We are maintaining our Neutral recommendation on Barrick Gold Corporation (ABX). The company’s first-quarter 2012 adjusted net earnings (excluding one time items) of $1.09 a share matched the Zacks Consensus Estimate. Revenues jumped 18% year over year to $3,644 million, missing the Zacks Consensus Estimate of $3,758 million.
Gold production fell 4% year over year while copper production jumped 56% from the year-ago period. Average realized gold price moved up 21% in the quarter whereas total gold cash costs increased 24.7%. The increase in average realized gold price helped Barrick Gold to increase its reported net earnings by 3% year-over-year to $1.03 billion in the quarter.
Moving ahead, the company reiterated its production targets for 2012. Barrick Gold expects to produce 7.3 -7.8 million ounces of gold and 550-600 million pounds of copper this year at cash costs of $520-$560 per ounce and $1.90-$2.20 per pound respectively.
The company’s exploration initiatives met with success in 2011 and encouraged it to raise its exploration budget to $450-$490 million in 2012, significantly ahead of $350 million incurred in 2011.
Barrick Gold’s growth drivers lie in its exploration programs. The company is aggressively replacing gold reserves, clocking an industry-leading 139.9 million ounces of proven and probable gold reserves replaced in 2011. It is also focusing on expanding its copper reserves and acquired Equinox Minerals for this purpose. The acquisition added a couple of quality copper mines to Barrick Gold’s portfolio, increasing its leverage to strong copper prices.
In addition, the company is on track to commence production at Pueblo Viejo and Pascua-Lama by the middle of this year and mid-2013, respectively. These two mines are expected to produce around 1.5 million ounces of gold annually at a low cost for the first five years of full production. Moreover, the company expects production at the Cortez project to increase to 1.20-1.25 million ounces of gold this year.
Also, the company is focused on returning cash to shareholders and recently increased its quarterly dividend by 33% to 20 cents a share. Over the past six years, Barrick Gold has increased its dividend by more than 260% on a quarterly basis. This adds to the company’s attractiveness as an investment option.
Concerns regarding the company are mostly macroeconomic in nature. Barrick Gold derives its revenues from gold and copper sales, leaving it prone to any negative fluctuation in the prices of these metals. In addition, Barrick Gold’s financial health and operations also depend upon prices of other commodities and foreign exchange rates, thereby creating another factor which may negatively impact the company.
Moreover, Barrick Gold’s rivals, Newmont Mining Corporation (NEM) and AngloGold Ashanti Ltd. (AU), are ramping up their operations and recently announced that they will be improving their mines and increase exploration activities.
Our recommendation on the stock is backed by a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.
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