February 16, 2012 / 10:44 AM / 5 years ago

2012 outlook spoils African Barrick dividend party

5 Min Read

LONDON (Reuters) - The prospect of power cuts, disappointing growth prospects and soaring costs outweighed the boost from a trebled 2011 dividend in African Barrick Gold ABGL.L results on Thursday, leaving the company's shares more than 9 percent lower.

The Tanzania-focused company last month posted a 2 percent dip in full-year production to 688,278 ounces, after outages at its Buzwagi mine held back output in the final quarter. But with power disruptions set to continue into 2012, it set its target for the year on Thursday at a modest 675,000 to 725,000 ounces -- forecasting what could be another drop.

Costs, meanwhile, jumped 22 percent on the back of industry wide inflation in, for example, the cost of materials, but also a higher headcount and increased use of more expensive generator power to keep mines working, with cash costs per ounce coming in at $692. The miner forecast a similar rate of increase for 2012, with cash costs of $790 to $860 per ounce.

The soaring cost of production, the darker side of rising prices in recent years, is becoming an increasingly painful issue for miners globally and particularly for those in newer frontiers like West and East Africa, where activity has boomed and talent and materials are in short supply.

African Barrick Gold Chief Executive Greg Hawkins said the miner would fight rising costs with increased productivity, increased recoveries and efforts to make its workforce as local as possible, cutting out expensive expatriate staff.

"If the gold price stabilizes, that will put some downward pressure on the cost base. If the gold price keeps going up, the pressure will still be there," he told Reuters.

ABG, a unit of Barrick Gold Corp (ABX.TO), also warned the power supply issues that dogged production through 2011 would likely continue well into 2012. The miner lost 40,000 ounces of production last year due to Tanzania's unreliable power supply.

It expects to complete back-up power installations at all its mines by the end of the second quarter, mitigating the production impact of power outages -- if not the cost, given the relatively higher cost of diesel-generated power.

The miner's shares, hit last year by its disappointing production, were down 8.7 percent at 473.4 pence at 0940 GMT, underperforming a 1.6 percent drop in the broader sector.

"On balance today's announcement is moderately negative," analysts at Liberum said in a morning note.

"Full year 2011 numbers were in line and while the dividend move looks better-than-expected, shares may react negatively to 2012 volumes and cost guidance."

Dividend Boost, Eyes Deals

African Barrick Gold, which operates four gold mines in Tanzania, said earnings before interest, tax, depreciation and amortisation (EBITDA) rose to $544 million in 2011, broadly within the range of analyst estimates, on the back of a 25 percent rise in revenues.

The surprise came in the form of a 208 percent boost to its total dividend to 16.3 cents per share. The miner also laid out a dividend policy committing to handing back between 15 and 30 percent of profits after tax and minority interests each year.

Gold miners, whose share prices have underperformed robust gold prices, have come under increased pressure from shareholders to return more of the cash, as development and acquisition spending fails to use up treasure chests.

Some analysts suggested the dividend hike was a recognition of the miner's difficulty in finding adequately priced deals in booming West and Northeast Africa, but Hawkins said prices were becoming increasingly attractive.

He said the miner had looked at around 20 projects in the last 18 months, but was unable to "close the valuation gap" through the whole of 2010 and into 2011, when commodity prices were at their post-crisis peak.

"We remain pretty active in looking around in the M&A space," he said. "Prices...have come off pretty dramatically in the last couple of quarters, so valuations are getting a little more interesting and it is still part of the company's strategy to broaden its wings across Africa."

Gold miners' valuations are currently at their lowest in a decade, though cash flows are still close to historic highs thanks to robust gold prices, making gold a likely hotspot for mining mergers and acquisitions this year.

Reporting by Clara Ferreira-Marques, Editing by Mark Potter and Andrew Callus

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