Barrick Gold Corp reported a 35 percent decline in quarterly profit on Thursday and warned capital costs on one of its biggest growth projects would come in much higher than forecast, driving down shares of the world's largest gold miner.
The company blamed the higher costs for building its massive Pascua-Lama gold mine, straddling the border between Chile and Argentina, on a decision to use an in-house team to manage construction rather than hiring an outside contractor.
Intended to save money, the move backfired, the company said on Thursday, an admission that may shed some light on last month's sudden dismissal of Aaron Regent as CEO.
The original decision to build Pascua in-house was made some five years ago, before Regent joined Barrick. The company had linked his ouster to the lackluster performance of the stock.
"Certainly it is a convenient excuse to say, 'we didn't know about this,' and imply that Aaron had his eye off the ball," said Dahlman Rose mining analyst Adam Graf. "I guess one could say when you're the CEO, in theory, the buck stops with you and ultimately you are responsible."
The price of gold has more than quintupled in the last decade, from about $300 an ounce in 2002 to about $1,600, a rise that has pushed top gold miners to seek growth at any cost.
But labor and material costs have skyrocketed along with metal prices, and that has weighed on the share prices of gold miners, most of whom have lost value this year even though spot gold is still well above historic levels.
Before Thursday's news, Barrick's Toronto-listed shares had dropped some 26 percent in 2012. The stock closed down another 4.2 percent at C$33.04 on Thursday.
Barrick's second quarter highlighted the drag costs are having on performance. Adjusted profit missed analyst expectations, with higher cash costs and lower sales volumes outweighing a stronger realized gold price.
The cost of building Pascua-Lama will likely be 50 to 60 percent higher than the top end of Barrick's earlier estimate of $4.7 billion to $5 billion, the company said. That will boost the estimated price tag to some $7.5 billion to $8 billion, though a full review is not yet complete.
Barrick also delayed initial production at the mine to 2014 from a previous target date in 2013.
"Frankly, I was shocked at the magnitude of both the increase in (capital costs) and the delay - shocked," said Graf.
Chief Executive Jamie Sokalsky, who transitioned from CFO to the top job after Regent's departure in June, said in a conference call with investors that his main focus was on delivering Pascua-Lama within the new budget and time frame.
Pascua-Lama is located high in the Andes, where weather is unpredictable. As a bi-national project, the mine presents special political challenges as well.
"In retrospect, the challenges that come with a project of this size and unique complexity were greater than anticipated and proved to be beyond the capabilities of the Barrick in-house construction team," Sokalsky said.
While Sokalsky promised to contain costs going forward, some analysts worried that inflation, particularly for labor costs, would lead to more overruns. In Argentina, for example, Barrick said hourly labor rates have risen 54 percent this year.
"As long as mining companies continue to pay whatever consultants ask and whatever employees ask of them, then inflation will continue," said George Topping, a mining analyst with Stifel Nicolaus. "You need to take a stand and say enough is enough."
PROJECTS ON ICE
With Sokalsky at the helm, Barrick has vowed to be a more disciplined company. The miner cut its long-term production goal to 8 million ounces in 2015 and deferred two major mine projects - Donlin Gold in Alaska and Cerro Casale in Chile.
"When you go to the market and you say, 'we're going to put (a project) on ice indefinitely', you send two messages. One, to all your equipment suppliers and things like that, bring down your prices. Number two ... let's concentrate on fewer projects and do them properly," said Colin Becker, mining partner with PricewaterhouseCoopers in Santiago.
While Barrick maintained its 2012 gold production outlook of some 7.3 million to 7.8 million ounces, it revised down its planned 2012 copper output to 460 million to 500 million pounds, mainly due to lower production at its Lumwana mine in Zambia.
Barrick said it is taking steps to improve operations at the copper project, acquired in its much-criticized C$7.3 billion ($7.16 billion) takeover of Equinox Minerals last year.
The company lowered its longer-term copper output target to more than 600 million pounds a year by 2013.
The news was better out of the Dominican Republic, where Barrick has nearly completed the construction of its Pueblo Viejo mine and expects to pour gold extracted from the mine next month with commercial production in the fourth quarter.
Net income in the second quarter fell to $750 million, or 75 cents a share, from $1.16 billion, or $1.16 a share, a year earlier. Excluding one-time items, earnings dropped to 78 cents a share from $1.12.
That was below analyst estimates of 95 cents a share, according to Thomson Reuters I/B/E/S, as revenues dropped 4 percent to $3.28 billion on lower sales and gold production.
Total cash costs per ounce were higher in the quarter, rising to $613 from $445 in the year-ago period on higher costs at Barrick's Australian projects and from its African Barrick Gold PLC subsidiary.
Barrick produced 1.74 million ounces of gold in the quarter, down from 1.98 million ounces in the second quarter of 2011. Quarterly gold sales volumes fell some 12 percent, while the average realized gold price rose 7 percent to $1,609 an ounce. ($1 = 1.0195 Canadian dollars)
© 2015 Thomson/Reuters. All rights reserved.