* Barrick Gold (ABX : TSE/NYSE : C$31.70 : Issued 376M; 390M f.d.)
Barrick Gold reported strong Q3/98 results in which it registered
year-over-year improvements in the quarter and in the first nine
months of 1998 in most key categories.
Note that all comparisons between Q3 and nine-month 1998 results with
year-ago results exclude the US$385M after-tax restructuring charge
taken in Q3/97. Given these strong results, we are maintaining our
BUY rating on ABX shares with a 12-month price target of C$40/share,
although a rally in gold prices above US$320/oz. appears necessary for
ABX shares to reach this level.
1998 and 1999 earnings estimates raised
Barrick's EPS of US$0.20 in Q3/98 was above the market consensus
estimate of US$0.18/share and our estimate of US$0.19/share. Given
the strong operating performance seen in 1998 to date, and
expectations for continued solid results ahead, we are raising our EPS
and CFPS estimates as outlined below.
The Goldstrike property is poised to set a new production record in
1998...
Barrick's total gold production rose to 797,154 ozs. in Q3/98 compared
with 757,476 ozs. a year ago, and in the first nine months 1998 rose
to 2.32M ozs. compared with 2.20M ozs. a year ago. The Goldstrike
property in Nevada, which hosts the Betze-Post and Meikle mines, was
the stellar performer with 1.7M ozs. of gold production in the first
nine months of 1998, 73% of the Company's output. Meikle had a
particularly outstanding Jan.-Sep. period with 684,516 ozs. produced
at a cash operating cost of just US$74/oz. According to Barrick,
Meikle is now expected to produce 830,000 ozs. of gold at cash
operating costs of just US$80/oz. in 1998 (we believe costs are likely
to be lower), which is above the Company's previous estimate of at
least 800,000 ozs., and even more improved compared with its estimate
heading into the year of 765,000 ozs. at US$90/oz. Given the strong
1998 results at Meikle, and expectations that Betze-Post will finish
the year strong as Barrick mines the high-grade 6th West Layback,
overall Goldstrike production appears poised to set a new record of at
least 2.3M ozs. compared with its previous record of 2.18M ozs.
...which could lift Barrick's overall 1998 production to new heights...
While Barrick has not forecast that it may achieve record gold
production in 1998, we believe it is poised to do so. Barrick's
current annual production record of 3.149M ozs. was achieved in 1996,
and we believe the Company may exceed this level by a small amount in
1998. Aside from record gold production at Goldstrike, records are
also expected to be set or approached at Holt-McDermott in Ontario,
Tambo in Chile, and Bullfrog in Nevada. Also contributing to our 1998
forecast is slightly earlier than expected mining at Pierina, which
should provide sufficient leach retention time of 50 days to yield
approximately 50,000 ozs. in Q4/98.
...but this record is expected to fall quickly as production in 1999
should reach at least 3.5M ozs.
Regardless of whether or not a new production record is established in
1998, it is likely to be short-lived as Barrick is poised to produce
at least 3.5M ozs. (we are estimating 3.6M ozs.) at total cash costs
of no more than US$170/oz. in 1999 when the new Pierina Mine in Peru
enjoys its first full year of gold production at a rate of at least
750,000 ozs. (we are forecasting in excess of 800,000 ozs.) at total
cash costs of about US$50/oz. If our 1999 estimates are reached, not
only would Barrick set a new Company production record, it would also
set a new low for the Company in terms of total cash costs.
Also possibly contributing to a strong year in 1999 are ideas that
Meikle's gold output could exceed the strong levels achieved in 1998
because it should benefit from increased hoisting capacity of 2,700
tpd from 2,400 tpd in 1998. Possibly partially offsetting some of
this improvement may be a reduction in ore grades at Meikle, which
could decline from the lofty 1.07 oz./ton level achieved in the first
nine months of 1998. The average reserve grade at Meikle is 0.78
ozs./ton.
Barrick's costs plunge, and should continue to do so in 1999.
As outlined above, contributing to the strong Q3/98 result was a sharp
decline in total cash costs to US$184/oz. compared with US$199/oz. a
year ago. In fact, every mine Barrick operates reported lower cash
operating costs (Barrick doesn't report total cash costs on a
mine-by-mine basis) in Q3/98 except for one, Betze-Post, which
recorded cash operating costs of US$177/oz. compared with US$164/oz. a
year ago.
Pierina should produce in excess of 800,000 ozs. in 1999.
As mentioned above, we believe Pierina should produce in excess of
800,000 ozs. in 1999 at total cash costs of US$50/oz. However, while
cash costs should be low at Pierina, especially in the first three
years of production because of the mining of higher than average ore
grades, we expect DD&A to add a whopping US$172/oz. to Pierina's total
production costs. Nonetheless, even with these high DD&A expenses,
Pierina would still have relatively low total production costs of
US$222/oz. Barrick spent US$790M to acquire this deposit (as well as
additional land positions) from Arequipa in August 1996, and capital
costs, plus capitalized interest for the mine are estimated to be
US$310M. Pierina contains 7.2M ozs. of reserves grading 2.0 g/t plus
an additional 0.9M ozs. of resources grading 0.9 g/t. As mentioned
above, this mine should lift Barrick's annual gold production to
3.5-3.6M ozs. in 1999 from 3.1-3.2M ozs. this year.
When operating in mid-2000, the Carlin roaster should enable Barrick
to produce at least 2.0M ozs./year at Goldstrike for at least a decade.
The Carlin roaster is scheduled to commence commercial production in
mid-2000 and is being built to treat 12M ozs. of carbonaceous and high
carbonate reserves. This should also enable Barrick to maintain
Goldstrike's gold production rate of at least 2.0M ozs. through 2010.
The roaster should increase Goldstrike's processing capacity to 29,500
tpd from the current 17,500 tpd rate, but production is not expected
to climb because ore grades are scheduled to decline.
5,000 ft. decline between Rodeo and Meikle is complete, allowing more
access for underground exploration.
Other news on the Goldstrike property includes the completion of a
5,000 ft. decline linking the Meikle mine to the Rodeo exploration
shaft. Prior to sinking the shaft, Barrick delineated several hundred
thousand ounces of gold, which was enough to justify the US$18M
expense of sinking the shaft. Now Barrick has much better access to
explore not only the Rodeo deposit, but Griffin and possibly other
underground satellite deposits as well, which should result in reserve
and/or resource additions by year-end, in our opinion.
Pascua should add another 800,000 ozs. by 2001.
At Pascua, located in Chile and Argentina, a lot of positive
exploration results has delayed the completion of a feasibility study.
Specifically, the potential of the Pascua project continues to
increase, especially in view of promising exploration results on the
Argentinean side of the border. The Company is particularly
encouraged by early results at Brecha Frontera and Penelope, both on
the Lama property in Argentina. An aggressive drill program resumed
in September in an effort to better understand the potential of the
deposit, and to add reserves and resources at year-end.
Previous operating parameters for Pascua included the commencement of
operations in late 2000 (now likely pushed back to 2001), with
production of 800,000 ozs./yr. at cash operating costs of US$190/oz.
when the mine reaches full capacity. Capital costs were estimated at
about US$825M. The deposit contains 11.2M ozs. of gold reserves
grading 1.8 g/t, an additional 6.0M ozs. of gold resources grading 1.1
g/t. plus 335M ozs. of silver grading 2 ozs./ton. Barrick's primary
objective in 1998 is to expand the reserve base, which includes
in-fill drilling to convert already identified resources into reserves
and to test other targets. Pascua should propel Barrick's annual gold
production to at least 4.0M ozs. in its first full year of operation.
Barrick's hedge gives it an edge.
Barrick realized US$400/oz. on its gold sales in each quarter in 1998,
a premium of US$105/oz. over spot gold prices. This generated US$241M
of additional revenue for Barrick in the Jan-Sep 1998 period,
representing 26.2% of the Company's US$919M of revenues. Looking
forward, Barrick should realize US$400/oz. on its gold sales through
the end of 2000. In total, the Company has 10.4M ozs. of gold hedged,
which we estimate has an average price of about US$370/oz.
Barrick has the strongest balance sheet and generates more cash flow
and net income than any other gold mining company in the world.
Barrick's balance sheet is by far the strongest in the gold mining
industry with US$402M in cash, US$500M in long-term debt that doesn't
have to be repaid for 8-9 years, shareholders' equity of US$3.5B, and
total capitalization of US$4.6B. This yields net debt (long-term debt
minus cash) to net debt plus equity, and net debt to net debt plus
capitalization ratios of just 2.7% and 2.1%, respectively. In
addition to its cash, Barrick has an additional US$1.5B available
under its revolving credit facility (US$1.0B) and unsecured debt
security shelf filing (US$500M). Moreover, the capital expenditures
of US$1.4B planned through 2000-2001 for construction of Pierina
US$310M-most of which has already been spent), Pascua (US$825M), and a
roaster at Carlin (US$330M) should be funded by cash flow from
existing operations.
Larry Strauss (416) 869-3092
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