Barrick Gold Corp. (ABX) posted record second-quarter 2011 results driven by higher gold sales volumes and higher prices for both gold and copper. The second quarter reported a net income of $1.2 billion or $1.16 per share.
Adjusted net income was up 36% year over year to $1.1 billion or $1.12 per share compared with $824 million or 84 cents per share in the prior-year quarter, above the Zacks Consensus Estimate of $1.10.
Revenue
In the second quarter of 2010, total revenue rose 31% year over year to $3.43 billion, above the Zacks Consensus Estimate of $3.3 billion.
In the reported quarter, gold production was 1.98 million ounces at total cash costs of $445 per ounce and net cash costs were $338 per ounce.
In second-quarter 2011, copper production was 93 million pounds at total cash costs of $1.56 per pound.
Region Wise
North America: North America region produced 0.92 million ounces at total cash costs of $404 per ounce primarily due to higher production from Cortez and Goldstrike. The Cortez property produced 0.42 million ounces at total cash costs of $220 per ounce.
The Goldstrike operation performed strongly, producing 0.30 million ounces at total cash costs of $511 per ounce in the second quarter, primarily due to better-than-expected grades from the open pit and higher roaster throughput.
Full-year 2011 production for the North America region is expected to be 3.30–3.46 million ounces at total cash costs of $425–$450 per ounce.
South America: This business unit performed exceptionally, with production of 0.45 million ounces at total cash costs of $373 per ounce in the second quarter. The Veladero mine produced 0.24 million ounces at total cash costs of $364 per ounce in the second quarter due to a higher than planned drawdown of leach pad inventory. The Lagunas Norte operation contributed 0.18 million ounces at total cash costs of $267 per ounce, exceeding expectations.
In 2011, South America production is expected to be 1.80–1.935 million ounces at total cash costs of $350–$380 per ounce, primarily due to lower grades at Veladero as anticipated in the mine plan.
AustraliaPacific:This business unit produced 0.46 million ounces at total cash costs of $611 per ounce in the reported quarter. The Porgera mine, the region's largest operation, produced 0.12 million ounces at total cash costs of $569 per ounce. Production from Porgera was impacted by pit wall remediation activities as well as power outages and unplanned maintenance, which affected mill throughput.
Australia Pacific is expected to produce 1.85–2.00 million ounces at total cash costs of $610–$635 per ounce in 2011.
African Barrick Gold plc (ABG):Attributable production from ABG in the second quarter of 2011 was 0.13 million ounces at total cash costs of $652 per ounce.
Barrick's share of 2011 production is expected to be 0.515–0.560 million ounces at total cash costs of $590–$650 per ounce.
Financial Position
In the second quarter 2011, operating cash flow was $690 million and adjusted operating cash flow was $938 million (which adjusts for the one-time operating cash flow impacts related to the Equinox acquisition) versus operating cash flow of $1,108 million and adjusted operating cash flow of $1,127 million, respectively, in the comparable prior-year period.
Capital expenditure was $1.1 billion versus $851 million in the prior-year period.
Cash balance at the end of June 30, 2011 was $2.9 billion.
Corporate Development
Barrick completed the acquisition of Equinox Minerals in July and is in the process of integrating the Lumwana mine and Jabal Sayid project into the Australia Pacific regional business unit. This transaction has added two quality copper mines to the portfolio and improves copper leverage while maintaining exposure to gold. Low cost financing has been secured and will further enhance returns from the acquisition. The Equinox transaction was a unique opportunity to acquire a large, producing asset in an environment of strong copper fundamentals. The Lumwana mine is a high quality, long-life mine with significant expansion and resource growth potential and provides with a major presence in Zambia, one of the most prospective copper regions in the world.
The company is focused on three areas for realizing the full potential of Lumwana and maximizing the long-term cash flows: operational improvements and efficiencies, a focus on exploration to materially expand the resource and an ongoing evaluation to determine the optimal size of the expansion.
Lumwana is expected to produce 155-175 million pounds at total cash costs of $1.75-$1.95 per pound from June 1 to the end of 2011. On a full year annualized basis, production is expected to be about 300 million pounds beyond 2011, prior to a potential expansion.
The Jabal Sayid copper project in Saudi Arabia is expected to enter production in the second half of 2012 at a total capital cost of approximately $400 million, of which $275 million remains to be spent. The mine is expected to produce 100-130 million pounds annually over its first full five years.
Outlook
The company is on track to achieve its full-year 2011 operating guidance of 7.6-8.0 million ounces at total cash costs of $450-$480 per ounce and significantly lower expected net cash costs of $290-$320 per ounce compared with previous guidance of $340-$380 per ounce, positioning Barrick as one of the lowest cost senior gold producers.
Following Barrick's acquisition of Equinox Minerals, the company expects to produce 455-475 million pounds of copper in 2011 at total cash costs of $1.55-$1.70 per pound.
Lumwana has excellent potential for both brownfield and greenfield resource growth. Barrick expects to spend over $50 million in 2011 as part of an 18 month exploration program to increase the measured and indicated resource as part of the expansion study, which is expected to be completed in the second half of 2012. As a result, the company's total exploration budget for 2011 will increase to $370-$390 million, of which approximately 40% will be capitalized.
Barrick has targeted growth in production to 9 million ounces of gold within the next five years. Total cash costs are expected to benefit from its large, low cost projects, primarily Pueblo Viejo and Pascua-Lama, as these mines come on stream. Once at full capacity, these two mines are expected to contribute about 1.4-1.5 million ounces of average annual production over the first full five years of operation and are expected to lower Barrick's overall total cash costs by about 20%. At current metal prices, these two projects are anticipated to generate combined average annual EBITDA of about $2.8 billion to Barrick over the same period.
Barrick faces stiff competition from AngloGold Ashanti Ltd. (AU) and Newmont Mining Corp. (NEM).
We maintain our Outperform recommendation on Barrick. Currently, it holds a Zacks #1 Rank (Strong Buy) on the stock.
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