Barrick Gold Slips to Underperform

On Feb 28, we downgraded gold mining giant Barrick Gold Corporation (ABX - Analyst Report) to Underperform based on higher expected costs and somewhat depressed production outlook for 2013.

Why the Downgrade?

Estimates for Barrick have been declining since it reported fourth-quarter 2012 results on February 14. The company slipped to a loss in the quarter, hit by hefty tax impairment charges related to its copper business.

Adjusted earnings fell year over year but beat the Zacks Consensus Estimate. The company saw increased cash costs across its gold and copper businesses. Its production guidance for 2013 reflects a year over year decline.

Following the release of fourth quarter results, the Zacks Consensus Estimate for 2013 fell 6.8% to $4.50 per share. On a similar note, the Zacks Consensus Estimate for 2014 also declined 3.8% to $4.83 per share. The bearishness appears to reflect higher expected costs and lower output. With the Zacks Consensus Estimates for both 2013 and 2014 falling, the company now has a Zacks Rank #5 (Strong Sell).

Cause for Concern

Barrick, on Feb 14, said that it expects gold production is in the band of 7 million to 7.4 million ounces, indicating a decline from the level it achieved in 2012. Lower anticipated productions from South America and Africa are expected to mask higher overall output from North America.

Production from the company’s flagship Goldstrike mine is expected to fall due to lower throughput resulting from the modification of autoclaves. Productions are also expected to be lower across Cortez, Lagunas Norte and Veladero mines.

Barrick’s prospects are also hindered by rising costs. The company had to contend with a considerable increase in cash costs in 2012. Total cash cost jumped 27% year over year to $584 per ounce of gold. Copper C1 cash costs also climbed 27% year over year in 2012.

Total cash costs for 2013 have been projected in the range of $610-$660 per ounce of gold, reflecting an annualized increase, mostly due to higher labor costs and lower ore grades.

Gold Mining Stocks That Warrant a Look

While we prefer to stay away from Barrick, other gold mining stocks worth considering are Banro Corporation (BAA - Snapshot Report), Sandstorm Gold Ltd. (SAND) and Seabridge Gold, Inc. (SA - Snapshot Report). All of them are Zacks Rank #2 (Buy) stocks.