A powerful combination of rising production, falling costs and premium prices for its gold is setting the stage for
During the first nine months of this year, the major produced 2.8 million oz. gold at a cash operating cost of US$123 per oz., allowing it to post record earnings for the period. And it realized an average price of US$385 per oz. for that production — a premium of US$112 per oz. over the average spot price of US$273 per oz.
During the same period last year, Barrick produced 2.3 million oz. at a cost of US$160 per oz., realizing an average of US$400 per oz. sold.
Barrick earned US$250 million (or 63 cents per diluted share) in the latest 9-month period, up from US$218 million a year earlier, while revenues rose to US$1.1 billion, compared with US$919 million.
Net income in the quarter ended Sept. 30 was US$79 million (20 cents per share), up from US$76 million a year earlier; revenues were US$331 million, compared with US$327 million.
The company now has a hefty cash position of US$640 million and US$525 million in long-term debt, none of which is due until 2007.
“We’ve never been stronger financially,” says President Randall Oliphant. He and Chief Financial Officer Jamie Sokalsky emphasize that, while the recent and sudden rise in the price of gold has caused some producers to be caught in a liquidity squeeze, Barrick has emerged unaffected.
“Barrick’s hedge program has shown that it’s as solid as a rock,” says Sokalsky. “Frankly, Barrick is the best credit in the gold business and we are able to negotiate things that perhaps other people can’t. Coming through this, our realized prices are exactly the same and we’re actually able to benefit with these higher gold prices.”
Oliphant agrees.
“I think gold is back. We’re delighted to see a better gold price — it’s better for Barrick and it’s better for the industry.
“The [Sept. 26] statement by the European central banks has provided clarity and transparency to the gold market. It has created a foundation for the gold price to go forward, and we hope this is the beginning of better days ahead for our industry.”
Oliphant points out that Barrick’s gold-borrowing costs are locked in at low rates until mid-2000 and he predicts gold lease rates will return to more normal levels of 2-3% by that time.
“We’ve got a statement from those who lend half the gold [the European central banks], as far as what their intentions are, and then we’ve got the other collection of banks who seem to be lending more every year as opposed to less. So I think the situation Barrick faced years ago is going to be true going forward — there’s going to be an available lending market at reasonable rates that will enable us to run our hedge programs.”
At the end of September, Barrick had 14 million oz. gold sold forward (about 20-25% of its reserves), and it stands to realize an average price of US$385 per oz. through to 2001.
Sokalsky stressed that Barrick’s hedging program has two “outstanding features”: First, he says, Barrick has the flexibility to sell its gold at either the contract price or the spot price — whichever is higher — and the company can roll forward its spot-deferred contracts for up to 15 years.
Second, Barrick is essentially free of margin calls. “Only if the gold price rose above US$600 per oz. would there be a minimal margin call on a small portion of the ounces in our program — and this would be simply a cash deposit, not a financial settlement.”
Barrick has sold long-term call options on 4 million oz. at an average price of US$360 per oz., spread out over the next decade. These are covered calls that represent only 10% of production in any one year. If gold prices were to rise above the strike price on these options, Barrick has the ability to convert them, with each of the counterparties and solely at Barrick’s option, into spot-deferred contracts at even higher prices in the future.
Oliphant declined to comment on the hedging problems of
Asked about the prospect of new acquisitions, Oliphant replies: “We’re poised and ready whenever the right thing comes along, but we’re not in a situation where we feel we need anything. It allows us to be selective, and I think our track record shows we’re making pretty decent decisions.”
On the operations side, Barrick expects to produce 3.6 million oz. gold this year at a cost of US$125 per oz., which Barrick Vice-Chairman John Carrington describes as “the highest production at the lowest cost in our history.”
The cornerstone Goldstrike operations in Nevada remain on target to produce 2.1 million oz. gold this year.
“In the longer-term, we see Goldstrike maintaining very low cash costs with the improvements made over the last few years,” says Oliphant, noting that, with the land acquired during this year’s asset swap with
Production from the new, low-cost Pierina gold mine in Peru totalled 730,209 oz. gold at US$40 per oz. during the first three quarters, putting the mine on track to meet its target of 835,000 oz. this year. Carrington said he now expects the mine to produce above the 700,000-oz.-per-year level for five years, up from the last estimate of three years.
The mine was a major contributor to a reduction in Barrick’s overall production costs, which fell 23% in the 9-month period, to US$123 from US$160 per oz. Total costs fell to US$133 from US$181 per oz.
Meanwhile, Barrick continues to wind down production at its higher-cost gold mines.
In Nevada, the Pinson mine was closed in January and the Bullfrog mine will process its last stockpiled ore in November.
In Chile’s El Indio belt, the Tambo mine will cease operations early next year, though the El Indio mine, previously scheduled to close along with Tambo, has been given a reprieve based on lower operating costs and the rise in gold prices.
“El Indio is actually making a very nice, positive contribution for us and we have at least a 2-year mine plan in front of us based on spot prices below US$300 per oz.,” says Carrington. “We have some pretty good exploration targets in front of us, and, with a bit of good fortune, we may have something else in the future.”
On the development front, surface exploration at the Pascua project on the Chilean-Argentine border began in September in order to follow up on excellent results from earlier in the year.
During the fourth quarter, 18 drill rigs will be operating at Pascua, mostly on the Argentine side of the property. Oliphant says he expects Pascua’s reserves and resources to “rise significantly” by year-end and that the gold mine will likely become South America’s largest.
Carrington is more guarded: “In some of our projects in the past, we’ve committed ourselves to production and to construction very early in the process — that’s not our intention at Pascua. It’s prudent to keep our options open, so we’ll only commit at the latest point possible, and I’d say that’s sometime next year.”
Barrick has also announced a revised mine plan for the Bulyanhulu gold project in Tanzania, which is expected to start up in 2001 and produce 400,000 oz. gold annually at a cash operating cost of US$130 per oz. over the first 15 years of production (see separate story page 1).
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