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Barrick Gold Corp. is poised to wipe out all of its retained earnings for the second time in less than four years.
An anticipated writedown of US$4.5-billion to US$5.5-billion on the bungled Pascua-Lama project would eliminate the US$3.9-billion in retained profits that the gold giant reported at the end of the first quarter. Back in 2010, Barrick wiped out more than US$2.2-billion of retained earnings when it took a US$5.2-billion charge to close out its hedge book.
It is highly unusual for a company of Barrick’s size and profitability to be in this position twice in such a short time. And while these are non-cash charges, experts said they point to a troubling trend of poor decision-making and oversight at the world’s largest gold producer.
“The writedowns impact them in perception,” said George Topping, an analyst at Stifel Nicolaus.
The red ink could be a lot bigger when the company reports second quarter earnings in four weeks. Barrick warned of other possible impairments last Friday, and analyst Greg Barnes of TD Securities estimated they could total close to US$10-billion. He noted that Barrick is still carrying US$3.5-billion of goodwill from the disastrous acquisition of Equinox Minerals Ltd., meaning a second writedown on the Equinox assets is possible. The Buzwagi mine in Tanzania is also at risk of a writedown, he wrote.
Barrick has elected to conduct fresh impairment tests in light of sharply weaker gold and silver prices. They have plunged 24% and 35% since the start of 2013, respectively.
When the company reported its 2012 year-end results, it assumed a gold price of US$1,700 an ounce to estimate future revenues from its mines. That is far above the current level of US$1,243.
Additionally, Barrick is using a price of US$1,500 an ounce to calculate its gold reserves, which is higher than any of its competitors and also out of touch with the current market. If the company elects to plug in a lower price, its gold reserves will fall (though the grade will increase as many low-grade ounces will disappear).
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