UPDATE 2-African Barrick disappoints as output to shrink again

Wed Feb 13, 2013 7:12am EST

* Operation review to focus on cutting operating costs, improving returns

* 2012 EBITDA down 39 pct vs 2011, misses expectations

* Guides that 2013 production will come in lower, costs steady

* Shares fall 8.7 pct

By Sarah Young

LONDON, Feb 13 (Reuters) - Miner African Barrick Gold forecast production would shrink for a fifth straight year and said it would focus on cutting soaring costs, after talks over a possible takeover of the firm collapsed in January.

The Tanzania-focused FTSE 250 company forecast on Wednesday that gold output could fall as much as 14 percent this year, sending its shares down over 9 percent, after 2012 earnings missed market expectations.

"Another disappointing result from a serial disappointer," Numis analyst Cailey Barker said.

Detailing the first findings of an operational review, initiated in the wake of parent Barrick Gold's failed attempt to sell the company, African Barrick said it plans to cut back on spending. It will investigate ways of reducing power and other operational costs as it seeks to work its assets harder to boost cash generation through this year.

The miner's 2012 core earnings, or earnings before interest, tax, depreciation and amortisation (EBITDA), came in at $331 million, down almost 40 percent and below forecasts.

The crash was a result of lower production - hit by a strike at its flagship Bulyanhulu mine and illegal mining at North Mara - but also cash costs, which soared 37 percent from their 2011 level to $949 per ounce.

While the battle against inflation is a being fought across the mining industry, African Barrick's problems exemplify the particular difficulties of the gold sector where poor community relations and power woes have added to costs. Global gold production has remained flat despite the price of gold rocketing 500 percent since 2000.

"During 2012 the increases in our operating expenses and in the level of capital we invested in our assets meant that the business consumed capital which is not sustainable over the longer term," Chief Executive Greg Hawkins said.

African Barrick's operational review, which will run for six months until mid-2013, will not help drive a big cost reduction this year, however, the company said, guiding that costs per ounce sold would be in the range of $925 and $975 and laying on the pressure for a stronger control of costs in 2014.

In addition to planning to axe $50 million from the 2012 sustaining capital expenditure bill, Hawkins said that the company would seek to cut costs in labour, energy and consumable goods at its three main mines in Tanzania.

But some analysts were sceptical about the company's ability to deliver on its cost cuts. Liberum called its cost guidance "ambitious" given the lower production base.

SERIAL DISAPPOINTER

Canada's Barrick Gold, which owns 74 percent of African Barrick, ended talks over a possible $3 billion deal to sell its stake in African Barrick to China National Gold this month and analysts said that a downgrade to 2012 production during discussions could have hindered negotiations.

Since being spun out of Barrick in 2010, African Barrick has been hit by power woes and fuel thefts among other difficulties and downgraded production a number of times, and its stock has frequently traded well below its 575 pence listing price.

Shares in African Barrick were trading at 311.4 pence in morning trading, a drop of around 30 percent since the beginning of the year, lagging the European mining index which is around 1.2 percent lower and far outpacing a 1.7 percent drop in the U.S. dollar gold price.

Hawkins, who has led African Barrick since its listing, shrugged off questions about his future, at a time when some high profile heads have rolled in the mining industry with the departures of the chief executives of Anglo American and Rio Tinto. He denied there were any management changes in the pipeline.

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