MINING FINANCE / INVESTMENT

The toughness of being Barrick

Pascua-Lama and Donlin Creek will cost $7.4bn to build, but what about Barrick's stock price performance?

Author: Barry Sergeant
Posted: Friday , 08 May 2009

JOHANNESBURG  - 

Barrick, the world's biggest gold miner, by value and production, this week announced the go-ahead for the $2.9bn Pascua-Lama gold-silver-copper mine that straddles high country in Argentina and Chile. In April, fresh information on mining Alaska's Donlin Creek was released, including a capital cost of $4.5bn. 

Barrick has some funding relief for the latter, given its status as a 50:50 joint venture with Novagold. This gives Barrick potential exposure of $4.1bn of capital expenditure for Pascua-Lama and Donlin Creek. 

There is no go-ahead as yet for Donlin Creek, nor for some of Barrick's other huge potential new gold mines such as 37.5%-held Reko Diq (Pakistan) and 51%-held Cerro Casale (Chile). The capital required for new mines is, of course spread out; at Pascua-Lama, for the next three years or so. 

BIG GOLD, BIG MONEY
			Output, Koz	Cash	Capital
	Reserves	Life	per year	costs	cost
Donlin Creek	29.3m oz	21 years	1250	$ 394/oz	$ 4.48bn
Pascua-Lama	17.8m oz*	25 years+	650**	$ 225/oz	$ 2.9bn
* Plus 718m oz silver and 650m pounds of copper
** Plus silver and copper

Big mines need deep and wide pockets. On March 31 2009, Barrick maintained the gold industry's highest credit rating, a cash balance of $2.1bn, $1.5bn in undrawn credit, and net debt of $2.9bn, with scheduled repayments of less than $300m over the next four years. 

During the first quarter of 2009 Barrick raised $750m in debt securities; together with the $1.25bn of debt securities issued in the third quarter of 2008, Barrick has completed its $2.0bn debt shelf prospectus. Barrick rates itself as on track with full year 2009 production guidance of 7.2m to 7.6m ounces of gold at net cash costs of $360-$385 per ounce or total cash costs of $450-$475 per ounce, with higher production expected in subsequent quarters and lower costs anticipated in the second half of the year.

Barrick also has new gold coming in. The Buzwagi (Tanzania) project has just poured first gold. As Barrick puts it, this medium-sized mine was "on schedule and in line with its pre-production capital budget of approximately $400m, making it the sixth Barrick project to be constructed on time in the last six years". The 100%-held Cortez Hills (Nevada) and 60%-held Pueblo Viejo (Dominican Republic) also remain on schedule and in line with pre-production capital budgets. 

Barrick's fourth quarter 2008 results announcement guided lower than previously for 2009, at 7.2m to 7.6m ounces; this has latterly been maintained, as mentioned. The main reason is lower expected grades and output at Barrick's flagship Goldstrike operations in Nevada. 

Barrick currently ranks among the world's top 10 miners of all kinds, measured by market value. Its current market capitalisation, at $28.6bn, has grown strongly from 12 month lows of $15.1bn, but sits well below its $45.2bn 12-month high. Recently, specialist mining analysts anticipated that Barrick would generate free cash flow of $1.1bn in 2010, nearly double the $0.6bn this year. Next year's figure will slim down, given the go-ahead for Pascua-Lama.

Barrick continues to be handicapped by a hedge book that, at a $1 000/oz gold price, has a mark-to-market negative value of at least $5bn and changes by up to $1bn for every $100/oz move in the gold price. While the vast majority of these losses remain notional, as such, Barrick's stock price, as measured in US dollars, has moved lower over the past year, in line with the majority of the members of the global Tier I gold group.

Seen over ten years, however, Barrick's stock price has not done much, showing a gain of some 62% to current levels around $33 a share. Over the same period, Newmont's stock price has gained some 90%, AngloGold Ashanti, some 54%; Kinross, which largely reinvented itself around five years ago, has gained 158%. Goldcorp, a relatively new kid on the block, but sporting a current market value of $23bn, has registered a gain of 1 021% in its stock price, ranking it as a "ten bagger" over the period. The toughness of being a big gold stock that's been around for more than a few generations is clearly evident. 

While investors may drool over the prospects of cash costs of $20 to $50 per ounce of gold at Pascua-Lama during the first five years of mining, there is ample evidence that the next round of potential new kids on the block could be more enticing. This may be seen in the spectacular stock price growth of a number of potential gold targets in the past while; samples with market values of more than $1bn include Iamgold, JSC Polymetal, Centerra, Osisko, Red Back, Eldorado, not to mention numerous smaller potential targets such as Greystar.

Global tier I gold stocks
	Stock	From	From	Value
	price	high*	low*	$ bn
Yamana	$ 8.51	-49.9%	157.1%	6.237
Goldcorp	$ 31.51	-40.2%	127.7%	23.007
Polyus	$ 41.00	-48.8%	192.9%	7.816
Harmony	ZAR 83.80	-36.9%	60.8%	4.235
Lihir	AUD 3.00	-17.6%	97.4%	5.372
AngloGold Ashanti	$ 35.30	-9.8%	164.0%	12.502
Zijin	CNY 8.74	-24.3%	132.4%	13.499
Barrick	$ 32.78	-37.5%	89.8%	28.624
Newcrest	AUD 30.10	-19.0%	81.9%	11.009
Gold Fields	ZAR 98.64	-21.1%	85.2%	8.245
Kinross	$ 16.30	-35.7%	138.0%	11.319
Newmont	$ 42.37	-21.2%	100.1%	20.294
Buenaventura	$ 24.37	-31.7%	170.8%	6.699
Freeport-McMoRan	$ 50.85	-60.0%	223.9%	20.933
[[SPDR Gold Shares ETF]]	$ 89.24	-9.9%	35.2%	32.242
Tier I averages/total		-32.4%	130.1%	179.792
Weighted averages		-37.2%	123.3%
TIER II	Stock	From	From	Value
	price	high*	low*	$ bn
Zhongjin	CNY 63.59	-10.8%	178.9%	3.350
Iamgold	$ 9.43	-0.8%	324.8%	3.443
Simmer & Jack	ZAR 2.89	-34.6%	96.6%	0.381
High River	CAD 0.14	-93.2%	250.0%	0.071
Eldorado	$ 8.32	-14.2%	249.6%	3.086
Agnico-Eagle	$ 48.37	-40.1%	131.8%	7.527
Centerra	CAD 6.59	-37.7%	632.2%	1.228
Randgold Resources	$ 55.03	-3.3%	147.0%	4.219
Shandong Gold	CNY 39.25	-9.8%	197.3%	4.094
Peter Hambro	GBP 6.26	-57.0%	301.0%	1.610
Hecla Mining	$ 3.12	-70.8%	215.2%	0.680
Golden Star	$ 1.58	-54.6%	295.1%	0.321
Franco-Nevada	CAD 25.53	-16.9%	119.7%	2.206
Fresnillo	GBP 5.73	-2.1%	516.1%	6.182
JSC Polymetal	$ 6.80	-26.1%	580.0%	2.142
Red Back	CAD 9.42	-2.6%	229.4%	1.858
New Gold	CAD 2.23	-77.1%	137.2%	0.409
Northgate	CAD 1.96	-39.7%	192.5%	0.432
Tier II averages/total		-32.9%	266.4%	43.239
Weighted averages		-26.7%	220.0%
* 12-month

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