Barrick unveils major growth platform (September 17, 2002)

After laying low for the summer while its peers grabbed the limelight, Barrick Gold (ABX-T) returned to front and centre today with the unveiling of a sweeping US$2-billion expansion program that would see four new projects come onstream in the next six years.

At full capacity, these four new projects — Alto Chicama in Peru, Cowal in Australia, Veladero in Argentina, and Pascua-Lama in Chile — are expected to produce 2 million oz. of attributable gold for Barrick at a cash cost of US$125 per oz., or 29% below Barrick’s existing cost structure.

By 2006, under the plan, Barrick’s net production is expected to rise by 1.2 million oz., or 21%, to 6.9 million oz. at lower costs.

Over the first decade of the plan, Barrick expects the following start-up dates, average annual production rates, and cash costs for the four projects: Alto Chicama (2005): 500,000 ounces at $130 per ounce; Cowal (2005): 270,000 ounces at $170 per ounce; Veladero (2006): 530,000 ounces at $155 per ounce; and Pascua-Lama (2008): 800,000 ounces at $85 per ounce.

In terms of internal rate of return for the four combined projects, Barrick projects a figure of 14% at US$325-per-oz. gold, or 11% at US$300-per-oz. gold.

Barrick says that its new growth plan is designed to make the company the world’s largest and most-profitable gold producer, and the industry’s major growth stock.

Specifically, Barrick has set itself two financial goals: the doubling of its earnings by 2006, based on $325 gold price; and significantly improving its return on equity.

The company notes that it should be able to carry out the expansion from a position of financial strength, characterized by: a US$1-billion cash balance; an A-rated balance sheet; expected free cash flows of US$500 million annually from its operating mines; and a 12-million-ounce forward gold sales position.

Barrick also announced that it would reduce its forward sales position to 12 million ounces by end of 2003, down from the 17.9 million ounces hedged as of the end of June.

By 2004, Barrick will have 15% of its reserves hedged, compared with 22% at present. Proven and probable reserves currently stand at 82.3 million oz. gold.

This reduction, however, will be mostly accomplished by fulfilling existing contracts rather than through gold buybacks on the open market. Still, the company also plans to continue reducing its call option and variable price sales contract position, with a target of 1.5 million oz. by the end of 2003.

Chief Financial Officer Jamie Sokalsky commented in a release that there are three main reasons for the reduction: interest rates are at 40-year lows, leading to lower forward premiums; the company has never been stronger financially; and the outlook for gold prices is positive.

Meanwhile, Barrick has boosted its exploration and development budget to an industry-leading US$95 million in 2002.