AFRICAN BARRICK GOLD

African Barrick Gold

African Barrick Gold

Introduction

When we talk about a company like barrack Gold, which is the largest gold producer in the world, a lot of things needs to be taken into consideration. The firm operates in different areas of the world and currently in 2011; it produced 7.7 million ounces of gold and 451 million pounds of copper. In the overall production and extraction of gold, Australia and Asia pacific counted for 24%, North America accounted for 44%, Africa for 7% and South America for 24%.

Recent Development

In a continuation of the story from recent quarters, Barrick Gold  unveiled more indications of lower gold and copper production and higher costs in both the short term and long term compared with previous expectations. We don't expect a material change to our $32 fair value estimate, though, as our outlook for Barrick's profitability had already been muted. The most notable disappointment is continued delays and capital cost creep at the massive Pascua-Lama development project on the border between Chile and Argentina. New CEO Jamie Sokalsky has inherited a difficult situation, and he reiterated the company's new commitment to maximizing returns and free cash flows. For our part, we note that those two goals can be at odds. For example, to rein in capital expenditures in 2013, the company will defer some maintenance capital expenditures. We hope to learn more about which maintenance capital expenditures can be deferred without hurting the long-term integrity of the mines and equipment. Barrick's experience with the recently acquired Lumwana mine, where past managers deferred investments and now production is suffering, only solidifies our view that free cash flow isn't the sole metric to strive for in gold mining.

Valuation

We're lowering our fair value estimate to $32 from $40 as we incorporate higher than expected capital costs for Pascua-Lama. We use Comex gold futures contracts for our price assumptions in 2012-14, while our 2015 and 2016 assumptions are $1,200 and $1,227 per ounce, respectively. We assume that Barrick's consolidated gold production grows from 7.8 million ounces in 2012 to 8.9 million ounces in 2016. This growth stems from the expected startups of Pueblo Viejo and Pascua-Lama. Our terminal multiple is 9.5 times enterprise value/EBITDA. We give Barrick Gold a high uncertainty rating. Gold price expectations can swing Barrick's valuation a meaningful amount in either direction.

Risk

Barrick's primary risk is a significant and sustained drop in gold prices. The company would also suffer from a drop in copper or silver prices. Barrick faces meaningful execution risk in bringing Pueblo Viejo and Pascua-Lama on line in the next several years. We believe Pascua-Lama entails a significant amount of risk given the cross-border position of the ore and operations, the high altitude in the Andes, and the delays and capital cost inflation already experienced since the project first entered the pipeline. Mining entails operating risks such as hazardous material release, labor disruptions, geological failures, explosions, and water damage. Controversy over Barrick's mining practices could harm the company's ability to obtain a ...