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WIKI ANALYSIS
Barrick Gold Corporation is the largest pure gold mining company in the world, with its headquarters in Toronto, Ontario, Canada and four regional business units (RBU's) located in Australia, Africa, North America and South America. Barrick is currently undertaking mining and exploration projects in Papua New Guinea, the United States, Canada, Australia, Peru, Chile, Russia, South Africa, Argentina and Tanzania.
Barrick has a portfolio of 26 operating mines, many advanced exploration and development projects located across five continents, and large land positions on the most prolific and prospective mineral trends. The Company also has the largest reserves in the industry, with 123 million ounces of proven and probable gold reserves, 6 billion pounds of copper reserves and 964 million ounces of contained silver within gold reserves.
Barrick produced 8.64 million ounces of gold at a cash cost of $282 per ounce, in the bottom third of the global cost curve. In addition, the Company produced 367 million pounds of copper at a total cash cost of $0.90 per pound. The company's production is 38% in North America, 23% in South America and 28% in Asia.
Barrick has the gold mining industry's strongest and only 'A' rated balance sheet, which positions the Company to take prompt advantage of attractive development, exploration and acquisition opportunities as they arise without needing to pause for financing. For example, reserves moved up 34 million oz after the Placer Dome acquisition, while they were flat for five years before this.
Company Overview
Profitability is increasing for Barrick after recent struggles with the bear market for gold. The company is fully leveraged to the rise in gold prices. For years Barrick's hedging strategy has given the company an edge over its competition, but as gold prices continue to rise this conservative approach has not paid off and as a consequence Barrick's growth has been stagnant. The unanticipated duration of the bear market for gold has spurred Barrick to abandon its corporate hedge book strategy (which has improved margins and more than offset higher cash costs) in favor of a non-hedge corporate policy in hope to achieve greater exposure to rising gold prices. Barrick has succeeded in extricating itself from all but 9.5 million ounces (approximately 8% of current gold reserves) allocated to the Pascua Lama and Pueblo Viejo projects that are both expected to deliver ounces by 2010. These hedges are primarily dedicated to the development of Pascua-Lama, and it is expected that Barrick will increase the average hedge price through close-outs by utilizing its excess cash.
The company is completing the achievement of synergies from the Placer Dome acquisition. It is estimated that there is $200 million of cost cutting yet to be done. Moreover, the recently acquired Pascua Lama properties are projected to yield over 18 million ounces of gold and 685 million ounces of silver in reserves. Barrick has been working towards commencing construction after obtaining approval from the Chilean and Argentinean governments. However, Barrick’s production is expected to remain relatively flat until 2010 when both Pascua Lama and Pueblo Viejo are given the green light. In the meantime Barrick will have to weather increasing operation costs. Exploration opportunities within existing plays is one of the more promising features of Barrick’s future growth potential. The company has begun an aggressive exploration program in Nevada at the Placer Dome plays that are likely to yield some lucrative results once underway.
While gold has and always will remain the focal point of Barrick's operations, copper and silver also contribute to the company's portfolio. In 2007 copper accounted for 15% of revenue and 20% of production. Though a useful commodity copper is exceedingly less expensive than silver or gold and therefore has little economic impact on Barrick’s growth. Silver accounts for little over 7% of revenue and 2% production.
Trends & Risk Factors
Exposure to Volatile Gold Prices and Operating Costs
With no control over prices, gold producers stand to lose if they are unable to control their costs. After the acquisition of Placer Dome, Barrick's operating expenses more than doubled in 2006 to $4,147 (USD in millions) from $1,967 in 2005. In an attempt to shield itself from volatile price fluctuations Barrick developed a rather large hedge book. As gold prices skyrockted investments in Barrick did not provide favorable exposure to gold price movements. As a result the company was underperforming and decided to truncate most of its corporate hedge commitments.
Environmental Restrictions
Environmental restrictions and accusations of environmental malpractise have been a perennial challenge for the mining industry. Environmental groups have accused Barrick of a number of environmentally unsound practices. Most significantly, Barrick has come under scrutiny for the use of cyanide leach taling dams for its gold mine projects in Austrailia as well as and the alleged release of approximately seven tons of mercury during 2004-2005 at the Super Pit gold mine. In response Barrick has propositioned a multi-million dollar project to spearhead research to reduce the tailings products and erodible waste produced from the mineral extraction process.
Barrick Boasts One of the Industries Best Operating and Development Teams
After emerging within the gold industry in 1983 Barrick's core strength has been the regional expertise of its operating and development teams. In the current mining environment, an intangible asset such as a collection of mining experts has proven to be an extremely valuable commodity. Barrick's wealth of mining expertise should reaffirm investor confidence in the company's ability to turn a plethora of new projects (most notably Pascua-Lama and Pueblo Viejo) into highly productive plays.
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