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

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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.
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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.

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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.

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