What $1,400 Gold Means for Barrick Gold

NEW YORK ( TheStreet ) -- Barrick Gold ( ABX) is the big daddy of all gold companies, but maintaining its explosive growth in the face of higher costs for everything from energy to labor will be the challenge going forward.

Barrick is a $52.88 billion company and is the biggest gold miner in the world. While other companies stumbled in the fourth quarter like Newmont Mining ( NEM) and Agnico-Eagle ( AEM), Barrick shinned.

The gold miner earned 95 cents a share and revenue topped $2.95 billion. Gold production rose to 1.7 million ounces at cash costs of $486 an ounce or $326 if you factor in by-product sales.

In 2011, Barrick hopes to produce between 7.6 million and 8 million ounces of gold, up 2.5% from 2010, at cash costs $450-$480 an ounce. In 5 years, Barrick is planning to produce 9 million ounces of gold and the company only needs gold prices to stay above $1,000 for all its projects to see juicy returns.

The headwinds facing Barrick and the gold mining industry at large include higher input costs, soaring oil prices, rising exploration costs and higher labor wages. This combination is hurting the entire gold mining sector and it's quickly becoming a matter of who will weather the storm best.
Barrick Gold CEO Aaron Regent

I sat down with CEO Aaron Regent during the BMO Capital Markets Global Metals and Mining conference last week to get a full rundown on Barrick's strengths and weaknesses.

Your quarter seemed almost perfect. How did you feel about it?

Regent: We were pleased with the quarter. I don't know if it was absolutely perfect, there's always things you'd like to see have improved somewhat but overall it was a very strong quarter. We had record results, as you would have seen, margins were good, we hit out production targets and capped off a very strong year for the company so we were pretty pleased with the quarter.

So what were the small things that you would have liked to have seen improvement on?

Regent: I can't tell you all those things ... look, overall I think the quarter was pretty strong. Operationally, there are some projects that we are moving along and I'd like to see them perhaps move a bit faster. From a safety perspective, the quarter was strong but I think there's still some work we can do on the safety front ... There are still lots of things we are working on.

How are you working on that for 2011 and how much will it cost you?

Regent: Well, for 2011 I think we are set up to have a pretty strong year as well. Our production profile is comparable to 2010. Our cash costs are up slightly but overall I think we've done a good job of controlling our costs and you compare our costs relative to our peers I think we've done pretty well. So you combine those factors and based where the gold price is today, which is through $1,400, last year the average gold price was around $1,228 so gold price is higher, so combined we should have another strong financial year.

In terms of projects, say, not moving as fast as you would like, or some safety issues, how are you rectifying that for 2011?

Regent: We have two big projects which are underway right now -- Pueblo Viejo and Pascua Lama. Puebla Viejo is scheduled to start, we're commissioning the project in the fourth quarter this year and will ramp up next year. So there is a lot of attention being put on that project from a management perspective.

Same story with Pascua Lama. Pascua Lama is another big project we're constructing and that's going to start ramping up in the first half of 2013. Same thing, a lot of attention being put on the project to make sure that we deliver it on schedule.

With things like safety, safety is a core value of the company and I think we look at our performance last year, we had pretty good safety statistics, but unfortunately we still had 6 fatalities in the company, which is totally unacceptable. So really changing our attention and focus on ... investigating the root causes for fatalities and also for near misses and treating near misses as it was a fatality.

Then you mentioned cash costs. I was just speaking with the CEO of Gold Fields (GFI) who said that they're looking at total cash costs and that for the industry they are $1,000, would you agree with that?

Regent: Well, I think if you look at total costs from an accounting perspective, you can probably reverse engineer it in the case of Barrick. We had profits of about $3.3 billion last year on 7.6 million ounces, so if you do the math that's roughly $400 an ounce, so backing that out our total costs would be around $800 to $750 an ounce, that's where we're positioned ... Based on what our cash costs are we are at the bottom of the industry so it's not surprising that our total costs were at the bottom of the industry as well.

How will your cash costs be affected by rising inflation across the board, in particular oil prices?

Regent: We are experiencing inflationary pressures particularly from a labor perspective and that is impacting our numbers. That is probably half of the increase in our cash costs this year. We're up about 10% ... half of it is due to labor.

With respect to oil we are hedged. We, in fact, have an energy division within Barrick which produces about half of our requirements and then we have financial contracts in place for the balance. So with respect to oil, we are effectively hedged, so the increase in prices won't impact us in that respect.

So what is the oil price for you then?

Regent: Our hedges are in place at around $85 overall, on average given the existing production plus the hedges that we have in place.

What are you doing to combat labor costs?

Regent: It's a tough one. It is a struggle and there are limitations as to what you can do in terms of managing those costs. You have union agreements, that you negotiate and you take countries like Argentina, for example, you have official inflation is 20%, so it means we have to negotiate increases like that. Peru, increases are 7%-8%. Australia, competition for labor is very high and so that is putting pressure on wages that you have to pay to make sure you keep people, so it is a challenge. But we look at our company overall and I think we're fortunate in that we're bringing on some lower cost mines.

So if you take our overall portfolio, our cash costs are pretty stable and will be stable for the next number of years if not trending down. That's really a function of product mix and the lower costs ... for the next generation of mines that we're building. So I think we're in pretty good shape in that respect.

If you look at our company over the last three years, our cash costs have been pretty stable so with the rise in the gold price there's been a significant increase in the margins we've been able to generate. That's been reflected in pretty strong bottom line results and we're kind of positioned similarly for the next number of years where our cash costs should be stable ... so if the gold price continues to rise we should continue to see significant margin expansion.

You mentioned South America ...your profits there really getting hurt in terms of inflation, where then are the mines that you hope will then compensate for that?

Regent: South America is one of the regions. Argentina, as I mentioned, Chile as well. There's a lot of activity in Chile right now, mining activity, a lot of power generation being constructed plus there's rebuilding efforts as a result of the earthquake that took place over a year or so ago.

That's kind of the environment ... the mines that are coming on, for example, Cortez Hills, which is a new mine that we just brought on stream last year. That mine was completed on time, on budget and in fact exceeded our targets ... it produced about 1.1 million ounces last year at a cash cost of under $300 an ounce and this year it's going to produce between 1.3-1.4 million ounces at a cash cost of under $300 an ounce.

Are you hoping that that will help offset high costs elsewhere?

Regent: Yeah, so that will help pull down our overall costs. Then Pueblo Viejo is our next big project which we are constructing ... that will ramp up in 2012 and 2013 and again that is a 1.1 million ounce producer. We own 60% of it but the cash costs again are below $300 per ounce.

Then we have another big project -- Pascua Lama project -- in Chile, Argentina and that project has cash cost of around $20-$50 an ounce, so some very low cash costs. So that one mine alone will reduce our overall cash costs by about 10%, so those are the ... quality of mines that are coming through over the next number of years.

In terms of oil prices, even though you are hedged are you looking at any alternative energy, natural gas, or hydro power to help mitigate costs further down the road?

Regent: There's a broader energy strategy that we have which is not only a function of managing your costs but also trying to manage your environmental footprint and look at renewables. So we do have renewables within our portfolio. In fact, at our Veladero mine in Argentina we have a wind turbine at 4,500 meters, which is the highest wind turbine in the world, so we have things like that. We have a wind farm that we are constructing in Chile which will produce about 20 megawatts for our Pascua Lama project so we do have a strategy of trying to use renewables as much as we can to reduce our environmental footprint.

Another example is our project in the Dominican Republic, currently we are using heavy fuel oil fuel, we're looking at a longer term solution of using natural gas which again is more cost effective plus its more environmentally beneficial.

Are you worried that any of those initiatives might ramp up costs in the short term?

Regent: No, I think, in fact, the one in the Dominican Republic, I just referred to, will actually lower our unit costs. HFO fuel is actually more expensive than natural gas but it was kind of a phased approach. The first phase was to get immediate power to the facility and HFO fuel source was the way to do that but we always recognized that it probably wasn't the right long term solution. We're looking at different options like coal or natural gas, but I think that natural gas is probably the route we will elect to go.

But you don't have to build a new pipeline or any new infrastructure for that?

Regent: We have built and are in the process of constructing a transmission line from basically the sea side into the project which is about 130-140 kilometers, so it's a transmission line, but other than that the power plant will be at the coast.

How high does the gold price have to stay for all your gold projects to be viable?

Regent: They're all viable right now. At these prices the rates of return are quite exceptional.

If the gold price falls below $1,200 are you going to be in trouble?

Regent: $1,200? No, I think there's good robustness to the projects we have so even at that price our projects are in pretty good shape.

Is there a cutoff?

Regent: I think with the returns we're targeting, we're targeting double digit rates of return after tax unlevered that's kind of the base line that we look for ... we kind of adjust returns depending on risk factors , countries, obviously if we are in a more risky country you want a high rate of return so we try to adjust it that way. But I think the projects we have right now are all pretty robust. So even if prices drop a little bit I think the economics of them are still intact.

Would $1,000 be a good threshold then for you guys?

Regent: $1,000 some of the returns might get a bit skinny at that price but fortunately we're sitting at $1,400 and I would say that our outlook for the gold price continues to be very positive.

What's your gold price target for 2011?

Regent: I tend not to give forecasts. I'll say directionally. We think the gold price should continue to perform well ... if I saw a survey of about 20 analysts I think the average was for $1,450 - $1,500 range or so that's a data point. You could look at where we are right now in the forward curve and the forward curve again would suggest an average gold price of $1,500 type range.

Long term?

Regent: Long term same thing. Look, I think you have to look at gold as a currency and when you asses the value of gold you have to compare it to the value of other currencies ... so in that respect you have to look at what you think the long term value of the U.S. dollar is going to be, the euro, the yen, sterling, and against that I think that gold has and will continue to perform quite well. So long term the outlook is very good.

What does $1,400 gold mean to you?

Regent: It means we should have a pretty good year financially. Last year we earned $3.3 billion, 19% were returned on equity based on a gold price of about $1,228, that's what we realized, so if the gold price is up roughly $170 higher than that and we're producing between 7.6 - 8 million ounces that obviously means that our earnings and profitability will be up nicely. So it's a good price.

What are the key themes you are noticing at BMO's conference?

Regent: A lot of investors have been asking question about pressures on costs ... so I think ... cost pressures have been evident in operating costs, numbers are up, capex, expectations for capex and pressure on capital budgets for projects are up so I think that's probably some key themes that investors have been asking about.


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-- Written by Alix Steel in New York.

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