Buy quality first. That is usually the advice given to investors who want gold mining stocks in their portfolios. And “quality” in this instance generally means the larger companies. But, given the disappointing results released by three of those miners last week, some investors may question the wisdom. Each company’s second quarter (Q2) results is a story of lower earnings, fallen production, and higher costs.
Barrick (NYSE:ABX,TSX:ABX), the world’s largest gold miner, reported that its production fell from 1.97 million ounces in Q2 2011 to 1.74 million ounces during the same quarter this year. The company described the decline as “expected”.
Net earnings declined from $1.16 billion, or $1.16 per share, in 2011 to $750 million, or $0.75 per share, in Q2 2012.
“Our second quarter earnings reflected lower gold production and higher operating costs as anticipated, but we continue to generate strong financial results and expect to have a stronger second half,” said Jamie Sokalsky, president and CEO of Barrick .
The company’s average spot gold price was $1,609, a 7 percent increase, but sales volume declined 12 percent, falling from 1.91 million ounces in Q2 2011 to 1.69 million ounces in the most recent quarter. Revenues fell 4 percent to $3.28 billion.
At $613 per ounce, cash costs increased 27 percent. Barrick said total cash costs for the year are now expected to rise to $550 to $575 per ounce, primarily because of higher costs at Australia Pacific and African Barrick Gold during the first half of the year.
The company’s Pascua-Lama project is expected to become one of the world’s largest low-cost mines. However, in addition to a schedule delay, which Barrick blames mostly on delays in completing the site’s camps, tunnel, and processing plant, the company is also expecting a hefty price increase for the project. Barrick’s preliminary estimates suggest capital costs could increase 50 to 60 percent from the top end of the previous estimate of $4.7 to $5 billion. Key factors in the increase include lower-than-expected contractor productivity, engineering and planning gaps, cost escalation, and schedule extension. A change in construction management is one of the solutions the company is using to get the project back on track.
Sokalsky also reported the completion of the Pueblo Viejo mine, and said it will begin contributing low-cost ounces shortly. Barrick owns a 60 percent share in that mine.
Gold production of 1.18 million ounces represented a 3 percent decline.
CEO Richard O’Brien said, “[a]s expected, our second quarter gold production was impacted by annual planned mill maintenance in Nevada and lower gold and copper production at Batu Hijau in Indonesia, as we continue with the planned stripping of Phase 6.”
Gold production at Batu Hijau decreased 68 percent due to the processing of lower-grade stockpile ore, but cost applicable to sales (CAS) per ounce rose 92 percent, an increase the company blames on lower production and higher waste mining costs.
CAS is a financial measure calculated by dividing the costs applicable to sales by the ounces sold.
Although Newmont’s average realized gold price was $1,598, representing a 6 percent increase, sales revenue of $2.2 billion represented a 6 percent decline. Sales volume also declined 6 percent as Newmont only sold 1.14 million ounces of gold during the quarter. Overall gold CAS of $681 per ounce marks a 17 percent increase.
Newmont reduced its gold production outlook from 5 to 5.2 million ounces, to 5 to 5.1 million ounces. The company attributes the reduction to fewer tons milled at Tanami in Australia, another site where production fell and CAS rose last quarter.
Capital expenditures will likely be $300 million lower than planned this year in part because Newmont has slowed the development timeline for its Peru-based Conga project.
The company’s net earnings of $268 million, or $0.56 per share, fell 45 percent from $489 million during the same period in 2011.
“The previously-announced shortfall at Red Lake negatively impacted our results in the second quarter,” said president and CEO Chuck Jeannes.
Rock de-stressing is currently occurring at Red Lake and is expected to result in higher production in the second half of this year.
But Goldcorp also experienced unexpected production problems in Mexico. Jeannes said Penasquito “had been delivering a good second quarter until encountering water availability issues that limited throughput in June.” The problem was caused by a prolonged drought, and though the company is addressing it by digging wells, production is expected to be lower in the second half of the year.
Gold production last quarter was down to 578,600 ounces from 597,100 ounces during Q2 2011. Gold sales fell from 606,400 ounces last year to 532,000 ounces in Q2 this year.
Total cash costs on a by-product basis increased from $185 to $370 and on a co-product basis from $553 to $619; Goldcorp has now revised its expectations for these figures upward.
The company also reduced its production expectations from 2.6 million ounces in 2012 to between 2.35 and 2.45 million ounces.
Goldcorp increased capital expenditure guidance from $2.6 to $2.7 billion to recognize the impact of the timing of spending at Pueblo Viejo. Goldcorp holds a 40 percent stake in the project and like Barrick is looking forward to the benefits of near-term production.
Writing for Mining Weekly, Martin Creamer reported that Gold Fields (NYSE:GFI) CEO Nick Holland told a crowd in Australia “if we’re brutally honest with ourselves, the industry has not done terribly well on any of the six key metrics over the past decade.”
Those key metrics are growing production volume, expanding margins, optimizing capital, providing balance sheet leverage with debt financing, returning free cash flow through dividends, and enjoying a positive rating multiplier effect.
“This industry is suffering from a management credibility discount … because we don’t deliver on our promises,” Holland said, adding that investors are fed up with this “jam tomorrow” approach.
Gold Fields has not yet released its quarterly results.
Securities Disclosure: I, Michelle Smith, hold equity interests in Goldcorp.