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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Saturday, October 31, 2009

Barrick Q309 Earnings Surprise

Toronto-based Barrick Gold $ABX is the world’s largest gold producer, has the most resource ounces, and claims the highest market capitalization in the industry. Many analysts have written off Barrick’s ability to grow the bottom line partly because of its size. Moreover, many analysts have been forecasting lower realized prices for gold sales and higher cash costs believing these would weigh down near-term earnings for the entire gold mining industry, especially for the largest miners. These analysts were proven wrong—at least for this quarter. Barrick showed how a large company with a rising gold production profile over the next few years can control cash costs and grow earnings in a rising price of gold environment.
Check out the Gold Stock Strategist newsletter for detailed resource, operational and valuation information on over 50 gold producers. The letter also provides recommendations in three risk-based categories—conservative, growth, and speculative. One recommended speculative pick, Castle Gold, is up 67 percent on a bid from Argonaut Gold since being picked by the Gold Stock Strategist as a buy-out candidate in the August 1 letter.


Barrick posted a third quarter a net loss of $5.4 billion or $6.07 per share, compared to a positive earnings of $254 million, or 29 cents per share in the same prior year period. The net loss reflects a $5.7 billion charge to earnings to account for a previously announced goal to eliminate its gold hedges. Adjusted for special items, the company earned 54 cents per share and exceeded consensus expectations by 46 cents profit per share.

Barrick produced 1.9 million ounces at a net cash cost of $371 per ounce on a realized gold price of $971 an ounce. Copper production was 104 million pounds at a cost of $1.05 per pound and a realized price of $2.90 per pound owing to a positive net hedge position. The company set a record cash flow of $911 million, an increase of 67 percent over last year. For 2010, production guidance was expanded to a range of 7.7 to 8.1 million ounces and even lower cash operating costs than 2009.

The decision to reduce the gold hedge book required a charge to its income statement of $5.7 billion. Barrick stated it has purchased about 1.1 million of its three million ounce "fixed" hedge contracts. This loss occurs because Barrick has to deliver physical gold to buyers at lower prices than the current spot price of about $1,040 an ounce. This is also bullish for the price of gold because the company will continue to buy back gold on the open market to fulfill the hedge commitment.

Technically, Barrick Gold shares have been flat since the beginning of 2009 despite a rising price of gold--the SPDR Gold Shares $GLD is up 19 percent year-to-date. Barrick's share performance is well under the 15 percent gain in the S&P 500 index $SPY year-to-date. Barrick's share price has recently plunged below the 50-day moving average over the past week caused by a marginally lower price of gold in response to a strengthening U.S. dollar. The share price is now bouncing off the 200-day moving average at just below $35 a share.

Global financial imbalances involving the United States and China remain a concern. The global imbalances and an expanding U.S. public debt load should continue to support a gradual weakening in the greenback and higher price of gold. On the supply side, global mine production of gold has been in decline since 2001 and is projected to be constrained over the next five to 10 years.

Barrick Gold is projected to grow earnings at a 7 percent clip over the next year or two at $950 an ounce for gold as they bring their new Pascua-Lama project into production. The simple and profitable story of Barrick Gold remains keeping operating costs under control, increasing gold production, all amid a rising price of gold environment.

Thursday, October 29, 2009

Agnico-Eagle Misses Q3 Consensus by 86 Percent

Toronto-based Agnico-Eagle Mines $AEM surprised everyone yesterday by posting a large loss and missing analyst earnings expectations by 86 percent due to special items, missed production targets, and higher operational costs.

Agnico-Eagle posted a third quarter loss of $17.0 million or 11 cents per share, compared to a positive earnings of $14.0 million or 10 cents per share in same quarter last year. Adjusted for special items, the company earned 3 cents per share and missed consensus expectations by 17 cents. The consensus estimate of analysts was 20 cents profit per share, excluding special items.

The company said the current quarter result includes a non-cash foreign currency translation loss of $22.9 million, or 15 cents per share and a stock option expense of $5.1 million or 3 cents per share. Offsetting these losses was a gain on the sale of marketable securities of $5.9 million, or 4 cents per share.

Revenues for the quarter were $158.8 million, compared to $83.3 million in the same quarter last year.

Third-quarter gold production was up 73 percent at 118,763 ounces compared to 68,753 ounces in the third-quarter of 2008. Cash costs for the third quarter were up sharply at $449 an ounce compared to cash costs of $135 in the same quarter last year. Production targets at new gold mines were slower than forecast, negatively impacting quarterly earnings. Agnico dropped its full-year production guidance to 500,000 ounces from its previous range of 550,000 and 575,000 due to operational issues at new mines in Finland and Quebec. Fourth-quarter production is expected to be 170,000 ounces. For 2010, production is now expected to be 1 million to 1.1 million ounces. Agnico had originally forecast 1.2 million ounces of gold production in 2010.

Production at the LaRonde mill was lower than forecast, owing largely to a seven day shutdown related to maintenance and upgrades to the service and production hoist systems.

Production at the Goldex mine in Quebec was below expectations because of a company decision to focus mining on the lower grade deposits. The new Lapa mine in northwestern Quebec and Kittila mine in Finland reported third quarter gold production lower than expected and with higher cash costs than forecast. The company expects cash costs to come down as it ramps up production and development costs decline.

There remains continued cost uncertainty with additional development costs at the Meadowbank mine project in Nunavut as the company begins production sometime during the first quarter of 2010. At full production, Nunavut is forecast to produce 350,000 ounce of gold annually.

Since the beginning of 2009, Agnico-Eagle shares have gained 13 percent, well under the 18 percent gain in the S&P 500 index $SPY. Agnico-Eagles' share price plunged well below the 50-day moving average level on yesterday's earnings announcement and is bouncing along the 200-day moving average at mid-day today just above $58 a share. The relative strength index is signaling an oversold stock (see below).

Like every other analyst, the Gold Stock Strategist was caught off guard by the production slow down and higher cash costs at Agnico-Eagle. The Agnico-Eagle earnings loss this quarter points to the complexity and uncertainty involved in mining for the yellow metal. This hit to 2009 profits might be an early signal for Agnico-Eagle investors that earnings are likely to remain flat over the near term given the operational challenges in bringing new mines into production.

Despite the technical strength, investors should be cautious with Agnico-Eagle for the near term with the operational challenges facing the company. We'll be looking for the company to prove it can manage its growth more efficiently and find a way to reduce negative forex charges.

There are safer plays than Agnico-Eagle in the gold mining industry. Barrick Gold $ABX, the world’s largest gold producer, is projected to grow earnings at a 7 percent clip over the next few years as they bring Pascua-Lama into production. Barrick is an industry leader and a top pick in the Gold Stock Strategist newsletter.

An article written on Tuesday, October 27, "Gold Miners Minting Money" is posted at Self Directed Investor for readers looking for more information on the third quarter gold miners' earnings season.

Tuesday, October 27, 2009

Gold Miners Minting Money

Gold Price Up, Gold Miner Earnings Expected Higher in Q309 Than Q308

Agnico-Eagle $AEM kicks off third-quarter gold miner earnings season after the bell on Wednesday, October 28. Gold producers are expected to report increases in quarter-over-quarter profits given recent strength in the price of gold and continuing operational cost containment. Third quarter over second quarter profits will likely be mixed, with a slight bias to the upside.

Macro Environment is Mixed

There are several macroeconomic cross-currents running through gold miners earnings for the quarter. Companies will be influenced by higher precious and base metal prices, stable input costs, and a weaker U.S. dollar.

Fear of inflation and a weakening U.S. dollar sent the average price of gold higher in the third quarter of 2009 to about $960 an ounce. This was a 10.3 percent increase from the $870 an ounce average during the same quarter in 2008.

Significant inputs like oil were at a record high during the third quarter of 2008 and have come down in price significantly. Cyanide and other chemicals used in the production process have also come down in price since the third quarter of 2008. Because milling gold ore is an energy intensive process, lower energy prices help reduce operating costs. In a flat operating cost environment, gold producer share prices are driven primarily by the yellow metal's price.

Companies with large metal byproduct credits in copper and zinc should see lower operating costs and improved margins from the previous quarter. Both byproduct metals have risen in price since the second quarter of 2009. Copper has gained 25 percent and zinc 19 percent. Stronger copper and zinc prices will reduce cash cost per ounce and go directly to the bottom line for companies with significant byproduct credits like Barrick Gold $ABX, Newmont $NEM, Goldcorp $GG, Agnico-Eagle $AEM, and Yamana Gold $AUY.

Exchange rate changes will negatively impact some gold miners as their costs rise in foreign currencies amid a weaker U.S. dollar. A slumping U.S. dollar has the effect of raising the cost of production for gold miners with revenue in U.S. dollars and costs in a foreign currency. Gold producers likely to see negative cash operating cost offsets due to a weaker greenback include Newmont Mining $NEM, Agnico-Eagle $AEM, and Jaguar Mining $JAG.

Looking Beyond Third Quarter Earnings

As important as recent earnings are, smart investors will look carefully at the fourth quarter guidance these companies provide. Particular attention should be paid to production forecast through the end of 2009. Gold ended September at just over $1,000 an ounce, rocketing through the previous record of $1,033.90 an ounce, and has been above $1,040 an ounce for most of October. Looking ahead and despite the recent correction under $1,040 an ounce, higher gold prices in October mean investors can expect improved profits for the fourth quarter of 2009

Special attention should be given to this week’s production guidance and updates on mine development by companies. In an early and bullish sign, Toronto-based IAMGOLD $IAG announced an increase in annual production of 30,000 additional ounces for a total of 940,000 to 950,000 ounces of gold production in 2009.

Barrick is an industry bellwether. the largest gold producer in the world by market cap and annual production. The company will announce earnings on Thursday, October 29. The company will be booking a $5.6 billion negative adjustment to close out its hedges, creating an unadjusted quarterly loss. The company is expected to report net earnings of $440 million, a 25 percent increase from the prior year’s third quarter.

Progress on Barrick’s plan to close out their hedge book will also draw close attention by industry analysts. In early September, Barrick unveiled a plan to close out their fixed hedges and begin to buy back a portion of its floating-price hedges. The company indicated in September it had already begun buying gold on the open market.

Large Barrick purchases in September and October may have had a positive impact on the rising price of gold and reduce future demand—a bearish sign. However, if Barrick only made marginal purchases over this time, it would be a bullish sign for the price of gold. Barrick’s fixed hedge book is equal to about 4 percent of total annual world-wide gold production.

Denver-based Newmont Mining $NEM and Peruvian gold producer Compania de Minas Buenaventura SA $BVN are also scheduled to report third quarter earnings on Thursday. Eldorado Gold $EGO will release their third quarter earnings report on Friday, October 30. South African gold miner Anglogold Ashanti $AU, Yamana Gold $AUY, Goldcorp $GG, Kinross $KGC, and IAMGOLD $IAG have scheduled their earnings releases for next week.

The table below provides release dates, actual Q3 2008 and Q2 2009 earnings, consensus earnings estimates, and earnings estimates provided by the Gold Stock Strategist for gold producers in the third quarter 2009.

Current global financial and monetary trends suggest dynamic changes in economic fundamentals over the long-run that are favorable for the price of gold. As long as governments around the world maintain extraordinarily liquid monetary policies and fast growing levels of public debt, gold producers will continue to mint money.

We remain in the middle stages of a long-term bull market for gold. If current trends hold and history repeats itself, the price of gold will continue to move higher over the next year within an upward trending price channel. As leveraged plays on the price of gold, this upward trend in gold price is bullish for gold producers.

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