It's easy to be drawn in from afar by that gorgeous and shiny new sports car on the showroom floor, but the real test comes as you get close enough to view the sticker.
From a distance, Barrick Gold (NYSE:GOLD) may seem like an alluring choice for gold exposure. After all, it's the world's largest producer, and that economy of scale has tended to support peer leading cash costs over the years. But have a seat before you inspect that sticker more closely, because Barrick Gold has some sticker shock in store for you.
Barrick suffered a 7% decline in third-quarter gold production (to 1.78 million ounces), and a substantial 20% drop in copper production over prior-year levels. Combined with lower prices for both metals -- including the 14% retreat by copper prices that we discussed in relation to Yamana Gold's (NYSE:AUY) impressive quarterly report here -- Barrick saw its revenue slip by 13% to $3.44 billion. With a huge drop in by-product credits from copper, net cash costs surged by 66% to $537 per ounce! At $592 per ounce, co-product cash costs for gold production underperformed those of far smaller competitor Yamana, and themselves represented a 31% increase over the prior-year mark. Preparing to relieve some portion of that co-product cost pressure, Barrick did offer a positive note on the Pueblo Viejo joint venture with Goldcorp (NYSE:GG), revealing that commercial production is expected before the end of the year!
The biggest sticker shock of all, meanwhile, came from the massive Pascua-Lama construction project under way on the border between Chile and Argentina. Just a few months after shocking investors with a 50%-60% escalation of projected costs for the project, Barrick revealed another upward adjustment, raising the total budget to as much as $8.5 billion! Part of the latest adjustment relates to timeline delays that now see first production pushed back into the second half of 2014, while the company's transition of project management from its in-house team to the global engineering and construction experts at Fluor (NYSE:FLR) also added some additional costs.
Placing this project into Fluor's capable hands would appear to reduce the risk of further cost escalation, but it's worth noting that only $3.7 billion has actually been spent thus far. These rising costs, or course, have no bearing on Pascua-Lama silver stream holder Silver Wheaton (NYSE:WPM), and those shares breezed past the news of the project's slight delay to post a fresh 52-week high Thursday.
The final bit of sticker shock assailing would-be buyers of Barrick Gold comes from the miner's stretched-out balance sheet. Following the controversial acquisition of Equinox Minerals for $7.7 billion in 2011, and considering the scale of looming capital expenditures even after the miner slashed $1 billion from its 2013 capex budget, Barrick's net debt of $11.2 billion presents the sort of sticker shock that's bound to steer investors toward the vast array of growing, low-cost gold miners with far less onerous debt loads. Over the long haul, I recognize that Barrick's massive cash-flow potential in a rising price environment for gold (and a stable one for copper) is likely to keep the balance sheet from becoming an acute source of concern. Still, it's enough to stub the toes of investors kicking the tires of some other sporty-looking models on the lot. Thursday's 9% decline in the shares may present an interesting play for traders, but as a long-term investor I continue to focus on the array of far more attractive operators in the gold-mining industry.