ABX Preview: Keeping Costs Under Control

Barrick Gold's (ABX - commentary - Trade Now) earnings are set to post a turnaround this year. The consensus is for earnings of 38 cents per share on $1.9 billion in revenue for the second quarter and $1.75 in EPS on revenue of $8.0 billion for all of 2009, which would be well above year-earlier figures. (Although Canadian, the company reports in U.S. dollars.)

The good news is that costs, notably for energy, have stabilized year over year after going up sharply in 2007 and 2008. They started at $280 an ounce in 2006, and rose to over $440 an ounce in 2008, before "flattening" to only about $450 an ounce in 2009. This means that our gold price estimates of $900 an ounce in 2009, and $1,000 an ounce in 2010 allow for earnings gains.

But Barrick has not been skimping on (controllable) exploration and development expense. Reserves grew from almost 90 million ounces in 2005 to almost 140 million in 2008.

Gold production will probably hit a low of 7.5 million ounces in 2009, as new production from the Buzwagi mine in Tanzania won't quite make up for declines from more mature operations. But output should rebound to nearly 8.0 million ounces in 2010, when new production comes on stream from the Cortez Hills mine in Nevada. This will be followed by the Pueblo Viejo mine in Dominican Republic in 2011 and the Pascua-Lama mine on the Argentine-Chile border in 2013, which should contribute perhaps 750,0000 ounces in the first year based on a 25-year initial mine life. A joint venture with NovaGold Resources (NG - commentary - Trade Now) in Donlan Creek, Alaska, of about the same size as Pascua Lama should also be producing by then, bringing the annual total to 10 million ounces or more.

Barrick and Newmont Mining (NEM - commentary - Trade Now) are the two largest gold companies in North America and the world and are of roughly equal size. Of the two, Newmont is more established and senior, but Barrick is more diversified. In North America, Barrick has a good mix of resources north and south of the forty-ninth parallel, while Newmont's is predominantly lower 48 American. In South America, Newmont's operations are mostly in Peru, while Barrick has diversified into more stable areas such as Argentina and Chile.

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Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Au is the author of A Modern Approach to Graham and Dodd Investing, a book for times of economic uncertainty. Au appreciates your feedback; click here to send him an email.