Barrick stung by higher costs

Higher costs are pushing capex estimates higher at Pueblo Viejo, Pascua-Lama and Cerro Casale, Barrick Gold‘s (ABX-T, ABX-N) major growth projects, the company reports.

Cap-ex at Pueblo Viejo has increased to US$3.6-3.8 billion, while pre-production guidance at Pascua-Lama and Cerro Casale have jumped to US$4.7-$5 billion and US$6 billion, respectively.

“These increases reflect higher input costs, productivity issues, and higher contingencies and highlight the inflation impacting the mining industry,” Brian MacArthur, an analyst at UBS Investment Research, wrote in a note to clients.

MacArthur’s buy rating on the stock remains unchanged, but he has downgraded his twelve-month target price on the stock from US$64 per share to US$60 per share. At presstime in New York Barrick was trading at US$47.44 per share.

In a press release announcing its second-quarter earnings, Barrick noted that the mining industry is facing global cost trends that “reflect a substantially higher commodity price environment, stronger local currencies, tighter labor markets and higher inflation in some regions compared to several years ago when many projects were at the feasibility stage.”

At the same time, “stronger metal prices have significantly improved project economics and overall rates of return despite higher estimated capital costs.”

Barrick reported net earnings in the second quarter rose 35% to US$1.2 billion (US$1.16 per share) from US$859 million in the year-earlier period.

Second-quarter gold production hit 1.98 million ounces at total cash costs of US$445 per oz. and net cash costs of US$338 per oz.

The gold major also said it is “on track” to meet its 2011 operating guidance of 7.6-8.0 million ounces of gold at total cash costs of US$450-$480 per oz.

In terms of copper, Barrick expects to produce 455-475 million pounds of copper this year at total cash costs of US$1.55-$1.70 per lb.

Barrick also forecast that first production at Pueblo Viejo is expected in mid-2012 and at Pascua-Lama in mid-2013 and expects the two projects to contribute 1.4-1.5 million ounces of average annual production over the first full five years of operation and to lower Barrick’s overall total cash costs by about 20%.

At current metal prices, the company says, the two projects will generate combined average annual EBITDA of about US$2.8 billion over the same period, with an average investment to EBITDA ratio of about 2.5 times.