The future is the key for Barrick

Increasing profits to US$492 million would be the envy of many miners. But when that company is Barrick Gold (ABX-T) the bar is set high, and while profits were up from the US$485 million for the same period last year, higher costs stopped the market from enthusiastically endorsing its second quarter results.

The luster of 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, which is 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, moving up to US$2.02 billion from US$1.97 billion the year previous. That coincided nicely with an increase in the average realized gold price of US$9 to US$931 per ounce. Such metrics resulted in an increase in operating cash flow of 42% to US$718 million in the second quarter compared to US$505 million in the same prior year 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 it managed for the same period last year.

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 starts to come on line with lower cash costs than its current roster has.

Looking less far out, the company gave guidance on next year’s production of between 7.7 million and 8.1 million oz.

Costs savings are also planned by more efficient energy use and lower labour costs.
The latter will come according to Regent, as inflationary pressure reduces employee wage expectations. Labour costs currently make up 25% to 30% of Barrick’s costs.

Another factor in its lower cost strategy is the renegotiation of contracts with its suppliers to reflect current market conditions. Regent says the company 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.

Beyond the financials, the quarter was also significant for the company’s getting the go-ahead on construction for its massive Pascua Lama project on the Argentinian-Chile border.

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

Most importantly, cash costs at the mine are expected to be in the US$20 to $50 per oz.

Those low costs will come in large part from 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.

In Toronto on July 30, Barrick shares were up 3% or $1.04, to $36.79 on 2.7 million shares traded.