Barrick shows progress on costs, cuts spending

TORONTO Wed Apr 24, 2013 10:01am EDT

TORONTO (Reuters) - Barrick Gold Corp (ABX.TO), making a painful adjustment to a sustained slump in bullion prices, said on Wednesday it was scaling back capital spending and reported progress in controlling costs, sending its shares higher.

The world's No. 1 gold producer also warned that it could suspend development at its largest new project, Pascua-Lama, after a Chilean court halted some work on environmental grounds. The project straddles the border of Chile and Argentina, high in the Andes.

The Toronto-based miner disclosed that possibility as it reported an 18 percent drop in first-quarter profit as gold prices slumped and sales volumes declined. Still, the results beat Wall Street estimates.

"At Pascua-Lama, we are working to address the environmental and other regulatory requirements on the Chilean side of the project," said Chief Executive Jamie Sokalsky in a statement.

"Concurrently, we are taking a hard look at evaluating all alternatives in light of the uncertainties associated with the suspension of construction in Chile."

Barrick's shares rose 4.39 percent to C$18.80 shortly after market open on the Toronto Stock Exchange. The stock has lost more than 48 percent of its value so far this year.

While the improvement on costs was welcome, investors may want to see more evidence Barrick is on the mend before jumping back into the stock.

"The market needs to better calibrate Barrick's progress at Pascua and how management will navigate capital and operating decisions at lower than anticipated gold prices," said Sterne Agee analyst Michael Dudas in a note to clients.

A local court suspended work on the Chilean side of Pascua-Lama to allow it to weigh community claims that the development is destroying glaciers and harming the water supply.

The company is now evaluating options, including a plan to develop a smaller pit on the Argentine side for initial production. If an alternative development is not feasible and uncertainties remain over the legal and regulatory issues, Barrick said it could suspend the project entirely.

The company on Wednesday announced no changes to its current budget or timeline for the $8.5 billion development project but warned a significant change to the plan could have an impact on costs and the production schedule.

Barrick has so far poured $4.8 billion into Pascua-Lama, which is expected to produce some 800,000 to 850,000 ounces a year in its first five years of full production.

The company is hungry to develop major new mines like Pascua-Lama to replace depleting assets at a time when gold miners have little choice but to tackle deposits in remote and inhospitable areas, such as the high-altitude Andes.

COST CONTROLS

Difficulties in building Pascua Lama have come at a time when Barrick and other gold miners are under heavy pressure to cut costs. Margins have narrowed in recent quarters as gold prices dropped and operating and capital costs rose.

To that end, the Toronto-based company reduced its full-year outlook for all-in sustaining costs to $950-$1,050 an ounce, down from a previous forecast of at $1,000 to $1,100. The forecast for the total cash costs, a more traditional measure, remained $600-$660 an ounce in 2013.

All-in sustaining costs in the first quarter were $919 an ounce, while total cash costs rose slightly to $561 an ounce, up from $540 an ounce.

Along the same lines, Barrick reduced its capital spending outlook for 2013 by about 10 percent to $5.2 billion to $5.7 billion, down from its previous forecast of $5.7 billion to $6.3 billion.

Barrick last year cut some $4 billion in planned capital spending and recast its long-term goals to focus on a higher-quality, more profitable production base of some 8 million ounces of gold a year by 2016.

The miner's net profit fell to $847 million, or 85 cents a share, in the first quarter from $1.04 billion, or $1.04, a year earlier.

On an adjusted basis, it earned $923 million, or 92 cents a share, ahead of the average analyst estimate of 88 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 6 percent to $3.44 billion as gold production dropped about 4 percent to 1.8 million ounces in the quarter.

Spot gold slipped into a bear market earlier this month, plunging to a two-year low below $1,400 per ounce for the first time in two years. Barrick's average realized gold price in the first quarter was $1,629 per ounce.

(Additional reporting by Euan Rocha in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty and Chris Reese)

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