St. LOUIS (ResourceInvestor.com) -- Rising costs, lower production and fewer sales led Barrick Gold [NYSE:ABX; TSX:ABX] to report a drop in third-quarter profit, with earnings falling 15% from the same quarter last year - and totalling 13% less than rival Newmont Mining Corp.'s [NYSE:NEM] third-quarter profit this year.
Toronto-based Barrick brought in $345 million, or 39 cents per share, in the quarter ended 30 September, compared to $405 million, or 46 cents per share, in the three months to September last year. The world's top miner cited higher cash costs due to mining lower grades of gold as the main reason for the drop in profits.
No. 2 gold miner Newmont, however, reported profit of $397 million, or 88 cents a share, in the third quarter this year on from a joint venture settlement and a tax credit. But despite fewer year-on-year sales, Barrick still outsold Newmont 30% in gold sales for the quarter.
Barrick sold 1.886 million ounces of gold in the third quarter at an average realized price of $681, down from 2.169 million ounces last year at an average realized price of $564. The miner produced 1.931 million ounces of gold at a cash cost of $370/oz in the quarter, compared to 2.162 million ounces at a cash cost of $281/oz year-on-year.
But Barrick President and CEO Greg Wilkins said the recent record highs in the gold price and the closing of the company's hedge book in August served to offset the rising cash costs and diminishing production.
"Our operations are delivering all of their production into the spot market just as gold prices have broken 27-year highs," he said in a press release. "Despite anticipated higher costs this quarter, Barrick continues to deliver excellent leverage to the strong gold price and this is being reflected in our share price performance."
Rising Costs, Less Production
Increasing cash costs was a common theme among third quarter reports this year, as rising energy and commodities costs affected operations sector-wide. Barrick attributed its increased costs to waste stripping and mine sequencing at several of its properties.
"Due to mine sequencing this year at a number of operations, average processed grades are about 10% below reserve grade year-to-date, representing one of the major factors in the increase in 2007 cash costs over 2006," the miner said in its report. "Within the next few years, the company expects a gradual trend back towards reserve grade to help mitigate other cash cost pressures."
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Barrick's Australia-Pacific units led the rising costs, producing 558,000 ounces of gold at a cost of $471/oz. "The region was adversely impacted by the commissioning of a free milling circuit at Kanowna, power restrictions at Porgera and processing of low grade stockpiles at Granny Smith as conversion to underground mining continues," the company said. In the same time period last year, the area produced 570,000 ounces at $364/oz.
Its African operations produced 146,000 ounces at $364/oz, compared to 256,000 ounces at $254/oz last year, partially due to heavy rainfall at its North Mara mine in Tanzania. Its South American units produced 429,000 ounces at $219, compared to 566,000 ounces at $129 last year, as the company continues its work to access higher grade ore at Veladero.
Its North America operations actually increased output year on year, producing 787,000 ounces at a cost of $381/oz, compared to 765,000 at $345/oz, with operations ramping up at Ruby Hill, Goldstrike and the Cortez JV with Kennecott Explorations Ltd.
Copper Output
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Barrick produced 99 million pounds of copper in the September quarter this year, up from 95 million pounds last year. Cash costs totalled 91 cents/lb, compared to 80 cents/lb last year. The company sold 111 million pounds of copper this year, 11% more than the 99 million it sold in the same time period in 2006. Spot prices rose to $3.50/lb from $3.48/lb.
Higher production rates at Barrick's Australia-Pacific units led to the year-on-year increase in output, with the region producing 19 million pounds of copper this year, compared to 15 million in Q3 of 2006. The region also lowered cash costs, dropping from $1.55/lb to $1.46/lb.
Arizona Star Acquisition
Barrick announced this week that it will bid for Arizona Star Resource Corp. [AMEX:AZS; TSX-V:AZS], which holds 51% stake in the one of the world's largest undeveloped gold and copper projects in Latin America. The Cerro Casale gold-copper deposit in Chile holds proven and probable reserves of 1.035 billion tonnes of ore containing 22.9 million ounces of gold and 5.8 billion pounds of copper. Kinross Gold [NYSE:KGC; TSX:K] holds the remaining 49% stake.
Vincent Borg, senior vice president of corporate communications for Barrick, told Resource Investor it is premature to predict when development will begin and how the project will impact Barrick's earnings, saying that there is "still more than a couple years" until production and that the firm is first focusing on making the offer successful.
Looking Ahead
Wilkins noted in a conference call today that despite the "challenging environment," the company's third quarter results were in line with expectations. Barrick said it also expects fourth-quarter production to be within the company's target for 2007.
"Production in the final quarter of the year is expected to be higher than in Q3 with access to higher grade ore at Veladero. The company currently expects full year production of approximately 8.1 million ounces of gold and 400 million pounds of copper at total cash costs of about $350 per ounce for gold and about $0.90 per pound for copper, in line with original 2007 guidance," Barrick said, adding that its outlook is subject to the possible effects of labour disruptions at its Bulyanhulu mine in Africa and industry-wide cost pressures.
Barrick led global gold miners in share price gains in the third quarter, adding 38% to its price. Kinross and Goldcorp [NYSE:GG; TSX:G] shares gained 28% and 26% in Q3, respectively, while Newmont increased 12.1%. The streetTRACKS gold ETF [NYSE:GLD] gained 13.5%. Spot gold is up 28.17% in the past year.
With a market cap of $37.87 billion, Barrick has traded between a 52-week high of $44.80 and a low of $26.94 on the New York Stock Exchange. It is currently trading about 1% down, losing 47 cents to $43.66. Newmont is trading down 77 cents at $50.13 today, with a market cap of $22.64 billion.
In the third quarter this year, Barrick maintained the industry's strongest credit rating, with a cash balance of $2.7 billion and net debt of $500 million.
