CAPEX Forecasts: An Indication of Where the Gold Industry Is Heading

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In my last post on gold equities, I covered Agnico-Eagle, Alamos Gold and AuRico Gold. I have short-listed three more players that need some investors’ attention. Before discussing them, it is important to note that price of gold as a commodity has been falling lately. In that respect, we need to analyze the CAPEX plans of the gold players in 2013 and the future:

Barrick Gold (NYSE: ABX)

The Street forecasts 4Q12 gold production of 1.93 Moz (million ounces) at a cash cost of $583/oz and copper production of 120Mlbs at $2.10/lb C1 cash costs.

This quarter can be viewed as a culmination of headwinds for Barrick and a final flushing out of major negative news. BGC is expected to clear the decks in Q4, then set upon a path of delivery vs. rebased expectations. Potential negatives come from Pascua Lama, Lumwana, ABG and 2013 guidance. The Street is cautious ahead of the quarter but continues to see the company as a 9-12 month turn-around story, which is preferred for:

(1) The management focus on FCF;

(2) Selective pursuit of high return projects; and

(3) BGC's diversified asset base and low cost production

At Pascua Lama, the Street doesn't expect a further increase to pre-production CAPEX from the $8-$8.5 billion currently guided, but I will feel more comfortable with this number once the EPCM's review of the project's progress is completed (expected this quarter). Additionally, any further slippage for the current H2/14’ start-up target will be an interesting point.

For Lumwana, the investors are focused on the results of the expansion study and the estimated production and costs to come from the Chimiwungo deposit (90% of future production). Barrick currently carries $3.8 billion for Lumwana, plus $3.5 billion in goodwill attributable to the Equinox transaction on its balance sheet. The Street is expecting a write-off of a portion of the goodwill.

With regard to 2013 guidance, the estimate for 2013 production is 7.4 Moz at $630/oz cash costs, with PV's 500-650kozs replacing depletion at older assets, prudent capital spending and lower grades at other Barrick assets. Costs are expected to be ~8% above the top end of the 2012 guidance range.


First gold pour is expected by Feb. 1, 2013. The stock is expected to begin an upward re-rating that normally occurs as the company graduates to the producer category this year. However, as with any new start-up, especially of this size, share price volatility is expected as the mine experiences normal teething pains. Let’s see what the company has to announce on Feb 22. at its earnings release.

Eldorado Gold (NYSE: EGO)

Eldorado previously reported Q4 production of 193.58koz (sales of 186.98koz). Cash operating costs were reported as $523/oz.

The company released 2012 production results and 2013 guidance on Jan. 9, after which Credit Suisse trimmed the target price by $2 to $18 based on higher costs and non-growth CAPEX in 2013. With this minor negative catalyst behind it, Eldorado remains an Outperform based on:

(i)  a solid long term operating track record (with 2012 being a hiccup year); and

(ii) a history of Net-Asset-Value accretion through exploration results that lead to reserve/resource growth.

Also, Eldorado owns a low cost cornerstone of production with 40% over the next five years from Kisladag (400kozspa, $408/oz cash cost, +10Moz reserve deposit).

The company is likely to update reserves and resources and has a solid track record of delivery in this area.

Foolish bottom-line

With an uncertain future for volatile gold prices, the companies have quite conservative CAPEX guidance for 2013. However, a lot will be disclosed in the ongoing earnings season, so we'll see if these companies have something up their sleeves to surprise the investors. 

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