We maintain a Neutral recommendation on the world’s largest gold miner, Barrick Gold Corporation (ABX), which posted record fourth-quarter 2010 results, driven by higher gold sales volumes and higher prices for both gold and copper.
Barrick Gold is fully leveraged to gold prices, which are likely to stay strong due to a decline in mine supply. High growth in the world money supply is also supportive of gold prices. In 2009, Barrick completed the elimination of its gold hedges based on an increasingly positive outlook for gold, using net proceeds from equity and long-term debt offerings.
The company now has full leverage to the gold price with the industry’s largest gold production and reserves. In the last two years, Barrick has eliminated its gold hedge position of 9.5 million oz at a weighted average gold price of about $930 per oz. During 2010, the $0.6 billion obligation relating to the Floating Contracts was repaid.
Barrick Gold’s Pascua-Lama project in Chile has the world’s largest silver deposit of 731 million oz. The company has signed the cross-border tax agreement with Chile and Argentina, which helps to finalize plans to develop the project.
The project has an expected average annual production of about 750,000–800,000 oz of gold and 35 million oz of silver at an anticipated total cash cost of $20–$50 per oz in the first five full years, considering a mine life of 25 years, which would make it one of the lowest cost gold producing mines in the world.
The project has 17.8 million oz of proven and probable gold reserves and 717.6 million oz of silver. Commissioning of the project is expected in the first half of 2013.
Barrick Gold anticipates that it will benefit from three of its potential mining projects, which are expected to contribute 2 million oz of lower cost production once they reach full capacity. The Cortez Hills project in Nevada recently started production and produced 0.21 million ounces at total cash costs of $329 per ounce.
Production at the Cortez project is anticipated to increase in the range of 1.30–1.45 million ounces at total cash costs of $235–$265 per ounce in 2011. It is estimated that the Buzwagi project in Tanzania would produce 200,000 oz of gold annually. However, for 2011, Buzwagi production is expected to be higher after successfully addressing production difficulties that began in 2010 due to fuel theft.
Barrick owns 60% of the Pueblo Viejo project in the Dominican Republic, which is anticipated to commence its first production in the first quarter of 2012.
Barrick Gold generates a strong cash flow and has the gold mining industry’s strongest and only ‘A’ rated balance sheet, which positions it to take advantage of attractive development, exploration and acquisition opportunities as they arise.
In 2010, the company increased its annual dividend from $0.40 per common share to $0.48 per common share and also moved from a semi-annual dividend to a quarterly dividend. This 20% increase in dividends reflects the company’s ability to generate substantial cash flows from operations in a high gold price environment.
BarrickGold hopes that its production will be 7.6-8.0 million oz in 2011, which is in line with fiscal 2010. Barrick’s newly expanded Cortez mine exceeded expectations in its first full year of production and the company continues to advance its project pipeline, including the world-class Pueblo Viejo and Pascua-Lama projects.
Preproduction capital budgets are now expected to be higher than previous estimates by about 10–15% to $3.3–$3.5 billion (100% basis) for Pueblo Viejo and by 10–20% to $3.3–$3.6 billion for Pascua-Lama. Despite these increases, Pueblo Viejo and Pascua-Lama continue to have very strong economics. Once at full capacity, these two mines are anticipated to contribute about 1.4 million ounces.
However, we believe Barrick Gold is non-diversified with more than 70% of revenue from gold sales. Although the elimination of the hedge book has increased its leverage to gold prices, it has also resulted in significant negative retained earnings on its balance sheet.
The slowdown in the global economy, especially in India, could also weaken demand for gold.
Barrick Gold faces strong competition from its peers Newmont Mining Corp. (NEM), AngloGoldAshanti Ltd. (AU) and privately held Rio Tinto Limited. These peers have recently announced their plans of expansion by improving mines and increasing exploration activities.
Newmont plans to increase its exploration expenditure by 25% from the previous year and improve existing mines in Nevada and Australia. Besides, AngloGold has similar plans.
We maintain our Neutral recommendation on Barrick Gold. Currently, it has a Zacks #3 Rank (Hold).
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