stage amortization charges brought total costs to US$295. Barrick is budgeting for 362,000 oz. at a cash cost of US$173 in 2002, and expansions over the next few years should bring annual production to 400,000 oz.

The larger story at Bulyanhulu was an increase in reserves to 25.4 million tonnes grading 14.7 grams gold per tonne, up 4.2 million tonnes over the figure reported for the previous year-end. Much of the increase came from bringing resources into reserves, but the additional resource at Bulyanhulu — 8.4 million tonnes at 15.9 grams — is slightly larger, though at a lower grade, than it was a year ago.

Kabanga

A sideline to the Tanzanian operations is the nickel deposit at Kabanga, which Barrick inherited in the takeover of Bulyanhulu’s previous owner, Sutton Resources. Anglo American (AAUK-Q) dropped out of an option deal on the property after Sutton merged with Barrick. Barrick statements imply a resource of 24 million tonnes at a grade of 2.5% nickel at Kabanga, and Oliphant said the company is “looking for ways to realize” Kabanga’s value.

Work at the Pascua-Lama and Veladero properties, which look at each other across the Chilean-Argentine border, is concentrating on evaluating the economics of a single consolidated operation, while development of the projects remains on hold. Metallurgical testing is under way on Veladero mineralization, with the goal of bringing in a revised feasibility study in the first half of this year; an earlier study, released last July, indicated that a 200,000-tonne-per-day operation at Veladero had an internal rate of return of only 7%.

Veladero, including Barrick’s adjacent Filo Norte property, has resources of 187.7 million tonnes grading 1.5 grams per tonne.

An updated feasibility study at the Cowal gold project in Australia, which Homestake bought last year from Rio Tinto (RTP-N) subsidiary North, is expected by year-end. Cowal, about 400 km west of Sydney in New South Wales, has a reserve of 51.1 million tonnes at a grade of 1.7 grams gold per tonne, and “the more we look at Cowal the better we like it,” says Carrington.