TORONTO – Stronger sales and record gold prices helped boost Barrick Gold Corp.’s profits 35 per cent in the second quarter, but the world’s largest gold miner said Thursday that two new mines are becoming more expensive than planned.
Toronto-based Barrick (TSX:ABX), which reports in U.S. dollars, said its profits increased to US$1.16 billion from $859 million a year ago.
The Toronto-based company has been riding high on the price of the precious metal, which is breaking records nearly every day, most recently on Tuesday when it closed at $1,616.80 per ounce. Investors are turning to the security of gold, as they worry about the value of currency amid the European and United States debt crises.
But Barrick said the industry is also facing higher expenses, and boosted its construction cost estimates on its Pueblo Viejo joint venture in the Dominican Republic, and the Pascua-Lama mine on the Chile-Argentina border.
The Pascua-Lama mine is being hit by inflationary pressures in Chile, including the rising Chilean Peso, higher wages for staff, the higher price of steel, cement, fuel and equipment. That project will now cost an estimated $4.7 billion to $5 billion, up from between $3.3 billion and $3.6 billion. First production is still scheduled for mid-2013.
Meanwhile, the company and Pueblo Viejo joint venture partner Goldcorp (TSX:G) have both said major rains in May damaged part of the mine. Barrick, which owns 60 per cent of the project, said it has to apply for new permits for the facility.
The company boosted the total estimated cost of that mine to between $3.6 billion and $3.8-billion, compared to the previous estimate of between $3.3 billion and $3.6 billion, and said the first gold will now be produced by the middle of next year, instead of this year as planned.
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Barrick is also building a new power plant on the site at a cost of $300 million in hopes to provide cheaper, long term power. The company’s share of that total cost is $180 million.
Chief executive Aaron Regent said on a conference call Thursday that despite higher upfront costs, developing new mines pays off in the long term, compared to just buying mines already under construction.
“On the development side, capital costs are up, and that’s a trend in the industry and clearly we’re being impacted by that, but the leverage to higher metal prices is quite substantial,” Regent said, explaining that with Pascua-Lama, the company could receive 2.6 times return on its investment.
“So (new) projects are hard, and there’s higher risk associated with it, but I think that your returns are higher on the project side, so you somewhat get paid for taking that risk.”
Mining analyst Elizabeth Collins of Morningstar wrote in a note that increased costs are typical in the mining industry right now as companies face higher commodity prices, strong local currencies, and tight labour markets.
“A payback period of less than three years is quite impressive, but it depends on commodity prices staying strong and all going according to plan from this point forward,” Collins wrote.
“Barrick’s currently producing mines are set to generate great earnings for the company in 2011, thanks to strong gold and copper prices and cash costs that remain in check. We’d highlight the Cortez mine in Nevada, which produced an impressive 420 million ounces of gold in the quarter at the low cash cost of $220 per ounce.”
Other miners have revised their cost or production estimates because of rising costs or bad weather. On Wednesday, the world’s second-largest gold miner, Goldcorp, cut its production guidance by about six per cent due to incidents like major rains and forest fires.
Sherritt International Corp. (TSX:S) said Wednesday that its troubled nickel mine project in Madagascar is now near completion after it had to boost estimated costs due to underperforming contractors and inaccurate estimates.
Barrick’s second quarter results announced Thursday were equal to $1.16 per share, beating average analyst estimates of $1.11 per share, according to a poll by Thomson Reuters, and above 86 cents a year earlier.
Revenues increased to $3.43 billion from $2.62 billion.
Barrick made a bold move into the copper sector this year with a friendly $7.3-billion bid to acquire Canadian-Australian miner Equinox Minerals Ltd. (TSX:EQN) whose flagship asset is the Lumwana copper mine in Zambia.
With the world supply of available gold mines wearing thin, the deal lets Barrick diversify into a metal that is selling at near record prices, mainly due to high industrial demand from China. Barrick says it plans to reinvest money earned through the copper business into its gold mining.
In May, Barrick promised it will make public the results of an independent investigation into alleged sexual assaults by police and company security guards at the North Mara mine in Tanzania. A subsidiary of Barrick holds a 74 per cent stake there.
Earlier that month, North Mara was the site of deadly clashes when police shot and killed seven people after hundreds tried to steal ore.
The allegations in Tanzania echo allegations at another Barrick gold mine in Papua New Guinea where a report by Human Rights Watch found half a dozen incidents of alleged rape by private security guards.
Barrick owns and operates gold mines in Canada, Peru, and Australia and has major projects in the Dominican Republic, Nevada, the Cerro Casale project in Chile, and the Pascua-Lama project on the Argentina-Chile border.
Shares in Barrick were down 59 cents, to $45.41 in midday trading Thursday on the Toronto Stock Exchange.
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