(By Mani) The quarterly results of Barrick Gold Corp. (NYSE:ABX) (TSX:ABX) was closely watched by investors in light of the recent change in CEO, and the numbers indeed offered plenty of surprises.
Topping the list were a startling capital cost increase and delay at Pascua Lama, serious challenges at Lumwana and a full-scale retreat from marching to 9 million ounces by 2016.
The company has determined that various pipeline projects do not currently meet its investment hurdles, citing current economic environment and its increased rigor on disciplined capital allocation.
As a result, the company now expects its gold and copper production base to be 8 million plus ounces by 2015 and 600 million plus pounds by 2013, representing a high quality and profitable core from which to expand further.
Barrick's strategy is now rooted in driving financial returns for shareholders, which has meant nearly abandoning its entire development portfolio in favor of focusing on a smaller, more profitable platform. The economic rationale is sound, but leaves Barrick a much different looking company.
In early June, Barrick Gold named Jamie Sokalsky as its president and chief executive, replacing Aaron Regent, due to the lackluster performance of the company's stock.
Under new leadership, Barrick is said to have initiated a capital allocation framework, with Pascua-Lama being the first test of this process. Preliminary analysis suggests that the required investment for this project will likely be 50 to 60 percent higher than the top-end of the previous estimate of $4.7 billion to $5.0 billion.
"We had previously been modeling Pasua Lama at a net asset value NAV of $4.1 billion ($4.01/share), using a 5 percent nominal discount rate. This implied an internal rate of return (IRR) of 10.7 percent. Assuming a higher capex of $7.5 billion to $8.0 billion, our estimated NAV declines 67% to $1.35/share, with an implied IRR of 4.2 percent," CIBC Equities analyst Alec Kodatsky said in a client note.
The company is also embarking on an ongoing portfolio rationalization for existing operations as well as projects, in an effort to derive maximum returns from its investments.
The first casualties of this process identified as not meeting internal hurdle rates are the Donlin Creek project in Alaska, a 50-50 JV with NovaGold (TSX:NG), and the Cerro Casale copper-gold project in Chile, a 75/25 JV with Kinross Gold (NYSE:KGC). Barrick has conveyed that it does not plan to make a construction decision on either of these projects under current market conditions.
"While Barrick plans to continue advancing work on both projects, including permitting for Donlin Creek and exploration at Cerro Casale, we do not believe that the company will make a go-ahead decision," Kodatsky said.
Meanwhile, Barrick is expected to provide an update on the review of existing operations in the third quarter of 2012, and better granularity with respect to the future production profile would be delivered at that time.
Barrick Gold's second-quarter net earnings fell to $750 million or 75 cents per share from $1.16 billion or $1.16 per share a year-ago. Adjusted net earnings for the quarter were $784 million or 78 cents per share, missing consensus estimate of 95 cents per share for the quarter. Revenues for the quarter declined 4 percent to $3.28 billion, which also came in below Street view of $3.50 billion.
Production for the quarter fell 12 percent to 1.7 million ounces, and cash costs dropped 38 percent to $613 an ounce. Annual gold production guidance was maintained at between 7.3 million ounces and 7.8 million ounces.
"We think Barrick has listened to most gold investors in formulating its new strategy, but expect the market will need time to adjust to the idea of a lower growth company and await proof that superior returns can result from this sea change in business direction," the analyst added.