Barrick Gold is the biggest gold miner in the world and it’s testimony to the controversial idea in business that size can be a hindrance rather than help to share market performance.
In its 2006 annual report, released last week, the giant defended its size, boosted by last year’s $US10 billion acquisition of rival North American producer, Place Dome saying its size was fundamental to it taking on riskier investments and retaining its industry leading position.
“We have worked steadily to prepare Barrick for this new environment.
“We have the strength, breadth and scale, coupled with the financial resources, to maintain a comprehensive exploration program, optimize our portfolio of operating mines and advance our pipeline of quality projects,” chairman, Peter Munk said in a letter to shareholders in the annual report.
Barrick Gold admitted its poor share market performance compared to smaller mining groups, but said that also allowed it to look at deals in parts of the world (Russia and South America) other miners would shy away from, or to look at deals of a size that all but a handful of its rivals could handle.
Since the start of 2006, Barrick share price has increased by around 13 per cent, but smaller Canadian mining companies having seen their share price rise by an average of 86 per cent.
“Further, we recognize that our share price performance needs to improve relative to the gold price, the Barrick chairman said “We believe that the market will recognize the latent value in our assets and the pipeline of projects for the benefit of our shareholders”.
But the message from Munck in the annual report was typically upbeat, with an important point made about the demand-supply picture for the metal between now and 2010.
“2006 was a dynamic year for the gold mining industry, and a banner year for Barrick .We saw a wave of industry consolidation and historically high gold prices, coupled with robust demand and flat supply. This comes at a time when global interest in gold as an alternate investment is on the rise.
“The yellow metal has been trading higher in United States dollar terms, but also against other major global currencies, an encouraging indicator for gold.
“However, while higher gold prices have attracted capital to the sector, few new discoveries have been found.
“Over the next three years, new gold projects around the world are unlikely to replace production declines across the industry.
“This growing discrepancy between gold supply and demand should have a profound impact on our industry and we believe Barrick is strategically positioned to leverage the opportunities that lie ahead, “he said.
But there will be a short-term slowdown (or what the company hopes is short-term).
“In 2007 we anticipate gold production will be slightly lower and operating costs higher than last year.
“Production is expected to be 8.1 to 8.4 million ounces at total cash costs of $US335 to $US350 per ounce. A substantial portion of the cash cost increase is attributable to mining at below reserve grade in 2007 as planned,” Peter Munk said.
That’s slightly less than the average costs in its Australia-Pacific operations ( Barrick has 10 mines including Plutonic, Kalgoorlie, Cowal, Granny Smith, Porgera in PNG and the Osborne copper mine in Qld).
“The Australia-Pacific region grew in size and strength in 2006.We now have 10 operating mines, which are expected to produce 2.2 to 2.3 million ounces of gold in 2007, at total cash costs of $US385 to $US400 per ounce.
“The Cowal mine entered production in late April, and is expected to produce approximately 240,000 ounces of gold in 2007, at total cash costs of about $US315 per ounce,” Barrick said in its annual report.
“Inflationary pressures felt across the mining industry have also had an impact on industry-wide cash costs; however, the Company’s cost containment programs have helped to mitigate the impact on Barrick.
“As cost pressures begin to stabilize in 2007, we do not expect to see similar increases in 2008.
“The Company has already poured gold at the new Ruby Hill mine in Nevada and throughout 2007 we will continue advancing our projects, which represent the strongest pipeline in the industry.
“The Company remains positive on the outlook for gold price, and we have the people, the assets, and the discipline to continue to achieve our targets, replace our reserves, build new mines, and generate strong financial results.
“For the industry as a whole, new projects are characterized by higher capital and operating costs, significantly longer timelines for development, more rigorous regulatory and public scrutiny, and in most cases, by lower grades.
“It is this project pipeline, unrivalled in the gold mining industry, which also sets Barrick apart from its competitors. In 2006 we laid much of the ground work for our future.
“The acquisition of Placer Dome and a strong performance from Barrick’s four newest gold mines led to record levels of gold production, which combined with strong gold and copper prices to produce the best financial results in Barrick’s history. The Company also effectively completed the integration of Placer Dome to establish itself as the pre-eminent gold producer.
“2006 gold production was 8.6 million ounces, at total cash costs per ounce of $US282, meeting our original guidance; copper production was 367 million pounds, exceeding our original production guidance, at total cash costs of $US0.79 per pound; earnings per share increased 136 per cent to $US1.77; and cash flow per share from operations rose 84 per cent to $US2.48.
“This demonstrates the excellent leverage our earnings and cash flow have to movements in gold price. Our results also benefited from newly acquired copper production, and higher copper prices, which rose 83 per cent over 2005.
“During the yea
