African Barrick hit with US$543M writedown at Buzwagi

VANCOUVER — Based on production metrics, Tanzania-focused African Barrick Gold (LSE: ABG; US-OTC: ABGLF) is having a relatively good start to 2013. Over the past six months the company has beaten analysts’ earnings forecasts and remains on track to meet its annual production guidance. On the flipside African Barrick has become the latest of many gold miners hit by impairment charges, and forced to undertake cost-saving operational reviews in the face of a steep decline in year-on-year spot gold prices.

African Barrick cranked out roughly 311,840 oz. gold from its three Tanzanian gold mines over the first half of 2013 — namely Bulyanhulu, Buzwagi and North Mara — at cash costs of around US$903 per oz. sold. The company’s production resulted in net earnings of US$39.3 million or US9.6¢ per share based on revenues totalling US$500 million. African Barrick’s earnings squarely beat a consensus analyst estimate of US2¢ per share, as second quarter production jumped to 177,000 oz. at lower cash costs of US$879 per oz.

“[Cash costs] are tracking below the bottom of the guidance range,” commented CEO Greg Hawkins, citing African Barrick’s expected range of between US$925 and US$975 per oz. “That in combination with our efforts on the ground highlight the work that has been done in terms of our operational review.”

“We’ve got a specific plan that we’ve spent a lot of time on over the past few months. Basically pulling apart the business in a ‘nuts and bolt sense’, and putting it back together. We’re very confident in our ability to go out and execute and get these things done,” he added.

African Barrick has reduced its capital expenditures for 2013 by around US$20 million so far, but the company believes it has identified US$185 million in potential savings, with US$100 million expected this year. That number breaks down to US$95 million in operating cost reductions, US$15 million in falling administrative expenses, US$50 million in sustaining capital expenditure cuts and a US$25-million reduction in exploration expenditures.

As a result of struggling precious metals’ markets African Barrick will also register an impairment charge of US$720 million as the company revises its asset valuations under a US$1,300 per oz. gold price, as opposed to a previous valuation based on US$1,700 per oz gold. The company’s net loss therefore clocks in at US$701 million — or US$1.71 per share — with operational cash flow totalling US$99 million.

The largest impairment charge will involve Buzwagi, where African Barrick will write down around US$543 million based on a revised mine plan geared towards decreased stripping ratios and operating costs. Buzwagi is the company’s lowest-grade and highest-tonnage mine, which operated at an average head grade of 1.4 grams gold per tonne and milled around 17.3 million tonnes during the first six months of 2013. The mine is operating at all-in sustaining costs of around US$1,643 per oz.

“I think for the market, it was a fair question whether Buzwagi could survive at these sort of gold prices,” Hawkins commented, adding that under current conditions it was necessary to discard African Barrick’s previous mine plane. “We had a key focus on that, and after reviewing it we’ve come up with a new plan that essentially has a six- to seven-year mine life, which we think we can run and generate positive cash flows at current prices.”

The company will move 7 to 8 million less tonnes of material at Buzwagi over the next three years, which it hopes will substantially reduce its waste-stripping costs. Mill throughput and recoveries should remain relatively unchanged, while average head grade is expected to jump to between 1.6 grams and 1.7 grams gold per tonne before falling to around 1 gram gold per tonne as African Barrick processes stockpiles.

African Barrick shares have tumbled 70%, or US$4.07 per share since early January. Shares were trading at £1.48 in London at press time, which equates to  US$2.29 per share. African Barrick maintains 410 million shares outstanding for a $939 million press-time market capitalization. The company maintains a strong balance sheet, having reported US$321 million in cash at the end of June. African Barrick maintains its 2013 guidance at between 540,000 oz. and 600,000 oz. gold at cash costs of US$925 to US$975 per oz.