Barrick Costs Rising as Gold’s Charge Stalls

Barrick Costs Rising as Gold’s Charge Stalls: Corporate Canada
The average gold price in the quarter rose 7 percent versus a year ago. Photographer: Paul Taggart/Bloomberg

Barrick Gold Corp. Chief Executive Officer Jamie Sokalsky makes his public debut tomorrow as head of the world’s biggest gold company battling rising costs, a decline in profit and a sluggish price for the metal that can no longer paper over the industry’s struggles.

Barrick, which promoted Sokalsky June 6 to replace Aaron Regent after the board was “disappointed” with the Toronto-based company’s share price, and its two largest competitors report quarterly earnings this week marred once again by cost inflation.

“We’ve seen gold prices flatline this quarter, so that does kind of leave the emperor stripped bare in a sense that they really have to deliver on cost control,” said Jorge Beristain, a Greenwich, Connecticut-based analyst at Deutsche Bank AG.

Barrick will probably say the total cost to produce an ounce of gold, excluding revenue from other metals, rose for the fifth consecutive quarter. The average of five analysts’ estimates compiled by Bloomberg is for $569 an ounce, 28 percent higher than a year earlier, while the average gold price in the quarter rose 7 percent versus a year ago.

The company is expected to report second-quarter profit excluding one-time items fell 16 percent to 94 cents per share from a year ago, according to the average of 20 estimates compiled by Bloomberg.

“The days when gold equity investors, and management for that matter, thought that everything would be taken care of by the price of gold are over,” said Adrian Day, who manages about $160 million of assets as president of Adrian Day Asset Management in Annapolis, Maryland.

Fuel Prices

Sokalsky, 55, who was chief financial officer at Barrick, takes the helm at a time when gold industry costs are rising because of wage inflation and lower-grade ores. Higher operational costs probably more than offset lower fuel prices and a strong U.S. dollar in the second quarter, RBC Capital Markets analysts including Stephen Walker said in a July 16 note.

Miners, which have enjoyed 11 annual consecutive gains in gold prices, will also be under pressure to defend against inflation at multibillion-dollar projects they’re building to stem output declines and boost share performance.

It’s “imperative” that gold producers demonstrate that they can contain costs, said Sonny Tahiliani, managing director at MacroMoves, a New York-based consultancy. Capital costs will probably rise more in countries which are experiencing higher wage inflation and “increasingly restrictive mining policy,” he said in an e-mail.

Barrick shares have fallen 25 percent this year in Toronto and declined 21 percent since June 5, the day before the company announced Sokalsky’s appointment. The NYSE Arca Gold BUGS Index, which comprises 16 gold mining companies, has fallen 20 percent this year.

Strategic Direction

For Barrick, investors who were surprised by Regent’s departure will be looking for clarity on the company’s strategy from Sokalsky tomorrow, Day said.

“One, are they going to stick with gold and two, are they looking for more acquisitions?” he said. “The market just really wants to know what their strategic direction is.”

Investors are also bracing for news on cost increases and delays at Barrick’s Pascua-Lama mine on the border of Chile and Argentina, he said. Barrick said May 2 it was reviewing the budget and schedule for the $5 billion project in the Andes mountains. Pascua-Lama’s cost forecast may rise to $5.5 billion, Anita Soni, an analyst at Credit Suisse, said in a July 23 note.

Significant Margins

At mines already operating, Barrick’s net cash margin will probably fall 7.7 percent from the first quarter, to $1,162, Brian Yu, an analyst at Citigroup Inc., said in a July 16 note. That’s 1.1 percent lower than a year ago. Vancouver-based Goldcorp Inc., the second-largest producer by market value, may say cash margins after byproducts fell 18 percent quarter-on-quarter to $1,194 per ounce, Yu estimated.

“Any time you get cost pressure you obviously want to know that the company is doing something concrete,” Day said in a phone interview yesterday. “You don’t want just bland words about plans to keep them under control.”

Andy Lloyd, a Barrick spokesman, didn’t immediately return phone calls seeking comment.

To be sure, producers will still report “significant” margins, said Brian Christie, an analyst at Desjardins Securities Inc. Gold miners will also continue to build their cash positions, which may allow for dividend increases, he said in a note.

Water Shortage

Still, Goldcorp shares fell 10 percent, the most in more than three years, the day after the company raised its forecasts for cash costs and lowered output projections July 10, citing delays at a Canadian mine and a water shortage at its Penasquito operation in Mexico. After revenue from selling other metals, the company expects gold costs will increase to about $370 an ounce in the second quarter, compared with $251 in the first three months of the year.

Newmont Mining Corp., the world’s second-largest gold miner by revenue, will provide target ranges this month to cut costs in “aggressive total cost management,” Chief Executive Officer Richard O’Brien said May 23. The Greenwood, Colorado-based miner is expected to report second-quarter earnings after markets close tomorrow.

“It’s all very well to have your costs rise 10 percent when the gold price is rising 20 percent, then you don’t care so much,” George Topping, a Toronto-based analyst at Stifel Nicolaus & Co., said in a July 16 phone interview. “When the gold price is flat and costs are still going up, then you really have to take quick action.”

While gold prices in the second quarter remained at historically high levels, Topping said he doesn’t expect any of the gold companies he covers will report positive free cash flow because miners are spending more on new mines and expansions.

Jeff Wilhoit, a Goldcorp spokesman, didn’t immediately return a phone call seeking comment. Omar Jabara, a spokesman for Newmont, declined to comment.

Metals Prices

Companies that use non-gold revenue to offset costs will also be affected by lower prices for metals like copper, silver and zinc, Greg Barnes, an analyst at TD Securities Inc. in Toronto, said in a July 18 note. Copper for delivery in three months on the London Metal Exchange averaged $7,829 a metric ton in the second quarter, 15 percent less than a year earlier. Silver futures in New York were 23 percent lower.

“I think you are really going to find several of the seniors talking of stripping out costs, both capital and operating, in order to maintain their margins,” Stifel’s Topping said. “That’s overdue and it should help the stock prices stabilize.”

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