Barrick’s Q3 fails to impress

Barrick Gold (ABX-T, ABX-N) has unveiled another disappointing quarter, as it wrestles rising costs, project delays and shrinking profits. And it’s prompted investors who expected a better third quarter to drive down the stock.

Net earnings more than halved to US$620 million, compared with US$1.4 billion a year ago. Adjusted earnings per share fell 38% to US$850 million, or US85¢, missing expectations of US99¢. 

The company’s president and CEO Jamie Sokalsky said on a conference call that the lower earnings during the third quarter resulted primarily from reduced sale volumes, higher sale costs and lower realized gold prices.

The Toronto-based miner produced 1.8 million oz. gold and 112 million lb. copper during the period, which Sokalsky explains was “slightly below expectations” owing to slipping production and rising costs from its Australia Pacific unit and subsidiary African Barrick Gold (ABG-L).

Compared with the year-ago period, gold sales fell 6% to 1.79 million oz., while copper sales declined 42% to 84 million lb. 
Total cash costs were US$592 per oz. gold and US$2.33 per lb. ­copper, with net cash costs coming in at US$537 per oz. gold, up from US$323 a year ago.

Barrick posted an operating cash flow of US$1.7 billion and an adjusted operating cash flow of US$1.3 billion, excluding the US$500 million it gained in a settlement relating to its Australian dollar hedge position. The figures were down 9% and 37%, compared with the year earlier.

“The market was expecting a strong quarter, but operating results were similar to second-quarter 2012,” Haywood Securities analyst Kerry Smith writes in a report. He has revised his target price to $48.25 from $50 per share, maintaining a “sector outperform” rating.

Along with the lacklustre financials, Barrick hiked up its capital expenditure estimate again for the Pascua-Lama gold project on the Chile-Argentina border from US$8 billion to US$8.5 billion — an increase of US$500 million over its July estimate — and delayed production to the second half of 2014 from mid-2014.

Sokalsky says that Barrick and its EPCM contractor Fluor have been working since July to get a better handle on costs and the schedule at Pascua-Lama, and they aim to release final results from a top-to-bottom review by year-end.

Barrick has pushed back the third-quarter start-up of the Jabal-Sayid copper project in Saudi Arabia until it achieves full compliance with the country’s standards, expected in 2014. 

The setback at Jabal Sayid has caused Barrick to trim its 2012 copper guidance to 450 million lb. from 460 million to 500 million lb., while C1 cash costs are still slated to fall within US$2.10 to US$2.30 per lb.

The company has also tightened its full-year gold guidance to 7.3 to 7.5 million oz. from 7.3 to 7.8 million oz. previously. Cash costs are estimated at US$575 to US$585 per oz., up from US$550 to US$575.

“Expectations of achievable guidance appear to be undermined by project delays [at Pascua-Lama and Jabal-Sayid] and persistent higher costs,” BMO Nesbitt Burns analyst David Haughton writes in a note, downgrading his price target to $46 from $50 per share, and the stock to “market perform” from “outperform.”

Despite additional spending at Pascua-Lama and ongoing cost pressures, Barrick anticipates 2013 capex will be similar to this year’s US$6 billion to US$6.3 billion, as it has cut or put off roughly US$1 billion in spending for next year. 

Both analysts agree the company’s balance sheet would benefit from selling its more costly African operations.

In August, Barrick reported that China National Gold Group might be looking to buy 74% of African Barrick.

“Barrick could potentially net over US$3 billion in proceeds from the sale of its stake, and a transaction could simultaneously shore up the balance sheet, improve liquidity, strengthen the quality of the asset base and reduce operating costs, which we believe would be positively received by the market,” Smith writes.

But he cautions that sales would likely come in below African Barrick’s initial public offering of £5.75 per share. The stock recently traded at £4.26.

Barrick unveiled its quarterly results on Nov. 1, a day after it announced a quarterly dividend of US20¢ per share. Its stock has dropped 13% on the financial news to close Nov. 2 at $35.23 apiece.