An industry leader in gold mining, Barrick Gold (ABX +2.12%) is expected to report its third-quarter earnings on Oct. 25. Interested as investors may be in the details, digging through a miner's earnings report can be overwhelming; it's easy to feel buried under the abundance of facts and figures. To make things a little easier, here are three things investors should focus on that we expect management to address.
Making a production goal
After producing 2.74 million ounces of gold in the past two quarters, Barrick is on target to hits its fiscal 2017 goal range of between 5.3 million ounces and 5.6 million ounces. Investors familiar with Barrick may recognize that this forecast is lower than the initial guidance -- from early 2017 -- of 5.6 million to 5.9 million gold ounces, but they need not worry that the revision stems from compromised operations. Instead, the updated figure reflects the sale of a 50% stake in its Veladero mine in Argentina.
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To meet the midpoint of its production guidance for the year, Barrick will have to produce about 2.7 million gold ounces in the second half. According to management, the majority of the half's production will occur in the fourth quarter, so it's reasonable to expect production less than 1.35 million ounces for the recently completed quarter. But there's cause for investors to look more closely.
In September, Barrick announced that it was partially suspending operations at Pueblo Viejo -- one of its core mines -- due to Hurricane Irma. As of yet, Barrick hasn't stated publicly whether operations have resumed there, nor said whether gold production will be lower than expected as a result of the storm.
The road to growth winds through Nevada
In its efforts to reduce its total debt from $13 billion at the end of 2014 to $5 billion by the end of 2018, Barrick has relied, in part, on the proceeds from the sales of non-core assets. Last quarter, for example, it completed the sale of a 50% stake in its Veladero mine to Shandong Gold for $960 million. Beyond looking for confirmation that management is progressing toward its debt-reduction target, investors should look for commentary on the company's progress in developing the projects in its pipeline.
In Nevada, the Cortez Deep South project is expected to contribute average annual gold production of more than 300,000 ounces from 2022 to 2026, with average all-in sustaining costs of $580 per gold ounce. Management had expected to complete its feasibility study on the site in the third quarter.
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Additionally, the company is pursuing development of an underground mine at Goldrush, Nevada. According to the pre-feasibility study, the project will average annual gold production of 450,000 ounces during its first five years of operation, and construction is estimated to begin in 2020. Management anticipates completion of the feasibility study in the second half of 2017.
Going with the flow
Since debt reduction is one of the company's priorities, maintaining strong cash flow is critical for financing organic growth projects. Cortez Deep South and Goldrush, for example, are expected to require initial capital costs of $153 million and $1 billion, respectively. Add in the estimated initial capital costs of $640 million for a project to extend the life of the Lagunas Norte mine and $300 million to $325 million for an expansion project at Turquoise Ridge, and it turns out that Barrick has four projects -- in varying phases of development -- requiring approximately $2 billion to develop. And this doesn't include the potential development of the two projects in Chile: Cerro Casale, a joint venture with Goldcorp, and Pascua-Lama.
Through the first six months of fiscal 2017, Barrick has reported a 3.6% year-over-year decline in its cash from operations. In addition to tax payments made in the Dominican Republic, management attributes the diminished operational cash flow to the concentrate export ban imposed by the Tanzanian government and an increase in working capital at Veladero. Management has asserted that it will report higher cash flow in the second half of the year; investors will want to confirm that's occurring when they review the Q3 earnings report.
Investor takeaway
Gold production volumes and the status of the projects in the pipeline will both be important things to look at when digging through Barrick's Q3 earnings report. More specifically, though, I'll be looking for commentary on operations at Pueblo Viejo. It's no secret that Hurricane Irma wrought havoc everywhere it went, and though the storm didn't hit the Dominican Republic directly, it wouldn't be surprising if Pueblo Viejo suffered some damage. Just how much is the question. In addition, I'll be interested to see if management is right in its assessment that cash flow will rise in the second half of the year since growing cash flow is essential to the company's goal of reducing debt while simultaneously developing organic growth projects.
