Barrick Gold Corporation, the world's largest gold producer, released its fourth quarter results on February 18 and conducted a conference call with analysts on February 19. As expected, lower realized gold and copper prices, as well as lower gold shipments, negatively impacted the company’s Q4 results. The company’s adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell from $406 million in Q4 2013, to $174 million in Q4 2014. Revenues stood at $2.51 billion in Q4 2014, lower than the $2.94 billion in revenues reported in Q4 2013.
The company’s management announced plans to strengthen its balance sheet by reducing its debt. Through a combination of divestments and operating cash flows, the company intends to lower its net debt by around $3 billion in 2015. It maintained its production and AISC guidance for 2015 at similar levels to those achieved in 2014. The company also stated its intention to suspend mining activities at its Lumwana copper mining operations in Zambia, if negotiations with the Zambian government over changes to the country’s mining tax regime do not yield desired results.
See our complete analysis for Barrick Gold
Gold Prices
Barrick’s average realized gold price for the Q4 2014 stood at $1,201 per ounce, down from $1,276 per ounce in Q4 2013. Revenues from gold sales account for around 85% of Barrick’s total revenues. Thus, the fall in gold prices was primarily responsible for the deterioration in the company’s year-over-year quarterly results.
Gold prices have fallen over the course of the last year, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing program. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The tapering of QE implied strengthening U.S. economic growth, which reduced the investment demand for gold and led to a fall in prices of the metal. Going forward, the Fed's outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. An interest rate hike is likely to limit the upside to gold prices, as investors shift towards higher yielding assets.
Operational Performance
As expected, Barrick’s Q4 2014 gold production of 1.53 million ounces was lower than the figure of 1.71 million ounces for the corresponding period a year ago. This was primarily because of the company’s portfolio optimization efforts, which has resulted in a reduction in its portfolio of mines from 27 to 19, over the course of the last year and a half. The company has divested a number of non-core, high-cost mines in order to operate more competitively in an environment of lower gold prices. Out of Barrick’s portfolio of mines, only the Pueblo Viejo and Veladero mines reported higher year-over-year production figures in Q4 2014. Production rose at the Pueblo Viejo mine from 157,000 ounces in Q4 2013 to 177,000 ounces in Q4 2014, as the mine continued to ramp-up production after commencing production in 2013. Production at the Veladero mine rose from 142,000 ounces in Q4 2013 to 197,000 ounces in Q4 2014 due to mining of higher grade ores. The increase in production at the Pueblo Viejo and the Veladero mine partially offset the decline in production at Barrick’s other major mines. Production at the Cortez, Goldstrike, and Lagunas Norte mines declined year-over-year due to the mining of lower grade ores.
Barrick’s copper production stood at 134 million pounds in Q4 2014, slightly lower than the production figure of 139 million pounds for Q4 2013. [1] Copper production rebounded to normal levels after the main conveyor at the Lumwana copper mining operations was repaired and normal operations resumed in July. The partial collapse of the terminal end of the main conveyor early on in the second quarter led to a sharp fall in Barrick’s copper production in Q2. The company’s average realized price fell to $2.91 per pound in Q4 2014, as compared to $3.34 per pound in Q4 2013. The fall in realized prices was mainly due to weakness in demand for the metal, particularly from China — the world’s largest consumer of copper, where slowing economic growth has dampened demand for the metal.
Barrick reported a significantly lower all-in sustaining costs figure for 2014, signifying tangible success in its cost reduction efforts through the sale of non-core assets and a reduction in operating costs. The AISC metric includes operating costs, sustaining capital expenditures, selling, general, and administrative costs, mine site exploration and evaluation costs, mine development expenditures, and environmental rehabilitation costs. It provides a comprehensive view of costs related to the company's current mining operations. The company’s AISC for the full year 2014 stood at $864 per ounce of gold produced, as compared to $915 per ounce for the previous year. However, the AISC for Barrick’s gold mining operations rose to $925 per ounce in Q4 2014, as compared to $899 per ounce in the corresponding period a year ago, primarily due to a fall in production levels as a result of the mining of lower grade ores.
Other Developments and Outlook
Barrick Gold announced contingency plans to suspend its mining operations at the Lumwana copper mine in Zambia, if there is no change to the existing regulation governing mining royalty rates in the country. Starting in 2015, corporate income taxes on mines have been replaced by increased royalties. The new regulations will result in an increase in the royalty rate from 6% to 20% for Barrick’s Lumwana open-pit copper mining operations. The royalties are applicable on revenues generated by the mine and as per the company management, this increase in royalty rates will threaten the viability of the Lumwana copper mine. The company is currently engaged in negotiations with the government pertaining to the new regulations governing mining operations in Zambia. However, if no changes to the regulation are effected, the company intends to start the process of suspending its Zambian mining operations in March.
Going forward, the company management stressed that disciplined capital allocation and debt reduction will continue to be the strategy for Barrick. As a part of its target to reduce its net debt by $3 billion in 2015, the company intends to sell off its Porgera and Cowal mines, located in the Australia-Pacific region. These mines are relatively high-cost mines for Barrick, with AISC figures which are significantly higher than the average company-wide AISC figure of $864 per ounce in 2014. In addition, Barrick does not have any plans to diversify into other metals or add to its existing copper mining operations. The company intends to focus on its low-cost, core gold mining operations. Given the prevailing environment of relatively subdued gold prices, we feel that such a strategy will position Barrick Gold to operate more competitively in 2015.
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