Barrick Gold (ABX) Q2 Earnings Preview 2013: World's Biggest Gold Producer To See 20%-Plus Profit Drop On Lower Selling Prices, Impairment Charges, High Expenses

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Munk
Barrick Gold Corporation Chairman Peter Munk speaks during the annual general meeting of shareholders in Toronto in 2012.

Barrick Gold Corporation (USA) (NYSE:ABX), the world's largest gold producer, will report a more than 20 percent fall in second-quarter profit on a huge drop in its selling price and a massive impairment charge on the Chilean portion of its troubled Pascua-Lama mine, as well as high expenses.

The Toronto gold producer, which reports Thursday before the market opens, is expected to announce net income of $607.12 million, down 22.56 percent or $176.88 million below the year-earlier level. Earnings per share are expected to drop 24 percent to 59 cents compared with 78 cents in last year's second quarter. It will also report a lower profit margin, 4.3 percent below the year-earlier period, according to analysts surveyed by Thomson Reuters.

Barrick's revenue will likely drop to 3.09 billion, 5.4 percent below the previous year's $3.28 billion.

The price of gold dropped by more than 22 percent in the second quarter as investors reacted to announcements made by the central banks of the world's two largest economies. The U.S. Federal Reserve announced that it would soon scale back its bond repurchasing program, and China's central bank also announced during the period that it plans to tighten its money supply. 

Besides having to accept a sharply lower selling price for its gold, Barrick's production also suffered. The Chilean government forced Barrick to delay production at its Pascua-Lama mine until the facility's water system was rebuilt to meet environmental requirements. The upshot was a drop in production that forced Barrick to take a writedown that is estimated at $4.5 billion to $6 billion.

Jorge Beristain with Deutsche Bank Equity Research said Barrick had already in the second quarter announced $537 million in writedowns for its Africa operations and $500 million in its energy business. "Add all those writedowns together, plus gold's price drop, and you have about $6 billion in writedowns" he said.

In addition to a lower selling price and production setbacks, high expenses weighed on the company's results.

"Barrick is working through its current portfolio. Decisions from previous years are impacting them now," Elizabeth Collins, with Morningstar Inc., said, referring to high-cost, low-volume copper mines in Saudi Arabia, Zambia and Tanzania. "Higher costs, production disappointments and political risk are partly to blame."

There were some operational successes in the second quarter. Its North American facilities performed well, and it ramped up production at its Dominican Republic mine to 146,000 ounces of gold from 96,000 ounces in the first quarter, Beristain said.

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