July 31, 2008 / 8:38 PM / in 10 years

WRAPUP 1-Canada gold producers hampered by surging costs

TORONTO, July 31 (Reuters) - Soaring production costs overshadowed the quarterly earnings of top gold producers Barrick Gold (ABX.TO) and Goldcorp (G.TO) on Thursday, despite results that benefited from a sharp year-on-year rise in gold prices.

Profit at world No. 1 gold miner Barrick climbed 22 percent as the 34 percent rise in the price of gold stayed ahead of cash costs that climbed 23 percent to $417 per ounce.

But the company was forced to revise upwards its 2008 cost estimates, while the company’s chairman and acting CEO, Peter Munk, wasted little time in voicing his concerns about inflation on the company’s conference call.

“The main challenges that face Barrick, and I think I may as well speak for the industry at large, are the cost factors. They are relentlessly moving upwards,” he said.

For Goldcorp, the world’s No. 2 producer by market capitalization, the cost inflation was even steeper and unexpected by the market.

The miner posted a surprise loss during the quarter, with its cost per ounce rising 42 percent to $432 on a stand-alone basis, meaning not factoring in by-product metals as an offset to costs.

It also raised its 2008 cost estimates by 20 percent.

The company lost $9.2 million, or 1 cent a share, compared with a profit of $2.9 million, or nil a share, in the year-before period. Adjusted earnings were 12 cents a share, while analysts had expected 22 cents a share.

“That was not the way it was supposed to happen,” Research Capital analyst Barry Allan said of the Goldcorp results.

The market sold off Goldcorp by 4.3 percent to C$38.15, although some of that may have been due to its announced C$1.5 billion ($1.47 billion) bid for Gold Eagle Mines GEA.TO for its Bruce Channel gold discovery. Shares of buyers often retreat on announced deals.

Barrick managed to come in close to the market’s estimates, earning $485 million, or 55 cents a share, in the second quarter, from $396 million, or 45 cents, in the year-before period.

The cost pressures also extended to smaller players, as Canadian mid-tier player Centerra Gold (CG.TO) reported a cost run-up of 58 percent to $553 an ounce.

However, Centerra’s reported profit tripled on the back of a large gain in the value of its treasury shares.


Miners have been been hit by higher costs of several inputs, including energy, labor, chemicals such as sulphuric acid, and equipment.

Meanwhile, the rising costs of building mines and expanding current operations, combined with the pressure to increase production, and difficulties of procuring long lead-time equipment, make the producers increasingly vulnerable to delays.

“When you look at Goldcorp, they got some huge projects, and these projects, if there are any problems, any delays... higher costs have resulted,” said John Ing, president of Toronto investment dealer Maison Placements.”

Barrick’s Munk said the key to lowering costs at his company is developing lower-cost mines to replace ounces from nearly depleted operations.

Barrick warned its 2008 production would come in on the low end of its expected range of 7.6 million to 8.1 million ounces, due to lower mining rates and grades at some of its mines.

Goldcorp cut its output forecast for the year to a range of 2.3 million to 2.4 million ounces, down from its previous expectation of 2.6 million ounces.

Barrick shares ended unchanged at C$43.36, while Centerra eased 36 Canadian cents, or 6.5 percent, to C$5.20.

$1=$1.02 Canadian Reporting by Cameron French; Editing by Frank McGurty

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