In the three months to September, Barrick Gold (NYSE:ABX) produced 1.95 million ounces of gold at a cash cost of $466 an ounce. This compares to the same period last year of 1.93 million ounces of production at a cash cost of $365. This translates into a 28% quarter on quarter increase in cash margins, to $406 per ounce.

But that was last quarter. During and since, the landscape has changed massively. Throughout October, Barrick’s share price plunged as the full force of the credit crisis took hold. As we have discussed elsewhere, the gold price fell as deleveraging forced asset sales across the board.



So the strong rise in cash margins achieved last quarter are unlikely to flow through into the fourth quarter with a gold price (so far) hovering around the $730 level. As we reported in our last review, Barrick commented that for the gold industry to break-even, it needed a gold price of around $700-800 an ounce. This takes into production cash costs, admin and exploration costs to replace depleted assets.

If the gold price falls much further, the supply side will be in real trouble. Herein lies our continued bullishness on gold. At these prices, there is no real incentive to expand production beyond what has already been planned, or explore for new deposits. Gold’s demand and supply fundamentals are already out of whack.

Central bank gold sales have been a prevalent supply side force for many years. This additional, non-mine supply has satisfied the rising tide of investment demand as investors of all types look to protect themselves from the declining value of fiat currencies. The second central bank agreement on gold sales (which limited signatories to sales of 500 tonnes per year) expires in September 2009. With some Members looking like not selling their entitlement within the current agreement, we doubt that a commitment to sales will be renewed next year.

In the meantime, Barrick must deal with poor prices and a difficult cost outlook. The $466 per ounce cash cost in the third quarter was due to a greater amount of production coming from the higher cost operations of the US and Australia, and less from South America. So we anticipate costs will decline as production contributions normalize and lower energy prices flow through.

For the full year to December, Barrick has maintained production guidance of 7.6-7.8 million ounces of gold at an expected cash cost of $425-$445 per ounce. But the cash flow figure will obviously vary depending on how the gold price performs in the final two months of the year.

While operating cash flows for the year so far, at $1.77 billion, are up strongly on 2007’s $1.06 billion, the final quarter could narrow the gap of year on year improvement.

With our bullish view on gold firmly in mind, there are some positive signs for Barrick heading into 2009. The company’s three most advanced projects are expected to produce about 1.9 million ounces of annual production (average over five years) at a lower cash cost than is currently being achieved.

The next major project set to come online is Buzwagi in Tanzania. Construction is 80% complete and first gold is expected in mid-2009. The Cortez Hills project in Nevada remains on track with first production anticipated in early 2010. Looking further out, the Pueblo Viejo project is still some years away from delivering its 500,000 plus ounces of annual gold production.

But with the gold price stuck in break-even territory, the market will be firmly focused on movements in the yellow metal, rather than being too pre-occupied with operational developments (notwithstanding any disasters!).

From a charting perspective, it appears that Barrick has some work to do before an upward trend is likely to re-emerge. Since touching a low of $17.27 in October, the stock has rallied by as much as 50 percent, reaching a high of $26.21. Although this is an encouraging sign, the rally is already starting to wane, reigniting memories of the failed September rally.

Given the extent of the gains already achieved and the proximity of resistance in the region of $27.50, we believe that prices are likely to stall and consolidate in the near-term. In the wake of failed rallies in both July and September, we cannot rule out further falls while the stock remains below the $27.50 barrier.

In our opinion, an extended period of consolidation and base building is required ahead of the emergence of a sustainable revival of upward momentum. But if the gold price makes a rapid and sustained move to the upside, as it has a habit of doing, Barrick’s share price will follow suit.

Barrick will remain held in the Fat Prophets Portfolio.

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