Barrick stung by higher costs

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

Capex at Pueblo Viejo has increased to US$3.6-$3.8 billion, while pre-production guidance at Pascua-Lama and Cerro Casale has 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, said in a note to clients. 

MacArthur’s buy rating on the stock remains unchanged, but he has downgraded his 12-month target price from US$64 per share to US$60 per share. At presstime in New York, Barrick traded at US$50.51 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 labour 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 at US$1.16 per share, from US$859 million in the year-earlier period. 

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

The company also said it’s on track to hit its 2011 operating guidance of 7.6 to 8 million oz., at total cash costs of US$450-$480 per oz.

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

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

At current metal prices, the company says, the two projects will generate combined average annual earnings before interest, taxes, depreciation and amortization (EBITDA) of about US$2.8 billion over the same period, with an average investment to EBITDA ratio of 2.5 times.