Barrick’s earnings way up, hedge way down

Newly crowned gold goliath Barrick Gold (ABX-T, ABX-N) more than tripled its earnings to US$224 million during the first three months of 2006 thanks to quarter-century high gold prices and its recent acquisition of Placer Dome.

The earnings come to US29 a share, and compare with year-earlier profit of US$66 million, or 12 per share. Likewise, operating cash flow was slightly more than tripled to US$378 million, even after US$20 million was consumed by restructuring costs associated with the US$10-billion, shares-and-cash acquisition of Placer. Sales more than doubled to US$1.25 billion.

“We are very pleased with the first quarter results. I must say that the strong metal prices have finally started to propel earnings and cash flow, and we have seen the margin expansion that we’ve been waiting for,” Barrick CEO Greg Wilkins told analysts during a recent conference call.

Barrick poured 1.96 million oz. of gold at a total cash cost of US$283 apiece during the quarter, up from the 1.14 million oz. produced at $241 per oz. a year earlier. The company sold its production at an average realized price of US$537 per oz., up 25.5% from a year ago. By comparison, the quarter’s average spot price was US$554 per oz., up from US$427 per oz.

The company’s bottom line also benefited from its initial production of 72 million lbs. (32,659 tonnes) of copper at US77 per lb.; it realized US$2.31 per lb. sold. Placer’s Zalidar mine in Chile chipped in 60 million lbs.

The impressive across-the-board increases reflect the inclusion of Placer’s operations from Jan. 20 — the day Barrick took up shares representing an 81% stake in its rival. Excluded are Placer’s assets (including 4 mines), which will be sold on to Goldcorp (G-T, GG-N) for US$1.6 billion by mid-May.

Chopping the hedge

On the flip side, Barrick also picked up a healthy hedge book from Placer, which contributed to a total hedge position of 20 million oz. at the end of 2005. Still, the company stuck to its aggressive plan and eliminated an enormous 5.7 million of those ounces — almost all of them from Placer’s book — at a cost of US$1.2 billion, some of that subsequent to the quarter’s end.

Barrick plans to eliminate the 2 million oz. remaining on Placer’s book by the end of the year. Another 2.8 million oz. will be eliminated from the corporate gold sales contract by the end of 2009. Barrick says those ounces could be eliminated for around US$2 billion, based on a current gold prices in the US$670-per-oz. range. The remaining ounces are hedged at the project level.

Barrick CEO Greg Wilkins told analysts during a recent conference call that the integration of Placer is slated to wrap up by the end of June, and that it has already begun eliminating redundancies. He also said that annual “synergies” of some US$200 million should fully kick in by 2007.

Wilkins expects around a quarter of the savings to come each from streamlining administrative offices with another 25% rung out of exploration. “But we are not going to give up any opportunity for discoveries by virtue of the lower cost or the lower investment in exploration activities,” Wilkins told analysts during a recent conference call.

Wilkins said the biggest savings will come on the operational and technical services side, where infrastructure, project optimization, and supply chain management will be combined.

Looking ahead, Wilkins reiterated his earlier guidance gold production of 8.6-8.9 million oz. of gold at cash costs of US$275 to US$290 per oz. The company also plans to produce some 350 million lbs. (158,757 tonnes) of copper at US75-US80 per lb.

Capital expenditures for the year, both sustaining and project, are estimated at US$1.2 billion to US$1.3 billion during the year.

The company had US$1.25 billion in cash and equivalents at quarter’s end, up from US1.04 billion at the end of 2005. Long-term debt grew to US$2.97 billion from US$1.72 billion during the same period.

Shares in Barrick ended $2.16, or 6.3%, better at $35.56 in Toronto on May 4. The shares trade in a 52-week window of $26.80-$37.22.

Barrick has declared a dividend of US11 per share payable on June 15 to shareholders of record at the end of business on May 31.