We are maintaining our Neutral recommendation on Barrick Gold Corporation (ABX), the largest gold mining company in the world, with headquarters in Toronto, Ontario, Canada.
Barrick reported record second-quarter 2011 results, driven by higher gold sales volumes and higher prices for both gold and copper. Adjusted earnings per share were $1.12, compared with $0.84 in the prior-year quarter. The result beat the Zacks Consensus Estimate of $1.10.
Barrick’s gold production is expected to increase to 7.6−8.0 million oz in 2011. However, we believe Barrick is non-diversified with more than 70% of revenue coming from gold sales. In addition, the slowdown in the global economy, especially in India, could weaken the demand for gold. The company has secured contracts for essentially all of its sulfuric acid supply required in 2011 at prices well below the average current market price.
Barrick Gold anticipates that it will benefit from major exploration programs, which are advancing at Cortez, Turquoise Ridge, Ruby Hill, and Spring Valley in North America, on early stage targets in the El Indio belt in South America, and at Porgera and on regional targets in the Australia Pacific region. The Pueblo Viejo and Pascua-Lama projects are anticipated to contribute 1.4-1.5 million ounces of average annual production over the first full five years of operation and lower Barrick’s overall total cash costs by about 20%.
Production at the Cortez project is anticipated to increase to 1.30–1.45 million ounces at total cash costs of $235–$265 per ounce in 2011. It is estimated that the Buzwagi project in Tanzania would produce 200,000 oz of gold annually. However, for 2011, Buzwagi production is expected to be higher after successfully addressing production difficulties that began in 2010 due to fuel theft.
Barrick also completed the acquisition of Equinox Minerals in July 2011, adding two quality copper mines and increasing its leverage to strong copper prices while maintaining its gold exposure. Low cost financing has been secured and will enhance returns from the acquisition. The company is focused on three areas to realize the full potential of the Lumwana mine: operational improvements and efficiencies, focus on exploration to expand the resource, and an ongoing evaluation to determine the optimal scope of an expansion.
Barrick Gold generates strong cash flows, which positions it to take advantage of attractive development, exploration and acquisition opportunities as they arise. In 2010, the company increased its annual dividend from $0.40 per common share to $0.48 per common share and also moved from a semi-annual dividend to a quarterly dividend. This increase of 20% in dividends reflects the company’s ability to generate substantial cash flows from operations in a high gold price environment.
However, we believe Barrick Gold is non-diversified with more than 70% of revenue coming from gold sales. Although the elimination of the hedge book has increased its leverage to gold prices, it has also resulted in significant negative retained earnings on its balance sheet.
The slowdown in the global economy, especially in India, could weaken demand for gold. India, which absorbs about 50% of the world's production, has witnessed sluggish GDP growth. Furthermore, the stronger dollar and negligible rate of inflation could impede the demand for gold. In addition, deficit financing and restructuring plans announced by the central banks to lift the global economy involves the sale of gold, which could again hurt prices.
Barrick faces stiff competition from AngloGold Ashanti Ltd. (AU) and Newmont Mining Corp. (NEM).
We maintain our Neutral recommendation on Barrick. Currently, it holds a Zacks #3 Rank (Hold) on the stock.
BARRICK GOLD CP (ABX): Free Stock Analysis Report
ANGLOGOLD LTD (AU): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis Report
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