Thomas Schuster
While many other producers are struggling to survive the lowest gold prices in two decades,
The good news, delivered by Chairman Peter Munk and other officials at a meeting with analysts in Toronto, coincided with the surprise departure of newly appointed president Paul Melnuk and the expiry of a failed takeover bid for
Munk downplayed speculation that one had anything to do with the other. He said Melnuk’s departure for personal reasons was “regrettable,” but would not cause “a ripple.” As for Argentina Gold, which holds a gold-silver project near Barrick’s Pascua project in Chile, Munk said, “being at the forefront does not mean bulking up.”
Munk’s reassurances did little to quash speculation that there had been dissatisfaction with Melnuk’s performance at both the board and institutional shareholder levels, in part because of the chaotic bid for Argentina Gold (AG), but mostly because of his relative lack of experience in the rough-and-tumble mining industry. A new chief executive is expected to be named shortly.
Barrick posted 1998 net earnings of US$301 million, or US79 cents per share, compared with US$262 million a year earlier. Gold production rose 5% to 3.2 million oz., while cash operating costs fell to US$160 per oz. from US$182 a year earlier. Total costs declined to US$180 per oz., from US$260 in 1997.
John Carrington, chief operating officer, told analysts that the no-nonsense approach to operations will continue in 1999 as production rises to 3.6 million oz. “We anticipate a further 22% decline [in production costs] to US$125 per oz., the lowest level ever recorded for a major gold company.”
Much of the credit for Barrick’s strong financial performance was attributed to the company’s hedging program, which is widely considered to be the best, and the most sophisticated, in the business.
Randall Oliphant, chief financial officer, told analysts that the gold sales program realized US$400 for each ounce sold in 1998, US$106 over the average spot price. “Today, we have our next three years’ production sold at US$385 per oz. Over the past 10 years, we have realized US$1.1 billion in additional revenue, or a premium of US$56 for every ounce sold over the entire period, primarily from interest income. I might add that, based on today’s gold price, we stand to generate another US$1 billion over the next three years, at a minimum.”
Oliphant also addressed concerns that Barrick might not benefit from a gold price rally, or that other companies would perform better if the gold price rises. “Barrick shares have consistently outperformed those of other producers in both rising and falling markets,” he said, after pointing out that the company theoretically could realize a price of US$400 per oz. should gold prices rally to US$350.
On the operations front, analysts were told that the new, US$260-million Pierina mine in Peru is expected to turn out 835,000 oz. gold this year at US$45 per oz., making it the lowest-cost, major gold mine in the world. It has proven and probable reserves of 114.3 million tons grading 0.063 oz. gold per ton.
Carrington said the next development project will be the Pascua deposit in Chile, which straddles the Chile-Argentina border. At the end of 1998, proven and probable reserves stood at 241.9 million tons grading 0.058 oz. gold (14 million contained oz.), plus additional resources of 200 million tons grading 0.033 oz. gold (6.6 million contained ounces).
The company plans to spend US$950 million to build a mine capable of turning out 675,000 oz. gold and 20 million oz. silver annually, at an average cash cost of US$150 per oz. over its mine life.
Barrick had hoped to acquire the nearby Veladero project in Argentina, currently held 60% by partner AG, which acts as operator. Its $5 cash takeover bid was conditional on acquiring at least 50.1% of AG’s shares on a fully diluted basis, including the 9.9% of the outstanding shares it already owned. But AG lobbied hard against the bid, which was not successful.
“Acquisition of Argentina Gold was a move to increase our land position along the El Indio belt,” Carrington said. “We were prepared to pay a reasonable price, we made a final offer, and that offer has now expired.”
Barrick will hold on to its 40% interest in Veladero, as well as its 10% stake in AG. Shares of AG tumbled 75 cents and closed at $4.50 on Feb. 9, one day after the bid expired.
AG director Lucas Lundin called Barrick’s offer “inadequate” and pointed out that the company has defined 5.1 million oz. gold in three zones — Filo Federico, NW and Amable — with only 30% of the Veladero property explored to date. The junior has been active in the region since 1994.
Analysts note, however, that a sizable portion of these contained ounces are in low-grade deposits situated within a high-altitude region (4,500 metres). Some say AG has yet to prove the economic viability of a stand-alone operation in this environment of low gold prices. As well, more metallurgical work is required as only preliminary tests have been done. These show 76% recovery for gold and extremely low recoveries for silver (less than 12%).
Filo Federico, for example, contains an indicated and inferred resource of 85.4 million tonnes averaging 0.75 gram gold and 25.6 grams silver per tonne, equivalent to 2.07 million oz. gold and 70.3 million oz. silver.
The NW target contains an indicated and inferred resource of 7.6 million tonnes averaging 1.45 grams gold and 21.05 grams silver, equivalent to 354,000 oz. gold and 5.1 million oz. silver.
The Amable target contains a low-grade zone cored by a high-grade zone. The indicated and inferred resource of the high-grade portion is 14.3 million tonnes grading 5.07 grams gold and 47.88 grams silver, equivalent to 2.3 million oz. gold and 22 million oz. silver. Amable has been described as “a novel type of gold deposit” with high-grade gold intercepts “of a distinctive and unusual kind.”
The low-grade calculation was estimated to contain an indicated and inferred resource of 8.7 million tonnes grading 1.35 grams gold and 44.02 grams silver, equivalent to 380,000 oz. gold and 12.3 million oz. silver.
Four reverse-circulation drills and two diamond core rigs are engaged in a program that is expected to last until May.
Lundin said discussions with several major mining companies “are ongoing.”
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