Earnings Preview: Barrick Gold (ABX)

Barrick Gold Corporation (ABX) is slated to release its fourth quarter 2010 results on Thursday, February 17 before the market opens. The current Zacks Consensus Estimate for the fourth quarter is 85 cents, representing a significant annualized growth of 41.39%.

With respect to earnings surprise, over the trailing four quarters, Barrick Gold has outperformed the Zacks Consensus Estimate in all the four quarters. The average earnings surprise was a positive 9.74%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Third-Quarter Performance

On October 28, Barrick Gold reported its third quarter fiscal 2010 results. Reported net income was a record $837 million or 85 cents per share. Adjusted net income rose 75% year over year to $829 million or 84 cents per share.

In the third quarter of 2010, gold production of 2.06 million ounces was ahead of its plan at lower than expected total cash costs of $454 per ounce or net cash costs of $349 per ounce on strong performance from the North America region, including the new Cortez Hills mine, which continues to exceed expectations.

Barrick is on track with its original operating guidance for higher gold production and lower total cash costs in 2010, with full-year production expected to be 7.65–7.85 million ounces at total cash costs of about $455 per ounce or net cash costs of $350–$360 per ounce.

The company is targeting growth in gold production to 9.0 million ounces within five years once the world class Pueblo Viejo and Pascua-Lama projects come onstream and as additional opportunities are developed around existing mine sites.

Barrick’s positive outlook on the gold price, combined with its strong balance sheet, has positioned the company to continue to invest in its high return projects and also to return additional capital to shareholders. As a result, Barrick’s board of directors has authorized a fourth quarter dividend of 12 cents per share, consistent with the dividend declared in the third quarter, which represents a 20% rise from the previous dividend on an annualized basis. Barrick continues to maintain a robust financial position with a quarter-end cash balance of $4.3 billion and $1.5 billion in undrawn credit after generating record operating cash flow in excess of $3.3 billion in the first nine months.

Agreement of Estimate Revisions

In the last 30 days, out of the 18 analysts covering the stock, 4 analysts increased their EPS estimates, while none decreased their EPS estimates for the fourth quarter of fiscal 2010.

In the last 30 days, out of the 19 analysts covering the stock, 2 analysts revised their EPS estimates upwards while none revised their estimates downward for fiscal 2010. For fiscal 2011, out of the 22 analysts covering the stock, 5 analysts increased their EPS estimates while none decreased their estimates.

Magnitude of Estimate Revisions

Despite the positive revision, earnings estimates for the fourth quarter, in the last 30 days, moved down by 1 cent from 85 cents to 84 cents. However, for fiscal year 2010, the earnings estimate revision remained flat at $3.20. Similarly, for fiscal 2011, the earnings estimate revision remained flat at $4.01.

Barrick Gold Corporation, the world’s largest gold miner, expects to benefit from three owned projects in its pipeline: Pueblo Viejo, Pascua-Lama and Cerro Casale. The Pueblo Viejo project in the Dominican Republic is advancing in line with its $3.0 billion capital budget (100% basis). Initial production continues to be anticipated in the fourth quarter of 2011, although timing delays may result in first production occurring in the first quarter of 2012. At the end of the third quarter, overall construction was nearly 40% complete, approximately 75% of the capital had been committed and engineering and procurement was about 95% complete.

At the Pascua-Lama project on the border of Chile and Argentina, detailed engineering and procurement is nearly 90% complete and the project is on track to enter production in the first quarter of 2013. The project remains in line with its pre-production capital budget of about $3.0 billion with over 40% of the capital committed. In Chile, the Barriales camp is substantially complete, allowing the work-force to be increased to the permitted capacity, and initial occupancy of the Los Amarillos camp in Argentina is expected in the fourth quarter of 2010. Average annual gold production from Pascua-Lama is expected to be 750,000–800,000 ounces in the first full five years of operation at total cash costs of $20–$50 per ounce.

At the Cerro Casale project in Chile, the review of any additional permitting requirements before considering a construction decision is progressing along with discussions with the government and meetings with local communities and indigenous groups. Pre-production capital is expected to be about $4.2 billion (100% basis) and Barrick’s 75% share of average annual production is anticipated to be about 750,000–825,000 ounces of gold and 170-190 million pounds of copper in the first full five years of operation at total cash costs of about $240–$260 per ounce.

Our Take

Barrick Gold is fully leveraged to gold prices. Gold prices are likely to stay strong due to a decline in mine supply. High growth in the world money supply is also supportive of gold prices. In 2009, Barrick completed the elimination of its gold hedges based on an increasingly positive outlook for gold, using net proceeds from the equity and long-term debt offerings. The company now has full leverage to the gold price with the industry’s largest gold production and reserves.

Moreover,Barrick’s Pascua-Lama project in Chile has the world’s largest silver deposit of 731 million oz. The company has signed the cross-border tax agreement with Chile and Argentina, which helps to finalize plans for developing the project.

However, Barrick Gold Corporationfaces stiff competition from AngloGold Ashanti Ltd. (AU), Newmont Mining Corp. (NEM) and Rio Tinto Limited.

We maintain our long-term Neutral recommendation for Barrick Gold. Currently, it holds a short-term Zacks # 3 Rank (Hold) on the stock.

BARRICK GOLD CP (ABX): Free Stock Analysis Report

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