Barrick Gold vows changes after losing US$3.1 billion on copper writedown

Barrick Gold is taking a massive writedown on its copper business, resulting in a $3.06-billion net loss in Q4 and signalling that it's prepared to make major changes in the way it does business.

Barrick Gold has vowed to make major changes in the way it does business after a massive writedown on its copper business in Africa pushed the miner to a loss of more than US$3 billion in the fourth quarter.

“It’s a new paradigm, we’ve made fundamental progress and we’ll continue to be a leader in our industry by being more disciplined in our allocation of capital,” CEO Jamie Sokalsky told analysts Thursday as he expressed his disappointment with the difficulties encountered in the past year.

Sokalsky said the focus must be on getting better returns from its production and not chasing growth at any cost.

“We’re still in a high gold price environment, with supportive price fundamentals,” he said. “I think there are many reasons to feel positive about both gold and copper prices but we just can’t rely on those prices continuing to go up. We have to manage the business better.”

The company is cutting or delaying US$4 billion in previously budgeted capital spending and writing down the value of its copper business unit by $4.2 billion after taxes, including $3.8 billion for its copper business and Lumwana mine in Zambia.

The charge comes about two years after Barrick acquired the mine amid soaring copper prices as part of a US$7.3 billion takeover of Equinox Minerals Ltd. The industrial metal’s price has since fallen by about 25 per cent, forcing many other miners to also take writedowns.

Despite the volume of copper at Lumwana, the cost to extract the metal is much higher than originally anticipated in 2011, including from a doubling of royalties by the Zambian government, Sokalsky said.

Barrick said it will use a new method for analysing the total cost of a mine throughout its entire life, and revealed Lumwana will be more expensive and less profitable than previously thought.

The Toronto-based company said it doesn’t plan to build any more new mines at this time and has put several mine expansions on hold, although it will continue to advance its gold projects in Nevada. The state has about one-third of Barrick’s total gold reserves and contributed about 40 per cent of its total production last year.

It’s also looking to reduce overhead costs by more than $100 million this year, although it didn’t provide details on how it will make those cuts. And it also plans to sell non-core assets such as Barrick Energy and Kabanga, its nickel joint venture in Tanzania.

Barrick (TSX:ABX), which reports in U.S. currency, beat expectations even though it lost $3.06 billion, or $3.06 per share, for the period ended Dec. 31. That compared to a profit of $959 million, or 96 cents per share a year earlier. Revenues increased 11.3 per cent to $4.2 billion, from $3.76 billion.

Adjusting for $4.2 billion in writedowns, including $3.8 billion for its copper assets, Barrick earned $1.11 billion, or $1.11 per share, compared to $1.17 billion or $1.17 peer share in the prior year.

Barrick Gold was expected to earn $1.04 per share in adjusted profits on $4.2 billion of sales in the fourth quarter, according to analysts polled by Thomson Reuters.

For the full year, it lost $670 million or 66 cents per share on $14.5 billion of revenues. On adjusted basis it earned $3.83 billion or $3.82 per share.

The miner generated a record $5.44 billion of operating cash flow in 2012 as it produced 7.42 million ounces of gold, including 2.02 million ounces in the fourth quarter.

Its new measure of all-in sustaining cash costs were $972 per ounce in the quarter, while total cash costs were $584 per ounce.

Barrick expects its gold production in 2013 will range between seven and 7.4 million ounces, while copper production is forecast at 480-540 million pounds.

Sokalsky acknowledged that investors have lost confidence in Barrick and other gold companies as their share prices have failed to keep pace with the soaring price of gold because of rising costs and decisions to pursue growth at any cost.

“The message from investors is clear and rightfully so, we need change and I and the Barrick management team have all been focused on making key changes in order to do a better job of delivering value to our shareholders.”

George Albino of GMP Securities said potential delays at the Pascua mine in Chile and grim Lumwana outlook overshadowed strong results.

“Despite the strong quarter and operational beat vs. our estimates and this morning’s positive equity performance, we view the quarter as a net mild negative,” he wrote in a report

Sokalsky, who was Barrick’s chief financial officer, was suddenly installed a CEO last summer, replacing Aaron Regent. Barrick founder Peter Munk was joined as co-chairman by a former president of Goldman Sachs.

At the time, Munk made it clear that shareholders had been disappointed by the company’s stock price.

Since then the stock has continued to fall from just under C$45 on June 5 to $32.44 at the close of trading on Thursday on the Toronto Stock Exchange, up 72 cents.

Sokalsky also announced Thursday that Barrick’s chief operating officer, Igor Gonzales, will retire this year but he will remain until his successor is appointed.

Gonzales joined Barrick in 1998 and has played a key role in the growth of Barrick’s South America business unit.