Barrick looks for 2003 turnaround

The message is out from Barrick Gold (ABX-T): the management shakeup that saw director Gregory Wilkins replace Randall Oliphant as chief executive officer is part of an effort to restore the company’s reputation as a solid operator, and has plenty to do with hedging.

Chairman Peter Munk, making a guest appearance at a Barrick conference call after Wilkins’ appointment was announced, made it clear Oliphant was taking the fall for Barrick’s share price performance, saying Barrick “is a public company, and public companies’ fundamental responsibility is to translate that excellence to their owners, which are the shareholders. And when that does not happen, then someone, something has to be changed.”

New chief executive Wilkins may have given a preview of the looming shift in the company’s direction when he conceded that the company’s hedge book was “a little larger than we would like it to be,” and that he planned to “manage the book so that it’s a little less intrusive into the reserves.” Telling mining analysts, in a Q&A session after the presentation, that he was still getting a handle on the situation at Barrick, he would not be drawn on what changes might be coming in the company’s hedging strategy.

But having signalled that Barrick may be veering from its traditional policy, Wilkins also justified it by noting that in January of this year, the book had performed just as its proponents always said it would, allowing Barrick to sell production at spot prices while existing contracts were simply rolled over into the future. James Sokalsky, Barrick’s chief financial officer, noted that the mark-to-market value of the company’s hedge book declines when the gold price rises, but the 80% of Barrick’s reserves that are unhedged increase in value, more than offsetting the loss on hedging.

Barrick’s principal core value, that of making money, seems to have been honoured in 2002, as the company posted net income of US$193 million (or US36 per share) on revenue of US$2 billion. The year’s results were an improvement over 2001, when Barrick took large year-end writedowns that left it with earnings of US$96 million on revenues of US$6.1 billion, and a US$109-million fourth-quarter loss. This year’s fourth quarter was much brighter: US$54 million in earnings on revenue of US$526 million. Barrick realized an average price of US$339 per oz., a premium of US$29 over average spot prices; the previous year’s realized prices averaged US$317 but were US$46 above spot.

Saying “last year’s experience, let me tell you, is something I never want to go through again,” John Carrington, Barrick’s chief operating officer, conceded that 2002 had brought the company some bad surprises on the operating front, at Bulyanhulu in Tanzania, Hemlo in Ontario, Plutonic in Australia, and Meikle in Nevada. The production shortfalls at those mines, he said, had brought home lessons about getting better advance knowledge of grades and tonnage in stopes, and having more production flexibility — most particularly, more early development and more workplaces in individual mines.

Five closures

Barrick’s average total cash production cost in 2002 was US$177 per oz., an increase of US$15 over the 2001 figure. Total production costs, including amortization and rehabilitation costs, rose to US$268 from US$247. Production, including attributable ounces from joint-venture mines, dipped 7%, year over year, as the company produced just under 5.7 million oz. gold.

Carrington said the company expects to produce 5.5 million oz. in 2003 at a cash cost near US$185 per oz. Five mines are closing in 2002, which will weigh down the numbers, and some operations will be mining lower-grade zones.

He said both mining grades and unit costs had been falling, with the savings in costs per tonne not matching the decline in grades. The result was an increase in costs per ounce.

The most economical mine was Eskay Creek in British Columbia, which rang up total cash costs of US$40 per oz., down from US$49 in 2001. Significant cost increases came at the Kalgoorlie Super Pit in Western Australia, Hemlo, and Meikle.

Another question on the minds of all major gold producers is, Where will new reserves come from? Barrick, a traditional acquisitor, hopes to address this concern by expanding its exploration budget. “As the juniors have stepped back, Barrick has stepped up,” said Carrington, pointing to two successive years with US$100-million exploration budgets.

The company now has four projects in its pipeline: Alto Chicama in Peru, Cowal in Australia, Veladero in the Argentine Andes, and Pascua across the border in Chile. About US$900 million is budgeted for development of the first three projects through 2005 and 2006; Pascua, which is metallurgically difficult, is scheduled for a 2005 construction start and for production in 2008.

At year-end, Barrick had US$1 billion in cash and short-term investments, and US$869 million in working capital. Its long-term debt was US$761 million.