* Q2 2012 $0.75 v Q2 2011 $1.16
* Pascua-Lama start-up delayed to 2014, cap costs up 50-60
* Construction management blamed for delay, cost overrun
* Shares close down 4.2 pct at C$33.04 on TSX
By Julie Gordon
TORONTO, July 26 Barrick Gold Corp
reported a 35 percent decline in quarterly profit on Thursday
and warned capital costs on one of its biggest growth projects
would come in much higher than forecast, driving down shares of
the world's largest gold miner.
The company blamed the higher costs for building its massive
Pascua-Lama gold mine, straddling the border between Chile and
Argentina, on a decision to use an in-house team to manage
construction rather than hiring an outside contractor.
Intended to save money, the move backfired, the company said
on Thursday, an admission that may shed some light on last
month's sudden dismissal of Aaron Regent as CEO.
The original decision to build Pascua in-house was made some
five years ago, before Regent joined Barrick. The company had
linked his ouster to the lackluster performance of the stock.
"Certainly it is a convenient excuse to say, 'we didn't
know about this,' and imply that Aaron had his eye off the
ball," said Dahlman Rose mining analyst Adam Graf. "I guess one
could say when you're the CEO, in theory, the buck stops with
you and ultimately you are responsible."
The price of gold has more than quintupled in the last
decade, from about $300 an ounce in 2002 to about $1,600, a rise
that has pushed top gold miners to seek growth at any cost.
But labor and material costs have skyrocketed along with
metal prices, and that has weighed on the share prices of gold
miners, most of whom have lost value this year even though spot
gold is still well above historic levels.
Before Thursday's news, Barrick's Toronto-listed shares had
dropped some 26 percent in 2012. The stock closed down another
4.2 percent at C$33.04 on Thursday.
Barrick's second quarter highlighted the drag costs are
having on performance. Adjusted profit missed analyst
expectations, with higher cash costs and lower sales volumes
outweighing a stronger realized gold price.
The cost of building Pascua-Lama will likely be 50 to 60
percent higher than the top end of Barrick's earlier estimate of
$4.7 billion to $5 billion, the company said. That will boost
the estimated price tag to some $7.5 billion to $8 billion,
though a full review is not yet complete.
Barrick also delayed initial production at the mine to 2014
from a previous target date in 2013.
"Frankly, I was shocked at the magnitude of both the
increase in (capital costs) and the delay - shocked," said Graf.
Chief Executive Jamie Sokalsky, who transitioned from CFO
to the top job after Regent's departure in June, said in a
conference call with investors that his main focus was on
delivering Pascua-Lama within the new budget and time frame.
Pascua-Lama is located high in the Andes, where weather is
unpredictable. As a bi-national project, the mine presents
special political challenges as well.
"In retrospect, the challenges that come with a project of
this size and unique complexity were greater than anticipated
and proved to be beyond the capabilities of the Barrick in-house
construction team," Sokalsky said.
While Sokalsky promised to contain costs going forward, some
analysts worried that inflation, particularly for labor costs,
would lead to more overruns. In Argentina, for example, Barrick
said hourly labor rates have risen 54 percent this year.
"As long as mining companies continue to pay whatever
consultants ask and whatever employees ask of them, then
inflation will continue," said George Topping, a mining analyst
with Stifel Nicolaus. "You need to take a stand and say enough
PROJECTS ON ICE
With Sokalsky at the helm, Barrick has vowed to be a more
disciplined company. The miner cut its long-term production goal
to 8 million ounces in 2015 and deferred two major mine projects
- Donlin Gold in Alaska and Cerro Casale in Chile.
"When you go to the market and you say, 'we're going to put
(a project) on ice indefinitely', you send two messages. One, to
all your equipment suppliers and things like that, bring down
your prices. Number two ... let's concentrate on fewer projects
and do them properly," said Colin Becker, mining partner with
PricewaterhouseCoopers in Santiago.
While Barrick maintained its 2012 gold production outlook of
some 7.3 million to 7.8 million ounces, it revised down its
planned 2012 copper output to 460 million to 500 million pounds,
mainly due to lower production at its Lumwana mine in Zambia.
Barrick said it is taking steps to improve operations at the
copper project, acquired in its much-criticized C$7.3 billion
($7.16 billion) takeover of Equinox Minerals last year.
The company lowered its longer-term copper output target to
more than 600 million pounds a year by 2013.
The news was better out of the Dominican Republic, where
Barrick has nearly completed the construction of its Pueblo
Viejo mine and expects to pour gold extracted from the mine next
month with commercial production in the fourth quarter.
Net income in the second quarter fell to $750 million, or 75
cents a share, from $1.16 billion, or $1.16 a share, a year
earlier. Excluding one-time items, earnings dropped to 78 cents
a share from $1.12.
That was below analyst estimates of 95 cents a share,
according to Thomson Reuters I/B/E/S, as revenues dropped 4
percent to $3.28 billion on lower sales and gold production.
Total cash costs per ounce were higher in the quarter,
rising to $613 from $445 in the year-ago period on higher costs
at Barrick's Australian projects and from its African Barrick
Gold PLC subsidiary.
Barrick produced 1.74 million ounces of gold in the quarter,
down from 1.98 million ounces in the second quarter of 2011.
Quarterly gold sales volumes fell some 12 percent, while the
average realized gold price rose 7 percent to $1,609 an ounce.