Barrick takes US$1.1b hit against 2000 earnings

As expected, Barrick Gold (ABX-T) wrote-down the value of some of its assets by a total of US$1.1 billion to reflect the reality of lower gold prices in recent years and to prepare for the possibility of future weakness.

President Randall Oliphant told mining analysts in Toronto that the adjustment will have no impact on the company’s cash flow, reserves, production profile or employment levels. “This decision reflects the reduced value of assets that were acquired prior to 1997 with higher-valued shares when gold prices averaged almost US$400 per oz. The stock market has already recognized this lower gold price environment in gold producers’ share prices — our books will now reflect this external reality as well.”

Barrick’s year-end review of assets and gold reserves was based on a gold price of US$300 per oz., compared with US$325 a year earlier. Pascua-Lama in Chile took the biggest hit with a writedown of US$790 million, which reflects the premium over book-value recorded when the project was acquired in 1994. The gold price was US$390 per oz. at the time.

Other writedowns include: US$132 million for the Pierina mine in Peru; US$107 million for the Goldstrike property in Nevada; and US$71 million for the Bousquet mine in Quebec and various exploration projects. The company’s year-end reserves were 58.5 million oz., down slightly from 59.3 million oz. at the end of the previous year.

On the operating front, Barrick produced 3.74 million oz. at a total cash cost of US$145 per oz. last year, up from 3.6 million oz. at US$134 per oz. in 1999. The company posted a net loss of US$776 million for the year (net earnings of US$334 million before the writedowns).

Vice-President John Carrington told analysts that while the recent decision to delay development of Pascua-Lama was “a disappointment,” it reflects a 25% increase in capital costs over the US$1.2-billion estimate presented a year ago.

“We’re still working to understand why the cost of placed concrete and erected steel are substantially higher than expected,” he added. “But operating costs haven’t changed, and we see potential for higher throughput and tweaking recoveries.”

Barrick is also examining the synergies of a combined operation with the nearby Veladero project, in which it holds a 40% interest. The project is operated by partner Homestake Mining (HM-N), which plans to carry out more drilling, metallurgical tests and optimization studies.

At the end of 2000, Pascua-Lama hosted proven and probable reserves containing 17.5 million oz. gold and 594 million oz. silver. Barrick’s share of gold resources at Valadero was 3.9 million contained ounces at year-end.

While the bulk of Barrick’s current production comes from the Goldstrike and Pierina mines, analysts were told that a third powerhouse is in the making at Bulyanhulu in Tanzania. The US$280-million underground mine is scheduled to begin production in April.

“We’re seeing grades averaging half an ounce,” Carrington said, “and in this environment, grade is everything.”

Reserves increased to 10 million oz. at year-end, up 33% from a year ago. Because of the ongoing exploration success, the company is reviewing how to increase annual production to 500,000 oz. gold from 400,000 oz. Cash operating costs are expected to average US$130 per oz. over the 19-year mine life.

With 5 km of strike extent to explore at Bulyanhulu, Carrington told analysts that, in the long run, another shaft will be sunk to gain access to reserves. “We have three options: deepening the shaft, sinking a new shaft to the west, or sinking one to the east.”

While the bulk of reserves are in the Main zone, recent drilling has outlined distinct deposits at both the East and West zones. The East zone contains 1.2 million oz. grading 12 grams gold. The grade is lower than at the Main zone, which carries a grade of 18.9 grams and is open to depth. However, the East zone is near the surface and its reserves can be reached by a ramp. The West zone is deeper and hosts almost 2 million oz. at 15.5 grams.

Barrick plans to carry out at least 80,000 metres of drilling this year to define reserves and resources on the Main, West and East zones.

Oliphant described Bulyanhulu as Barrick’s “foothold in Africa,” but refused to comment on speculation that the company may acquire a South African gold producer, either on its own, or with a senior partner. “We are looking at this industry downturn as a time of opportunity, but we intend to be disciplined with respect to acquisitions.

“Let’s just see what happens.”