EventOn May 6th /08 Barrick Gold (ABX: TSX, ABX: NYSE) reported its Q1/08 results.
Company Profile (from Reuters)
Barrick Gold Corporation is engaged the production and sale of gold, as well as related activities such as exploration and mine development. Barrick also produces some copper and holds interests in a platinum group metals development project and a nickel development project, both located in Africa, and a platinum group metals project located in Russia. Barrick has four regional business units: North America, South America, Australia Pacific and Africa. Barrick concluded its offer for Arizona Star Resource Corp. (Arizona Star) in December 2007, acquiring an approximate 94% interest in Arizona Star. In March 2008, Barrick acquired the remaining shares of Arizona Star. In December 2007, it completed the acquisition of the Kainantu mineral property and over 2,900 square kilometers of exploration licenses in Papua New Guinea from Highlands Pacific Limited. In March 2008, it acquired an additional 40% interest in the Cortez property from Kennecott Explorations (Australia) Ltd.
Takeaways From The EventFor Q1/08, Barrick reported net income of $514 million, ($0.59 cents a share), compared to a net loss of $159 million, ($0.18 cents a share), from a year earlier. In Q1/08, the company produced 1.74 million ounces of gold (down from 2.03 million ounces last year) at total cash costs of $393/oz (up from $309/oz last year). Barrick realized an average gold price of $925/oz during the quarter which helped drive its revenue to $1.9 billion, compared with $1.1 billion in Q1/07. Barrick maintained their full year production guidance of 7.6 - 8.1 million ounces of gold at total cash costs between $390 and $415 per ounce and 380 - 400 million pounds of copper at total cash costs of $1.15 - $1.25 per pound. The company also increased its quarterly dividend by 33% to $0.20 cents (from $0.15 cents previously).
Responding to Barrick’s Q1/08 results,
TD Newcrest analyst Greg Barnes writes “On a regional basis, the South American operations outperformed our expectations with production beating our forecasts by 19% and cash costs lower by 19% than our forecasts. Helping the quarter were lower copper cash operating costs in the quarter that were reported at US$0.94/lb vs. our forecast of US$1.18 – management maintained full year copper operating cost guidance at US$1.15-1.25/lb. The weak link during Q1 was the North American operations. Versus our forecasts, production was light by 18% while cash operating costs were higher by 7%. Goldstrike had a tough quarter with higher stripping costs and mechanical issues negatively impacting production. Improvements are expected from the Nevada operations through the balance of the year from Goldstrike (with the mechanical issues resolved) and via the now fully-owned Cortez Mine. Cortez is not expected to have a banner year in 2008, with lower grades negatively impacting production. We expect to see improvement in 2009 – we are forecasting gold production of 650,000 ozs at a cash cost of US$380/oz in 2009 vs. production of 460,000 ozs at a cash cost of US$535 this year. Annualizing Q1/08 production leaves Barrick approximately 600,000 ozs below the lower end of its production guidance and 1.0 million ounces below the high end (2008 production guidance maintained at 7.6-8.1 million ounces for 2008). Given Q1 production challenges, management now expects that 7.9 million ounce will be the upper-end of production for the year. We are now assuming production of 7.7 million ounces (previously 7.97 million ounces) at a cash cost of US$410/oz (previously US$400/oz).”
Barnes lowers his target price to US$54.00/sh based on “a 1.8 times multiple to our NAV-5 (60% weighting) and an 18 times multiple to our 2009 CFPS estimate (40% weighting). We use lower multiples for Barrick relative to Goldcorp given its relatively flat production profile.”
Another analyst who covers Goldcorp is
Steven Butler of Canaccord Adams and he writes “Barrick easily has the biggest pipeline of larger-scale projects in the industry. While there is much opportunity associated with this portfolio and we may indeed be undervaluing certain elements of it, we are cautious on our valuation given the stale nature of many of the indicative feasibility study parameters in an environment of ever-increasing capital and operating costs and unclear path of sequential development. Nonetheless, progress was reported yesterday with the on-track development of Buzwagi, feasibibility study and project notice delivered to the government of the Dominican Republic for Pueblo Viejo, completion of detailed engineering at Cortez Hills with 50% of capital committed or spent to date, and completion of the feasibility study for the Sedibelo platinum project in South Africa. Management has indicated robust rates of return for Sedibelo. Based on the information provided yesterday (4.76 Moz 100% LOM production, $700 million capex, $700/oz cash costs), we would derive a 10% after-tax DCF valuation of $560 million using the current price basket of $2,100/oz. The project's reserve grades are 3.5 g/t Pt and 1.5 g/t Pd plus minor rhodium and gold. Under exploration assets, we have conservatively increased our valuation of this project to $400 million (from $200 million previously).”
Due to the production deficit in Q1/08 and guidance towards the higher end of the forecasted cash costs, Butler lowers his 2008 production estimate to 7.66 Moz at total cash costs of $410/oz from 7.97 Moz at $400/oz. As a result, he also ratchets down his EPS and CFPS estimates to $2.49 and $3.66 from $2.67 and $3.84 respectively. Butlers maintains his Hold recommendation but mentions that “the shares offer superior leverage to higher gold prices and reasonable value, our HOLD rating is predicated largely on the company's flat near-term profile and lack of clarity on the costs and timeline of the project pipeline. Butler reduces his target price to US$50.00 (previously US$53.00) which reflects “an approximate 1.5 times multiple (previously 1.55 times) of our 5%/$1000 peak gold NAVPS.”
In response to Barrick’s Q1/08 numbers
Haywood Securities analyst Kerry Smith writes “Goldstrike will remain in a high-waste stripping phase until the latter part of Q2/08, with most of the ore processed currently coming from low-grade stockpiles grading about 3.0 grams per tonne, after which grades are expected to trend back towards reserve grade of about 4.0 grams per tonne gold. Equipment issues at Goldstrike and North Mara have now been resolved, and re-staffing at Bulyanhulu is nearing completion. Production from Cowal, which typically represents about only 3% of quarterly production, will continue to be weak through Q2 and Q3 as ore is sourced from low-grade stockpiles while remediation work is carried out. At Turquoise Ridge, pending an investigation into a second contractor fatality, the Getchell mine is again closed. With about 25,000 to 30,000 ounces only of reserves remaining, the risk of a permanent shutdown will not depress overall Company production. Overall, production in 2008 is expected to be back-half weighted as grades improve, and the operational issues experienced in Q1/08 are resolved.”
Regarding Barrick’s valuation, Smith writes “The increase to our 2008E total gold cash cost from US$405 per ounce to US$415 per ounce lowers our 2008E CFPS by US$0.05 to US$3.90. Nonetheless, at a 15.0x cash-flow multiple, we maintain our $60.00 target price and continue to recommend the shares of Barrick Gold Corporation (ABX–T) with a SECTOR OUTPERFORM rating. Currently, the Company’s peer group trades at 14.6x 2008E CFPS, while Barrick trades at 9.9x.”
Richard Gray of Blackmont Capital writes “Barrick’s Q1/08 adjusted EPS of $0.62 was ahead of consensus of $0.60 per share and slightly below our expectation of $0.66 per share. Cash flow of $0.83 per share was below consensus of $0.93 per share and our estimate of $0.95 per share. The primary reason for the shortfall was lower-than expected production of 1.74 million ounces, which was below our estimate of 1.93 million ounces. Cash costs of $393/oz were in-line with our expectation of $397/oz. A good operating quarter at the Zaldivar copper mine resulted in Barrick’s by-product cash costs (copper profits deducted from gold costs) to come in at an estimated $246/oz for the quarter, well below our $284/oz estimate. The solid quarterly cost performance was due to another good quarter in South America, which represented 31% of production and where cash costs averaged $193/oz. This offset higher costs in North America (35%, $497/oz), Australia (25%, $438/oz), and Africa (9%, $508/oz). The production shortfall versus our expectation can be primarily attributed to struggles at one of the company’s most important mines, the Goldstrike complex in Nevada. Production of 295,000 oz at total cash costs of $521/oz fell well short of our expectations of 416,000 ounces at $425/oz. The quarter was affected by continued production from lower-grade stockpiles due to planned waste stripping, a SAG mill gear failure, and a fire at the roaster. The mill and roaster issues have been resolved, while higher grade ore from the pit should be accessible in the latter part of Q2/08.”
Comparing Barrick’s costs to its peers, Gray writes “Barrick’s cash costs in Q1/08 compare well with the other three North American senior gold producers. The cash cost of $393/oz (treating the copper as a co-product) is very similar to Newmont’s Q1/08 average of $396/oz and Goldcorp’s $396/oz, and below Kinross’ Gold (K-TSX) $472/oz. If we treated the copper profits as a credit to the gold costs, Barrick’s Q1/08 average of $246/oz also compares well Goldcorp’s $240/oz and is well below Newmont’s $341/oz. As Kinross does not currently benefit from any copper production, the cash cost is the same. Barrick indicated that it expects the average cash cost in 2008 to be at the higher end of the $390-415/oz guidance provided, implying that costs can be expected to increase slightly over the course of the year. The original guidance range was calculated (in February 2008) using an average oil price of $90 per barrel and a gold price of $800/oz (impacts royalty costs), but with oil currently at $122 per barrel and gold trading near $880/oz, these costs are expected to trend higher. Barrick indicated that for every $10 per barrel increase in the oil price, costs would increase by $4/oz on an annual basis. Also, for every $100/oz increase in the gold price, costs would increase by $4/oz.” Due to the higher cash costs and lower production estimates, Gray reduces his EPS (to $2.35 from $2.46) and CFPS (to $3.31 from $3.47) estimates. Gray upgrades his recommendation from a Hold to a Buy and maintains his target price of C$54.00/sh, which is based “on an equal weighting of 2.0 times NAV and 12.5 times 2009 CFPS. Trading currently at only 1.3 times NAV and 11.4 times 2009 CFPS, the shares are attractively valued.”
John Hill of Citigroup writes “We rate Barrick Gold shares Buy / High Risk (1H). We regard Barrick as among the strongest names in the gold industry, offering a unique combination of asset quality, production growth, and financial strength. It has a reliable track record of adding value the old-fashioned way: proving up major in-ground reserves and bringing low-cost production on-line quickly. Its project pipeline adds to successes at Pierina (Peru), Lagunas Norte (Peru), and Veladero (Argentina), while economies of scale and metallurgical innovation extract shareholder value from the flagship Goldstrike property. Further discoveries in Nevada, the Frontera district of Chile/Argentina, and Tanzania are likely. We believe the market is becoming more focused on the company's growth profile and financial strength, and more sanguine in regard to the hedge book that is slowly decreasing in size as a % of reserves.”
Hill bases his US$62.00 target price on “an equally weighted average of four methodologies (DCF, Reserve, PE and OCF multiples). Operating cash flow (OCF) multiples of our composite of gold stocks suggest compression from previous levels of 18-20x forward, the prevailing range during the early 1990s, the last time gold was above $400 per ounce. With a return of profitability we apply a 15x multiple to our 2009E OCF estimate for a value of $57. P/E multiples are decomposed on gold and copper, based on significant valuation differentials resulting from futures markets contango vs. backwardation, respectively. The gold P/E multiple is set at 25x, inline with peer average. We choose a 11x peak/mid-cycle copper multiple. The blended multiple is about 22x on 2009E EPS, yielding $61/sh. Unit Reserves are multiplied by the margin of our $950/oz gold forecast next year less 2009E total production costs (reserve multiple of $445/oz). Copper reserves are multiplied by $0.45/lb, consistent with producing copper assets, to arrive at $61/sh. All reserves are adjusted for estimated metal recovery. Our discounted cash flow (DCF) is based on a cost of capital of 4.0%. The sum of DCFs plus cash, less debt yields a net asset value. We apply a 2.0x multiple to reflect upside in exploration assets, the fungible nature of gold with cash, and investor demand for quality gold producers. Our DCF-based calculation arrives at $70/sh.”
Lastly,
Barry Cooper of CIBC World Markets writes “Barrick did not change its production guidance although we think that even the lower end of its production guidance of 7.6 million ounces could be a challenge to reach in light of Q1/08 results. On an annualized basis, Q1 production would imply an annual production of 7 million ounces, significantly below company guidance of 7.6 million to 8.1 million ounces. Barrick also maintained its cost guidance for the company at $390/oz to $415/oz, although management did increase cost expectations for some individual segments including the Australia/Pacific segment by $50/oz and its African operations also by $50/oz. We expect costs per ounce will be at the high end of the range. Our expectations for costs for the year are $411/oz. The quarter was really a four asset story for the gold operations with Lagunas Norte, Veladero, Porgera, and Pierina reporting good results. Combined these four assets generated 55% of the company's operating CF from gold with production of only 39% of the company's gold. The higher proportion of operating CF was achieved because of the combined lower cost per ounce of $200/oz for 685,000 ounces of production. The rest of the operations had combined production of 1.06 million ounces at a much higher cost of $515/oz. Amongst the underperforming assets during the quarter, Goldstrike produced 295,000 ounces (18% decrease QoQ) at costs of $521/oz (increase of 23% QoQ) because of equipment issues including SAG mill gear failure. Plutonic, Kalgoorlie and Kanowna were impacted by lower-than-expected grades. Cowal was impacted by a slip on the pit wall. Round Mountain and Turquoise Ridge reported lower-than-expected production. Bulyanhulu was impacted during the quarter by illegal strikes and North Mara had one of its main excavators destroyed in a fire. In hedging, Barrick added another 1 million ounces to the floating deferred contracts, which now total 2.8 million ounces with a fixed loss of $482/oz, in addition to 6.7 million ounces that are normal forward sales and priced in the $350/oz range with a mark-to-market that changes with the gold price. The 2.8 million ounces of floating contracts does not change with the gold price. The hedge book had a mark-to-market loss of $5.3 billion as at March 31, 2008. In our opinion, continued crystallization of hedge losses will be viewed positively by investors as more gold ounces are leveraged to the gold price, even for ounces at development projects.
Cooper rates Barrick a Sector Performer (which is essentially a Hold).
My Take: A couple of the analysts covering Barrick mention its “flat production profile,” and thatswhy I prefer names like Kinross (K: TSX), Agnico Eagle (AEM: TSX) and Goldcorp (G: TSX) due to their superior growth profiles.
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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