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February 2, 2012 Dear Friend,
Barrick Gold emphatically tells us that
it does not experience a material deterioration in project capital
or operating costs as Kinross Gold disclosed in January 16th in
Kinross's warning of a pending goodwill charge. Further, Barrick
Gold believes that only it has sufficient information on its future
production volumes, operating costs, capital costs and ongoing
exploration results, and its team questions whether any outsider has
enough information to second guess its carrying values. Barrick Gold
defends its prerogative to select appropriate discount rates, metals
prices, volumes and costs to conduct impairment tests. It says
emphatically that it does not expect a large impairment writedown,
qualified accounting opinion, any delay in applying IFRS impairment
tests or any equivalent development. To put it mildly, ABX does not
agree with our analysis herein.
We reviewed the Equinox Minerals acquisition of Zambian and Saudi assets, 75%-owned Cerro Casale in Chile and 60%-owned Pueblo Viejo in the Dominican Republic for potential impairment charges at our assumed scenario of 8% discount rates and three year rolling average copper prices of $3.53 per lb and $1,262 gold. We note that 2009 metals prices were quite low at $2.26 per lb for copper, $972 for gold and $14.75 for silver. For example, three year rolling average prices one year from now for copper may rise to $4.11 and gold to $1,500 per oz, which illustrates the sensitivity and volatility of these exercises. We estimated a $3.6 billion after tax impairment charge on the $7.3 billion Equinox Minerals acquisition, a $350 million after tax impairment charge on $1,244 mm paid for 75% of the Cerro Casale copper-gold project in Chile and no impairment with a $630 mm after tax positive NPV to the Pueblo Viejo project in the Dominican Republic based our assumptions of 8% discount rates, $3.53 copper, $1,262 gold and specific capital costs, operating costs and output levels. We note that the Equinox acquisition had nearly a $1 billion positive NPV on April 25th, the day it was announced, when copper was near $4.40 and at $4.11 estimated 2010-12 three-year average copper prices the estimated impairment charge would fall to $455 million. Barrick Gold will use other metrics and make other calculations, as it differs. Kinross Gold's shares fell 20% after its January 16th announcement, and we are reviewing Barrick Gold, Goldcorp and Newmont Mining concerning estimated rates of return for recent acquisitions and for the potential of any similar charge. We estimate Barrick Gold paid $0.79 per lb for Equinox's copper reserves and resources including expansion cap ex, or FOUR TIMES the average of 66 transactions over the past seven years, which appears to be a large sum to recover. We wonder if Barrick Gold's shares will perform less well if it avoids a writeoff, as some outsiders or shareholders may toss and turn at night wondering how it made its calculations or whether it will repeat past transactions. Our analysis in this report involves possible noncash charges and past transactions, and has no impact on our earnings estimates or our $59.74 per Barrick share NPV calculation at $1,500 gold and $4.00 estimated long-term copper. However, none of the three large projects that we evaluated offer huge rates of return. We concluded that current investor psychology or concerns over rates of return are likely to continue, unless ABX levers up to buy back a large amount in excess of 100 million common shares, and that other stocks are going to perform better. For example, we have Overweight ratings on Xtstrata and Anglo American that are subjects of takeover speculation this morning and have instituted research coverage of Pretium Resources and Tahoe Resources in the past 60 days among emerging gold and silver producers. For these reasons we downgraded Barrick Gold to Neutral from Overweight, as we do not see a trigger for investor sentiment to change in the near term and there are other stocks providing more opportunity for market recognition and near-term financial returns. Short of Barrick Gold embarking on a large share buy back or gold prices rising sharply, we do not see a "trigger" for Barrick to trade up to its NPV and every gold stock should rise if prices rise.
Our prior research report dated December
7, 2011 detailed our data base of copper deposit and mine
acquistions and our Kinross Gold report dated January 19, 2012
analyzed its carrying values in a very similar manner. We attempted
to follow Kinross Gold's interpretation of IFRS, and they agreed
that at a $1,200 gold price their carrying values were difficult to
recover at Tasiast.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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