Barrick Gold Corporation operates mines in North America, South America, Australia and Africa. The company has mainly gold and copper in its portfolio and competes with other mining companies such as Newmont Mining, Goldcorp Inc. and Freeport McMoran Copper.
In this article, we take a closer look at Cortez and Goldstrike mines that are located in Nevada and are Barrick Gold’s two largest mines in terms of gold production. In 2013, they together constituted 31% of the company’s total gold production. In the North American region, which accounts for almost 43% of Barrick’s total production, gold from these two mines amounts to more than 70% of Barrick’s production.
Let’s take a look at the cost of production, the significance of the mines for Barrick’s overall portfolio and future, the quantity of reserves and the likely production trajectory going forward.
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Cost Profile
The all-in sustaining cash cost is a newly adopted cost measure in the gold mining industry. It includes total cash costs, sustaining capital expenditures, G&A cost, mine site exploration and evaluation costs, and environmental rehabilitation costs. In 2013, Goldstrike's production stood at 892,000 ounces of gold at an AISC of $901 per ounce. In the same year, Cortez produced 1.337 million ounces of gold at an AISC of $433 per ounce. Considering that Barrick’s overall production in 2013 was 7.16 million ounces at an AISC of $915 per ounce, excluding the low costs incurred at Cortez and Goldstrike, the overall costs would be much higher.
Players like Kinross, Newmont and Goldcorp have production costs in the range of $1,000-1,200 per ounce. Thus, Cortez and Goldstrike are crucial to sustaining Barrick’s cost advantage over rivals.
Advantage Of Low Costs
In 2013, Barrick's entire gold production was delivered into the spot market. The company realized an average price of $1,407 per ounce. For 2014, Barrick has assumed a price of $1,300 per ounce and has reduced the price assumption for reserve calculation to $1,100 per ounce.
At the presently prevailing price levels of $1,300-1,350 per ounce, many small and medium scale miners are hemorrhaging owing to their high costs of production. We think that if prices don’t cross $1,400 per ounce soon and stay there, high cost mines will be shut down and prices will rise.
Reserves And Production Potential
Mining companies generally measure their future production prospects in terms of proven and probable reserves. At the end of 2013, Goldstrike had proven mineral reserves of 65.94 million tonnes, containing 6.76 million ounces of gold. Probable mineral reserves stood at 28.78 million tonnes, containing 3.94 million ounces of gold. Thus, overall reserves stood at 10.7 million gold ounces. On the other hand, Cortez had proven mineral reserves of 23.87 million tonnes which contained 1.57 million ounces of gold, and probable reserves of 183.83 million tonnes which contained 9.45 million ounces of gold.
One may notice that although Cortez contains a little more than one-third of the proven mineral reserves at Goldstrike, the quantity of gold contained is disproportionately lower. The difference arises due to the grade of ore, a parameter measured simply as gold ounces per tonne of ore. While the grade of ore at Goldstrike is 0.103 ounces/tonne, that at Cortez is just 0.066 ounces/tonne. A similar explanation holds forth for probable mineral reserves. For these, the grade of ore at Goldstrike is 0.137 ounces/tonne while at Cortez it stands at 0.051 ounces/tonne. The grade of ore at both mines is superior to Barrick’s company-wide grade of 0.045 ounces/tonne for proven reserves and 0.037 ounces/tonne for probable reserves. Even rival miner Newmont has an overall ore grade of 0.039 ounces/tonne for proven reserves and 0.027 ounces/tonne for probable reserves.
One should note, however, that figures for the grade of ore at these mines are not the realized grades in any given year. Ore bodies are never homogeneous. Therefore, we observe the grade of mined ore varying year-over-year. For some years it may be greater than the overall grade, and for others it may be lower. The lack of uniformity should be evident from the following tables taken from Barrick’s 2013 annual report filed with the SEC:
Goldstrike:
| Summary of Operating Data | For the years ended December 31 | |||||||||||||||
| 2013 | 2012 | % Change | 2011 | |||||||||||||
| Total tons mined (000s) | 96,287 | 110,361 | (13%) | 118,523 | ||||||||||||
| Ore tons processed (000s) | 7,527 | 8,253 | (9%) | 7,798 | ||||||||||||
| Average grade (ozs/ton) | 0.146 | 0.172 | (15%) | 0.166 | ||||||||||||
| Gold produced (000s/oz) | 892 | 1,174 | (24%) | 1,088 | ||||||||||||
| Gold sold (000s/oz) | 887 | 1,175 | (25%) | 1,085 | ||||||||||||
| Cost of sales ($ millions) | $ 656 | $ 730 | (10%) | $ 653 | ||||||||||||
| Adjusted operating costs (per oz)2 | $ 606 | $ 520 | 17% | $ 512 | ||||||||||||
| All-in sustaining costs (per oz)2 | $ 901 | $ 802 | 12% | $ 774 | ||||||||||||
| All-in costs (per oz)2 | $ 1,153 | $ 926 | 25% | $ 802 | ||||||||||||
Cortez:
| Summary of Operating Data | For the years ended December 31 | |||||||||||||||
| 2013 | 20121 | % Change | 2011 | |||||||||||||
| Total tons mined (000s) | 147,718 | 120,203 | 23% | 119,021 | ||||||||||||
| Ore tons processed (000s) | 22,045 | 9,870 | 123% | 11,502 | ||||||||||||
| Average grade (ozs/ton) | 0.076 | 0.150 | (49%) | 0.136 | ||||||||||||
| Gold produced (000s/oz) | 1,337 | 1,370 | (2%) | 1,421 | ||||||||||||
| Gold sold (000s/oz) | 1,371 | 1,346 | 2% | 1,416 | ||||||||||||
| Cost of sales ($ millions) | $ 630 | $ 603 | 4% | $ 606 | ||||||||||||
| Adjusted operating costs (per oz)2 | $ 222 | $ 233 | (5%) | $ 246 | ||||||||||||
| All-in sustaining costs (per oz)2 | $ 433 | $ 608 | (29%) | $ 437 | ||||||||||||
| All-in costs (per oz)2 | $ 529 | $ 628 | (16%) | $ 486 | ||||||||||||
According to Barrick, based on existing reserves and production capacity, the expected remaining mine life at Goldstrike is 13 years for underground mining, 14 years for open pit mining and 16 years for processing operations (reflecting additional underground ores as well as additional toll ores purchased from third-party vendors). For Cortez, the expected remaining mine life is approximately 13 years for underground mining, nine years for open pit mining and 13 years for processing operations. The company is likely to have arrived at these figures based on its own models, taking into account the geological composition of the mine, the grade of ore at different layers in the ore body, and internal demand projections.
Key Takeaways
1) Goldstrike and Cortez are Barrick’s most productive gold mines and account for nearly one-third of Barrick’s total production.
2) These mines are also among its low cost mines which give Barrick a crucial competitive advantage, especially in the present circumstances when market headwinds are threatening the survival of many peers.
3) The grade of ore at Goldstrike and Cortez is superior to Barrick’s overall average, which helps in bringing down the company’s overall cost of production because more gold can be recovered per tonne of ore mined. It also generates higher free cash flow for each tonne of ore extracted.
4) Given the present level of reserves at these mines, they are likely to remain productive for another 10-15 years. However, the level of production each year can’t be expected to be the same as the year before because it depends on the grade of ore, which is not uniform throughout the deposit. As the mines approach the end of their lives, the production will show a declining trend.
We have a price estimate for Barrick Gold of $15.
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