African Barrick Gold: Increased Gold Production

African Barrick Gold’s Q4 '12 production results demonstrated a 9.3% quarter-on-quarter increase in gold production, compared to Q3, driven by a 12.3% increase in average grades and a 9.3% increase in mill throughput. Compared to Edison’s prior expectations, production was 2.6% lower. However, there was a 21,099oz shortfall in gold sold compared to gold produced (owing to timing issues), which cost the company an estimated $35.9m of FY '12 revenues. The shortfall will be made up in Q1 '13, but we have revised down earnings expectations for Q4 '12 and FY '12 by 47.2% and 20.7% respectively. By contrast, Q1 '13 will benefit by an estimated 6.6c per share. Without the shortfall, Edison’s downgrade would have been a mere 1.8c per share.

Buzwagi at last
While Buzwagi and North Mara had notably good quarters, Bulyanhulu suffered from a continuation of the problems that beset it in Q3 '12 (eg. blocked paste fill pipes, which restricted access to the higher grade, long-hole stopes) plus a higher-than-average rate of staff churn owing to a spike in temporary resignations occasioned by an anticipated change to the Tanzanian pension system. The paste fill problems are being rectified by drilling new holes. By contrast, throughput at North Mara returned to plan at the same time as the head grade recovered above 3.0g/t (albeit one quarter later than originally expected). The grade at Buzwagi similarly increased by 75% to 2.1g/t (although this effect will prove temporary); more significantly, at a rate of 11,543tpd, mill throughput was within 3.8% of nameplate capacity, as management mastered working diesel back-up power supply in sequence with grid power.

Valuation: 488pps core plus 129pps expansion plus?
Edison estimates that average unit working costs will have fallen 5.6% to $71.00/t in Q4, on which basis unit costs of production for Q4 '12 and FY '12 will have fallen to $919/oz and $940/oz respectively. In FY '13, we estimate that the grade at Bulyanhulu will remain at 8.0g/t, the grade at North Mara will moderate to 2.7g/t, costs at Bulyanhulu will revert to $193/t (vs $174/t in Q2 '12) and costs at Buzwagi will revert to $41/t (vs $40/t in Q1 '12). On this basis (and assuming 11,207oz of production from Tulawaka) ABG will produce c 630,283oz at a unit cost of production of $900/oz.

In the longer term, assuming a gold price of $1,676/oz (vs $1,350/oz previously), Edison estimates that the net present value of the future (maximum potential) dividend stream to investors from existing producing assets is $7.80 (488p) per share. This valuation excludes any upside from either the Bulyanhulu plant expansion (which we previously valued at 22.6c per share, but now 36.2c/share at $1,676/oz Au), Nyanzaga (which we previously valued at 87.4c per share, now 170.1c/share), or any additional blue-sky exploration potential – ie a total valuation of $9.87 (£6.17) per share plus blue-sky.

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