- Barrick's new mines are making a significant contribution to earnings and cash flow in a positive gold price environment.
- Third-quarter 2005 net income was $113 million, or $0.21 per share, and cash flow from operations was $232 million, or $0.43 per share, compared to net income of $32 million, or $0.06 per share, and cash flow from operations of $152 million, or $0.28 per share, in the prior-year period.
- Gold sales were 1.5 million ounces at a total cash cost of $210 per ounce(1) in Q3 2005. The Company remains on track to meet its original full-year guidance to produce between 5.4 - 5.5 million ounces of gold for 2005 at total cash costs of about $225 per ounce(2).
- The Lagunas Norte mine in Peru, which achieved start-up in June 2005 ahead of schedule and under budget, produced over 210,000 ounces of gold at total cash costs of $121 per ounce during Q3 2005. In its first full quarter of operations, Lagunas Norte has become one of Barrick's largest producers, second only to the flagship Goldstrike property.
- The Veladero mine in Argentina poured its first gold during Q3, ahead of schedule. The commissioning of Veladero marks the beginning of production from the highly prospective Frontera District, a 30-million ounce gold camp in Chile and Argentina that also contains the sizeable Pascua-Lama project.
- Significant progress continues at the Company's other development projects, including Cowal in Australia which is on target to commence operations in Q1 2006.
- Significant drilling results on the Dee Property could lead to a new oxide ore deposit on the Carlin Trend.
Barrick Gold Corporation today reported earnings of $113 million ($0.21 per share) and operating cash flow of $232 million ($0.43 per share) for third quarter 2005 compared to earnings of $32 million ($0.06 per share) and operating cash flow of $152 million ($0.28 per share) in the year-earlier period.
"These strong results demonstrate that Barrick has the team, resources and expertise to develop new mines and deliver value to its shareholders," said Greg Wilkins, President and Chief Executive Officer. "These new mines solidify Barrick's foundation for continued growth."
Barrick's new mines began to deliver significant results in third quarter 2005, with earnings and cash flow increasing appreciably over previous quarters. Most notably, Lagunas Norte produced 211,000 ounces during the quarter at a total cash cost of $121 per ounce. The availability of higher-grade ore at Goldstrike open pit also contributed to higher production and lower total cash costs per ounce in third quarter 2005, compared to the prior-year quarter.
In addition to higher gold sales volumes and lower total cash costs, third-quarter 2005 earnings were favorably impacted by a $32-per-ounce higher realized gold price, compared to the prior-year period, partly offset by higher income tax expense associated with higher earnings. The Company's third-quarter 2005 earnings also included a number of special items that had a positive effect totaling $9 million post-tax ($0.02 per share), compared to a positive effect of $15 million post-tax ($0.03 per share) in the prior-year quarter. See page 9 of Management's Discussion and Analysis for further details.
PRODUCTION AND COSTS
In third quarter 2005, Barrick produced and sold 1.5 million ounces of gold at total cash costs of $210 per ounce, compared to 1.2 million ounces produced and 1.3 million ounces sold at total cash costs of $221 per ounce for the prior-year quarter. Barrick reduced its gold hedge commitments by a further 200,000 ounces, bringing the Corporate Gold Sales Contracts position down to 6.4 million committed ounces, or 9% of year-end reserves excluding Pascua-Lama.
The third quarter benefited from a full quarter of production from Lagunas Norte as well as a stronger operating performance at Goldstrike, and these trends are expected to continue in the fourth quarter. The Company is on track with its original guidance to produce 5.4 - 5.5 million ounces of gold for the year at total cash costs of about $225 per ounce, but remains subject to increasing cost pressures affecting the entire industry. Refer to the Production and Cost Summary on page 5 for a mine-by-mine summary of full-year 2005 production and total cash cost estimates.
The North America region saw a significant increase in production over the second quarter 2005 at lower total cash costs, due primarily to mining higher-grade ore at the Goldstrike open pit. In the fourth quarter 2005, the North America region is expected to deliver a similar operating performance as the third quarter and is on track to meet its full-year production and cash cost guidance.
The South America region also saw a significant increase in production over second quarter 2005 at lower total cash costs as Lagunas Norte was in production for a full quarter subsequent to commencing operations in mid-June 2005. The South America region's production for the full year is expected to be slightly lower than previously expected and at marginally higher total cash costs.
The Australia/Africa region's operating performance was similar to the second quarter 2005. The region is on track to meet its full-year production guidance at slightly higher total cash costs.
The Company recently consolidated its interests in South America into one regional business unit with Igor Gonzales as President. The other regions are led by Greg Lang, North America; John Shipp, Australia/Africa; and Rene Marion, Russia/Central Asia.
DEVELOPMENT PROJECTS UPDATE
During the third quarter, the Veladero mine in Argentina poured its first gold, earlier than previously forecast, and is in its final stages of commissioning. Veladero's construction costs are expected to be in line with the Company's estimate of about $540 million. Gold production from Veladero is expected to average approximately 700,000 ounces annually over the first three full years of operation.
The start-up of Veladero marks the beginning of Barrick's production in the Frontera district that straddles the Chile/Argentina border. Barrick has a 3,000-square-kilometer land position in the district, including its Pascua-Lama project. Frontera is one of the most prospective gold camps in the world, with Pascua-Lama targeted to be in production in 2009 subject to timely completion of the permitting process. Within the region, Barrick currently has proven and probable gold reserves in excess of 30 million ounces, resources of over 3 million ounces(3), and through its current exploration program, is targeting resource additions.
The Company's Cowal project in Australia is progressing with overall construction about 50% complete. Procurement is concluded and 85% of materials and equipment have been delivered to site. Construction highlights include the completion of engineering, the structure and cladding for the plant workshop, the regrind area structural steel and the backfill for the stockpile reclaim tunnel. Production is expected to commence in first quarter 2006.
At the East Archimedes project located at the Ruby Hill mine site in Nevada, permitting approvals were received in October and mining activities are ramping up. The first gold pour is targeted for mid-2007.
At the Pascua-Lama project in Chile/Argentina, work continues on community and government relations, permitting, protocol implementation and tax stability. While approvals for the environmental impact assessments are targeted in the first quarter of 2006, the timing of the receipt of these approvals, as well as the resolution of some of the other external issues, such as permitting and licensing; cross-border operating issues; and fiscal, tax and royalty issues, is largely beyond Barrick's control.
At the Nevada power plant, all major mechanical and electrical work has been completed. Performance testing is underway and test energy has been sold. The plant is expected to be ready for operation in November 2005.
EXPLORATION UPDATE(4)
In Nevada, Barrick's exploration program has been exploring 35 high-quality opportunities that range from reserve development to grassroots exploration. At Goldstrike North Post, reserve development drilling is underway and confirming the shape and grade of the orebody previously defined by surface drilling. Drill programs are also testing six additional targets on the Goldstrike property, with positive results for some areas, such as the Meikle Rodeo corridor, where drilling has intersected mineralized zones both immediately beneath active mining levels and at depth. The Betze North Pit drill program has recently returned several significant intercepts that may help expand the open pit or may represent high-grade underground pit-wall mining opportunities. Elsewhere in the district, exploration continues at Storm where ore grade mineralization outside the previously defined deposit has been intersected.
The Company is announcing significant drilling results at the Dee Property that could lead to a new oxide ore deposit on the Carlin Trend. Barrick holds a 60% interest at Dee, which includes the South Arturo Zone located to the southeast of the Storm deposit and the Dee open pit. Eight holes have been completed on the South Arturo Zone and all eight have intersected significant oxide gold mineralization. The drilling covers an area of 1,000 feet by 1,500 feet and the mineralization is open to the south, east and west. Drilling continues and a resource calculation will be done at year-end.
In the Frontera district in South America, exploration drilling and fieldwork resumed at the end of the quarter. Initial focus is on part of the Guanaco Zonzo area where a large geophysical anomaly between two known mineralized areas is being tested. Follow-up drilling is planned at the main Guanaco Zonzo target where previous drilling obtained potentially ore grades and widths. Drill programs will commence shortly at Regalito as well as at two other targets in the Veladero/Pascua-Lama area.
In Tanzania, a drill program at Buzwagi is continuing with results confirming the potential to add mineralization outside the currently defined pit outline. Engineering studies are ongoing and a pre-feasibility study is on schedule for completion by year end. On the Nyanzaga property, drill programs commenced on two near-surface oxide zones, and are continuing into the fourth quarter. Assay results confirmed the potential for an oxide resource and show the zones are open and extend to the south.
Barrick is building a new generation of mines around the globe and has the lowest total cash costs among the major gold producers. Its vision is to be the world's best gold company by finding, developing and producing quality reserves in a profitable and socially responsible manner. Barrick's shares are traded on the Toronto, New York, London, Euronext-Paris and Swiss stock exchanges.
(1) Total cash cost per ounce is defined as cost of sales divided by ounces sold. Total cash costs per ounce exclude amortization expense, which was $72 per ounce in third quarter 2005. For further information on this performance measure see page 20.
(2) The Company's original guidance of $220-$230 per ounce restated for the impact of the new accounting policy for stripping costs and the inclusion of accretion expense.
(3) Based on reserves calculated as at December 31, 2004 using an assumed price of $375 per ounce for gold, $5.50 per ounce for silver and an exchange rate of $1.45 Can$/US$. Calculations were performed by employees of Barrick under the supervision of Rene Marion, P.Eng., Vice President Technical Services of Barrick. For a breakdown of reserves and resources by category and additional information on reserves and resources, see the most recent Annual Information Form/Form 40-F on file with Canadian provincial regulatory authorities and the US Securities and Exchange Commission.
(4) Barrick's exploration programs are designed and conducted under the supervision of Alexander J. Davidson, P. Geo., Executive Vice President, Exploration and Corporate Development of Barrick. For information on the geology, exploration activities generally, and drilling and analysis procedures on Barrick's material properties, see Barrick's most recent Annual Information Form/Form 40-F on file with Canadian provincial securities regulatory authorities and the US Securities and Exchange Commission.
Key Statistics
Three months Nine months
ended ended
(in United States dollars) September 30, September 30,
(Unaudited) 2005 2004 2005 2004
----------------------------------------------------- --------------
Operating Results
Gold production (thousands of
ounces)(1) 1,509 1,240 3,812 3,807
Gold sold (thousands of ounces) 1,456 1,267 3,670 3,736
Per Ounce Data
Average spot gold price $ 439 $ 401 $ 432 $ 401
Average realized gold price 427 395 426 383
Total cash costs(2) 210 221 229 213
Amortization(3) 72 89 77 90
Total production costs 282 310 306 303
----------------------------------------------------- --------------
Financial Results (millions)
Gold sales $ 627 $ 500 $ 1,574 $ 1,431
Net income 113 32 226 92
Operating cash flow 232 152 457 386
Per Share Data (dollars)
Net income (basic and diluted) 0.21 0.06 0.42 0.17
Operating cash flow 0.43 0.28 0.85 0.72
Weighted average common shares
outstanding (millions)(4) 539 533 537 535
----------------------------------------------------- --------------
As at As at
September 30, December 31,
--------------------------
2005 2004
----------------------------------------------------
Financial Position
(millions)
Cash and equivalents $ 1,105 $ 1,398
Non-cash working capital 225 141
Long-term debt 1,763 1,655
Shareholders' equity 3,804 3,576
----------------------------------------------------
(1) Includes equity ounces in Highland Gold.
(2) Represents cost of goods sold plus royalties, production taxes
and accretion expense, less by-product revenues, divided by
ounces of gold sold. For further information on this performance
measure, refer to page 20.
(3) Represents amortization expense at the Company's producing
mines divided by ounces of gold sold.
(4) Fully diluted, includes shares issuable upon exchange of BGI
(Barrick Gold Inc.) exchangeable shares.
Production and Cost Summary
Production (attributable ounces) (000's)
-------------------------------------------
Three Nine
months ended months ended
September 30, September 30, December 31,
(Unaudited) 2005 2004 2005 2004 2005E
---------------------------------------------------------------------
North America
Open Pit 475 356 1,019 1,009 1,470-1,480
Underground 104 140 383 427 530-540
---------------------------------------------------------------------
Goldstrike Property Total 579 496 1,402 1,436 2,000-2,020
Eskay Creek 41 60 147 216 170-180
Round Mountain (50%) 97 106 290 297 370-375
Hemlo (50%) 59 54 180 181 235-240
Holt-McDermott(2) - 15 - 55 -
Marigold (33%) 15 12 49 32 65-70
---------------------------------------------------------------------
791 743 2,068 2,217 2,840-2,885
---------------------------------------------------------------------
South America
Pierina 153 133 454 552 615-625
Lagunas Norte 211 - 252 - 545-550
Veladero 5 - 5 - 50-55
---------------------------------------------------------------------
369 133 711 552 1,210-1,230
---------------------------------------------------------------------
Australia/Africa
Plutonic 60 72 194 231 250-260
Darlot 41 42 96 112 130-135
Lawlers 32 29 93 82 120-125
Kalgoorlie (50%) 99 129 336 334 435-440
---------------------------------------------------------------------
232 272 719 759 935-960
Bulyanhulu 82 84 239 261 320-325
Tulawaka (70%) 27 - 54 - 75-80
---------------------------------------------------------------------
341 356 1,012 1,020 1,330-1,365
Highland equity portion 8 8 21 18 20-30
---------------------------------------------------------------------
Total 1,509 1,240 3,812 3,807 5,400-5,500
---------------------------------------------------------------------
Total Cash Costs (US$/oz)(1)
-------------------------------------------
Three Nine
months ended months ended
September 30, September 30, December 31,
(Unaudited) 2005 2004 2005 2004 2005E
---------------------------------------------------------------------
North America
Open Pit $ 198 $ 249 $ 245 $ 256 $ 240-245
Underground 350 279 304 265 300-310
---------------------------------------------------------------------
Goldstrike Property Total 226 256 261 258 255-260
Eskay Creek 60 64 54 41 80-90
Round Mountain (50%) 235 205 232 211 250-260
Hemlo (50%) 281 269 281 244 275-285
Holt-McDermott(2) - 157 - 198 -
Marigold (33%) 277 204 222 200 225-235
---------------------------------------------------------------------
224 231 243 227 245-250
---------------------------------------------------------------------
South America
Pierina 123 124 128 104 130-135
Lagunas Norte 121 - 121 - 100-110
Veladero - - - - 245-255
---------------------------------------------------------------------
122 124 126 104 120-130
---------------------------------------------------------------------
Australia/Africa
Plutonic 239 223 253 215 250-260
Darlot 237 194 268 200 260-265
Lawlers 302 249 287 246 260-270
Kalgoorlie (50%) 231 233 219 232 245-250
---------------------------------------------------------------------
245 226 245 223 250-257
Bulyanhulu 327 280 347 299 340-350
Tulawaka (70%) 282 - 276 - 270-275
---------------------------------------------------------------------
272 241 272 242 275-280
Highland equity portion 314 212 297 206 300-320
---------------------------------------------------------------------
Total $ 210 $ 221 $ 229 $ 213 $(i)225
---------------------------------------------------------------------
(i) Represents approximate amount
Total Production Costs (US$/oz)
----------------------------------
Three months Nine months
ended ended
September 30, September 30,
(Unaudited) 2005 2004 2005 2004
---------------------------------------------------------------------
Direct mining costs at market
foreign exchange rates $ 237 $ 251 $ 263 $ 244
Gains realized on currency and
commodity hedge contracts (21) (20) (23) (20)
By-product credits (23) (26) (27) (28)
---------------------------------------------------------------------
Cash operating costs 193 205 213 196
Royalties 11 10 11 10
Production taxes 4 3 3 2
Accretion and other costs 2 3 2 5
---------------------------------------------------------------------
Total cash costs 210 221 229 213
Amortization 72 89 77 90
---------------------------------------------------------------------
Total production costs $ 282 $ 310 $ 306 $ 303
---------------------------------------------------------------------
(1) Total cash costs per ounce statistics for 2005 and 2004 are not
comparable due to the change in accounting for deferred stripping
costs. Refer to pages 18 and 19 for further details. For further
information on this performance measure, refer to page 20.
(2) Holt-McDermott ceased production in fourth quarter 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
This portion of the Quarterly Report provides management's discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in financial condition and results of operations as at and for the three and nine month periods ended September 30, 2005, in comparison to the corresponding prior-year periods. This MD&A has been prepared as of October 20, 2005. This MD&A is intended to supplement and complement the unaudited interim consolidated financial statements and notes thereto, prepared in accordance with US generally accepted accounting principles ("US GAAP"), for the three and nine month periods ended September 30, 2005 (collectively, the "Financial Statements"), which are included in this Quarterly Report on pages 21 to 38. You are encouraged to review the Financial Statements in conjunction with your review of this MD&A. This MD&A should be read in conjunction with both the annual audited consolidated financial statements for the three years ended December 31, 2004, the related annual MD&A included in the 2004 Annual Report, and the most recent Form 40-F/Annual Information Form on file with the US Securities and Exchange Commission and Canadian provincial securities regulatory authorities. Certain notes to the Financial Statements are specifically referred to in this MD&A and such notes are incorporated by reference herein. All dollar amounts in this MD&A are in millions of US dollars, unless otherwise specified.
For the purposes of preparing this MD&A, we consider the materiality of information. Information is considered material if: (i) such information results in, or would reasonably be expected to result in, a significant change in the market price or value of Barrick Gold Corporation's shares; or (ii) there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision, or if it would significantly alter the total mix of information available to investors. Materiality is evaluated by reference to all relevant circumstances, including potential market sensitivity.
CONTENTS
---------------------------------------------------------------------
Executive Summary 6
---------------------------------------------------------------------
Key Economic Trends 7
---------------------------------------------------------------------
Results 8
---------------------------------------------------------------------
Overview of 2005 versus 2004 8
---------------------------------------------------------------------
Consolidated Gold Production, Sales and Costs 9
---------------------------------------------------------------------
Results of Operating Segments 10
---------------------------------------------------------------------
Other Costs and Expenses 13
---------------------------------------------------------------------
Cash Flow 15
---------------------------------------------------------------------
Balance Sheet 16
---------------------------------------------------------------------
Quarterly Information 17
---------------------------------------------------------------------
Off-Balance Sheet Arrangements 17
---------------------------------------------------------------------
Critical Accounting Policies and Estimates 18
---------------------------------------------------------------------
Total Cash Costs Performance Measures 20
---------------------------------------------------------------------
EXECUTIVE SUMMARY
Production and sales increased and total cash costs per ounce decreased in third quarter 2005 compared to both the corresponding period in 2004 and the first two quarters of 2005. In third quarter 2005 we produced and sold 1.5 million ounces of gold at a total cash costs of $210(1) per ounce. The start-up of Lagunas Norte in June 2005 and availability of higher-grade ore at Goldstrike open pit in third quarter 2005 contributed to higher production and lower total cash costs per ounce than in both the third quarter 2004 and first half of 2005. Production rates in the first nine months of 2005 at Plutonic and Bulyanhulu were lower than originally expected, but this was offset by better performance at a number of our other mines. At Plutonic, open-pit mining ended in second quarter 2005, and at Bulyanhulu lower throughput led to lower production levels. Notwithstanding the fact that production at Plutonic and Bulyanhulu in 2005 is lower than initially expected, we remain on track to meet our original full-year guidance for 2005 to produce 5.4-5.5 million ounces of gold at an average total cash costs of about $225(2) per ounce. While we expect lower production levels at Plutonic, Bulyanhulu and Eskay Creek to continue, we are still targeting an increase in our gold production to about 6.8 million ounces in 2007.
(1) Total cash costs per ounce is defined as cost of sales divided by ounces sold. Total cash costs per ounce exclude amortization expense, which was $72 per ounce in third quarter 2005. For further information on this performance measure see page 20.
(2) The Company's original guidance of $220-$230 per ounce restated for the impact of the new accounting policy for stripping costs and the inclusion of accretion expense.
Earnings of $113 million in third quarter 2005 ($0.21 per share) were 253% higher than in third quarter 2004, mainly reflecting higher gold production and sales, higher realized gold prices and lower total cash costs per ounce. Operating cash flow of $232 million ($0.43 per share) in third quarter 2005 was 53% higher than in third quarter 2004 due to the same factors. For the first nine months of 2005, both earnings and operating cash flow increased over the comparable period in 2004 mainly due to the impact of higher realized gold prices as we benefited from rising market gold prices.
We continue to make significant progress on the development of our new generation of mines. The Tulawaka mine began production in first quarter 2005, and the Lagunas Norte mine began production in second quarter 2005. The Veladero mine made its first gold pour in mid-September 2005, ahead of schedule, and is expected to commence operations upon completion of ongoing commissioning activities. At our fourth new mine, Cowal in Australia, production is expected to commence in first quarter 2006. We continued work on advancing our two other projects in development, Pascua-Lama in Chile/Argentina and East Archimedes in Nevada. While approvals of the Pascua-Lama environmental impact assessments are targeted in the first quarter of 2006, the timing of the receipt of these approvals, as well as resolution of some other external issues, is largely beyond Barrick's control.
KEY ECONOMIC TRENDS
The MD&A included in our 2004 Annual Report contained a discussion of the key economic trends that affect our business and how they impact our financial statements. In 2005, there has been a continued trend of higher gold and silver prices which, while benefiting gold revenues and by-product credits, also leads to higher royalty expenses, as well as a trend of inflationary pressure in the cost of other commodities and consumables. Also, while exchange rates between the US dollar and both the Canadian dollar and Australian dollar have not changed significantly to date in 2005, our reported total cash costs per ounce are affected by the exchange rates under our currency hedge position, whose profile results in increases in costs over time. Assuming that these economic trends continue, we expect our revenues to benefit from higher gold and silver prices, but we also expect our total cash costs per ounce in 2006 and beyond to increase over our guidance for the full year 2005, which is consistent with recent trends in total cash costs per ounce across the rest of the gold mining industry.
Gold Prices
The gold price ranged from $411 to $473 per ounce during the first nine months of 2005, with an average market gold price of $432 per ounce. Gold prices continued on a general upward trend in 2005, with the average market price in the first nine months of 2005 being 8% higher than the corresponding period in 2004. In 2005, we sold most of our production at market gold prices and our average realized selling price was $426 per ounce, slightly lower than the average spot market price. We continue to view the outlook for market gold prices to be positive.
Silver Prices
With an average market price of $7.07 per ounce in the first nine months of 2005, silver prices continued to be strong. Higher silver prices help to reduce total cash costs per ounce of gold as silver sales are recorded as a by-product credit.
Currency Exchange Rates
At the end of third quarter 2005, through our currency hedge position, we have protected local currency-based expenditures for about the next three years at exchange rates that are, on average, more favorable than current market rates. Through this hedge position, we have been able to mitigate, to a significant extent, the negative effect of a weaker US dollar on operating costs at our Australian and Canadian mines. The average rates for currency contracts designated against operating costs over the next three years are $0.66 for Australian dollar contracts and $0.74 for Canadian dollar contracts. Further details of our currency hedge position are included in note 14 to the Financial Statements.
Inflationary Cost Pressures
The mining industry is experiencing significant inflationary cost pressures, which has been evident through higher production costs reported by a number of gold producers. We have been actively seeking ways to mitigate these costs pressures. In the case of diesel fuel and propane, we have put in place hedge positions that have been successful to a significant extent in mitigating price increases, and are expected to provide some further protection for about one quarter of our annual consumption over the next four years. For other cost pressures, we have been focusing on supply chain continuous improvement initiatives to mitigate the effect on our production costs.
Fuel
Crude oil prices rose from $43 per barrel at the end of 2004 to $66 per barrel at the end of third quarter 2005. To help control the cost of fuel consumed at our mines, we have a fuel hedge position totaling 2.3 million barrels, representing about 24% of our estimated future diesel fuel consumption over the next four years. The average cap price is $44 per barrel.
Propane prices rose from $0.76 per gallon at the end of 2004 to $1.18 per gallon at the end of third quarter 2005. To help control the costs of propane consumed at our mines, we have a propane hedge position totaling 21 million gallons, which represents about 69% of our estimated future propane consumption through to the end of 2006, at an average price of $0.79 per gallon.
Electricity
Electricity prices continued to rise in 2005, mainly as a result of diesel fuel and natural gas price increases, as well as the impact of increasing demand for electricity. To partially mitigate rising electricity costs, we are building a 115-megawatt natural gas-fired power plant that will be available to supply our Goldstrike mine from fourth quarter 2005 onwards. This power plant will provide Goldstrike with the flexibility to generate its own power or buy cheaper power from other producers, with the goal of minimizing the cost of power consumed at the mine.
Consumables
With increasing demand for tires and limitations in supply from tire manufacturers, tire costs have been rising and many companies have experienced difficulty securing tires. We have been seeking to mitigate this cost pressure by finding ways to extend tire lives and looking at the various alternatives for supply. The limited availability of tires has not had any significant impact on productivity at our mines to date.
Prices for certain other consumables, such as cyanide and explosives, have also been generally increasing, which in turn leads to higher mining and processing costs. We are focusing on supply chain initiatives and continuous improvement initiatives to mitigate the impact of higher prices for consumables.
Labor costs
With high demand for experienced miners and relatively inflexible supply, the industry is facing upward pressure on labor costs, and, in some areas, higher turnover due to the strong demand. The cost pressures have, to date, been most significant in Australia, where there is a shortage of skilled labor, which has led to pressure on costs at our Australian mines.
US Dollar Interest Rates
Over the first nine months of 2005, short-term US interest rates have risen, while long-term rates (10-30 years) have remained relatively unchanged, with rates at relatively low levels historically. In periods of higher interest rates, we earn higher interest income on cash balances and expect higher forward selling prices under our gold sales contracts. A significant portion of our long-term debt has fixed interest rates and therefore interest costs have not historically been significantly affected by changing interest rates.
RESULTS
---------------------------------------------------------------------
Three months Nine months
($ millions, except per share ended ended
and per ounce data in dollars) Sept.30 Sept.30
2005 2004 2005 2004
---------------------------------------------------------------------
Gold production ('000s oz) 1,509 1,240 3,812 3,807
---------------------------------------------------------------------
Gold sales(3)
'000s oz 1,456 1,267 3,670 3,736
$ millions $ 627 $ 500 $ 1,574 $ 1,431
---------------------------------------------------------------------
Market gold price(1) 439 401 432 401
---------------------------------------------------------------------
Realized gold price(1) 427 395 426 383
---------------------------------------------------------------------
Total cash costs(1),(2),(3) 210 221 229 213
---------------------------------------------------------------------
Amortization(1),(3) 72 89 77 90
---------------------------------------------------------------------
Total production costs(3) 282 310 306 303
---------------------------------------------------------------------
Net income 113 32 226 92
---------------------------------------------------------------------
Net income per share(1),(4) 0.21 0.06 0.42 0.17
---------------------------------------------------------------------
Cash inflow (outflow)
---------------------------------------------------------------------
Operating activities 232 152 457 386
---------------------------------------------------------------------
Capital expenditures (323) (218) (835) (536)
---------------------------------------------------------------------
Other investing activities 1 (1) (77) (41)
---------------------------------------------------------------------
Financing activities 59 154 160 (1)
---------------------------------------------------------------------
Cash position - end of period $ 1,105 $ 775 $ 1,105 $ 775
---------------------------------------------------------------------
(1) Per ounce weighted average.
(2) Total cash costs per ounce statistics for 2005 and 2004 are not
comparable due to the change in accounting for deferred stripping
costs - see page 18. Total cash costs per ounce statistics
exclude amortization - see page 20.
(3) Excludes equity ounces from Highland.
(4) Basic and diluted.
OVERVIEW OF 2005 VERSUS 2004
Earnings
Earnings in third quarter 2005 were $81 million higher than third quarter 2004. The main factors and various special items are summarized in the tables below, together with references to where more information can be found in this MD&A. Earnings continue to be positively impacted by lower amortization rates, and our guidance for amortization of the full year has been revised downwards to $430-$455 million.
Impact on earnings
---------------------------------------------------------------------
Increase (decrease)
Q3 2005 Year to
Refer to page vs date 2005
($ millions) Q3 2004 vs 2004
---------------------------------------------------------------------
Higher realized gold prices 9 $ 47 $ 158
---------------------------------------------------------------------
Total cash costs (increase)
decrease 9 16 (59)
---------------------------------------------------------------------
Sales volumes increase
(decrease)(1) 9 16 (4)
---------------------------------------------------------------------
Lower amortization rates 8 25 48
---------------------------------------------------------------------
Lower exploration/development
expense 13 11 6
---------------------------------------------------------------------
Lower interest expense 14 6 17
---------------------------------------------------------------------
Higher income tax expense(2) 14 (23) (22)
---------------------------------------------------------------------
Special items(3) 9 (12) (11)
---------------------------------------------------------------------
Other (5) 1
---------------------------------------------------------------------
Total $ 81 $ 134
---------------------------------------------------------------------
(1) Impact of changing sales volumes on margin between selling
prices, total cash costs and amortization.
(2) Excluding the impact of recording previously unrecognized
deferred tax assets.
(3) Excluding impact on the period of deferred stripping accounting
changes.
Special Items - Effect on earnings increase (decrease)
---------------------------------------------------------------------
Refer to Three month period ended September 30,
($ millions) page 2005 2004
Pre-Tax Post-Tax Pre-Tax Post-Tax
---------------------------------------------------------------------
Non-hedge derivative
gains (losses) 14 $ (2) $ (2) $ 8 $ 9
---------------------------------------------------------------------
Gains (losses) on
investments 14 (3) (3) - -
---------------------------------------------------------------------
Gains on asset sales 14 4 3 2 2
---------------------------------------------------------------------
Gain on Kabanga
transaction 12 - - - -
---------------------------------------------------------------------
Impairment charge on
royalty interest - - (8) (5)
---------------------------------------------------------------------
Currency translation
gains 14 11 9 3 3
---------------------------------------------------------------------
Deferred stripping
accounting changes
---------------------------------------------------------------------
Cumulative effect 18 - - - -
---------------------------------------------------------------------
Impact on the period
compared to
previous policy 18 11 6 - -
---------------------------------------------------------------------
Changes in AROs at
closed mines (8) (4) (3) (2)
---------------------------------------------------------------------
Income tax credits - - - 8
---------------------------------------------------------------------
Total $ 15 $ 9 $ 2 $ 15
---------------------------------------------------------------------
---------------------------------------------------------------------
Refer to Nine month period ended September 30,
($ millions) page 2005 2004
Pre-Tax Post-Tax Pre-Tax Post-Tax
---------------------------------------------------------------------
Non-hedge derivative
gains (losses) 14 $ 7 $ 5 $ (1) $ 3
---------------------------------------------------------------------
Gains (losses) on
investments 14 6 5 1 1
---------------------------------------------------------------------
Gains on asset sales 14 5 4 5 4
---------------------------------------------------------------------
Gain on Kabanga
transaction 12 15 15 - -
---------------------------------------------------------------------
Impairment charge on
royalty interest - - (8) (5)
---------------------------------------------------------------------
Currency translation
gains 14 6 5 4 4
---------------------------------------------------------------------
Deferred stripping
accounting changes
---------------------------------------------------------------------
Cumulative effect 18 6 6 - -
---------------------------------------------------------------------
Impact on the period
compared to
previous policy 18 29 27 - -
---------------------------------------------------------------------
Changes in AROs at
closed mines (13) (8) (3) (2)
---------------------------------------------------------------------
Income tax credits - - - 38
---------------------------------------------------------------------
Total $ 61 $ 59 $ (2) $ 43
---------------------------------------------------------------------
Cash Flow
In third quarter 2005, our cash position decreased by $26 million. We generated $232 million of operating cash flow in third quarter 2005, $80 million higher than in third quarter 2004, mainly because of higher gold sales volumes, higher realized gold prices and lower total cash costs per ounce. Capital expenditures were $323 million, $105 million higher than in third quarter 2004, mainly due to the levels of construction activity at our development projects. We drew down $32 million from financing facilities used to fund construction at our development projects and received $50 million in proceeds on the exercise of stock options.
In the first nine months of 2005, our cash position decreased by $293 million. We generated $457 million of operating cash flow, $71 million higher than in 2004, mainly because of higher realized gold prices, partly offset by higher total cash costs. Capital expenditures were $835 million, $299 million higher than in 2004, due to the levels of activity at our development projects. We received $160 million from financing activities in 2005, including $88 million in proceeds on the exercise of stock options and $170 million in proceeds from various financing facilities used to fund construction at our development projects, partly offset by dividend payments of $59 million.
CONSOLIDATED GOLD PRODUCTION, SALES AND COSTS
Gold production in third quarter 2005 was 269,000 ounces higher than in third quarter 2004, primarily due to the ramp up of production at Lagunas Norte and higher production levels at Goldstrike open pit. Ounces sold increased by 189,000 ounces compared to third quarter 2004, consistent with the higher production levels. In the first nine months of 2005, ounces produced and sold were similar to 2004 as new production from Lagunas Norte and Tulawaka was offset by lower production at Pierina, Eskay Creek and Plutonic.
In third quarter 2005, we sold most of our production at market prices, and delivered approximately 0.2 million ounces into existing fixed-price gold sales contracts and another approximately 0.1 million ounces into existing floating spot-price gold sales contracts for a total opportunity cost of $19 million compared to prevailing spot market prices. We realized $427 per ounce of gold in third quarter 2005, $32 per ounce higher than third quarter 2004, reflecting higher market gold prices. In the first nine months of 2005, we realized $426 per ounce, $43 per ounce higher than the same period in 2004, also due to higher market gold prices. The price realized for gold sales in fourth quarter 2005 and beyond will depend upon market conditions and the selling prices of any gold sales contracts into which we voluntarily deliver, which could be below prevailing spot market prices.
Consolidated total cash costs per ounce
---------------------------------------------------------------------
Three month period Nine month period
ended Sept.30, ended Sept.30,
(in dollars per ounce) 2005 2004 2005 2004
---------------------------------------------------------------------
Cost of goods sold(1),(2) $ 237 $ 251 $ 263 $ 244
---------------------------------------------------------------------
Currency/commodity hedge
gains (21) (20) (23) (20)
---------------------------------------------------------------------
By-product credits (23) (26) (27) (28)
---------------------------------------------------------------------
Royalties/mining taxes 15 13 14 12
---------------------------------------------------------------------
Accretion/other costs 2 3 2 5
---------------------------------------------------------------------
Total cash costs $ 210 $ 221 $ 229 $ 213
---------------------------------------------------------------------
(1) At market currency exchange rates.
(2) Total cash costs per ounce statistics for 2005 and 2004 are not
comparable due to the change in accounting for deferred stripping
costs - see page 18. Total cash costs per ounce excludes
amortization - see page 20.
Total cash costs per ounce in third quarter 2005 were lower than in third quarter 2004, primarily because of the new low-cost production from Lagunas Norte, and the availability of higher-grade ore at Goldstrike open pit. These factors were partly offset by higher royalties, due to higher gold prices, and the impact of inflationary cost pressures.
RESULTS OF OPERATING SEGMENTS
In our Financial Statements, we present a measure of historical segment income that reflects gold sales at average consolidated realized gold prices, less segment operating costs and amortization of segment property, plant and equipment. Our segments mainly include producing mines and development projects. We monitor segment operating costs using "total cash costs per ounce" statistics that represent segment cost of sales divided by ounces of gold sold in each period. The discussion of results for producing mines focuses on this statistic in explaining changes in segment operating costs, and should be read in conjunction with the mine statistics presented on pages 39 to 42.
NORTH AMERICA
The region produced 791,000 ounces in third quarter 2005 (2004: 743,000 ounces) at total cash costs of $224 per ounce (2004: $231 per ounce), for a total of 2,068,000 ounces in the first nine months of 2005 (2004: 2,217,000 ounces) at total cash costs of $243 per ounce (2004: $227 per ounce). Higher gold production and lower costs in third quarter 2005 were mainly due to higher ore grades at Goldstrike open pit. For the first nine months of 2005, production was lower than 2004 mainly due to the depletion of ore reserves at Holt-McDermott by the end of 2004, as well as processing of lower-grade ore at Eskay Creek in 2005.
In 2005, total cash costs per ounce increased due to inflationary cost pressures and higher royalties, partly offset by higher toll milling credits and the impact of the change in accounting for stripping costs. Results for third quarter 2005 were affected by similar cost pressures, but total cash costs per ounce were lower than in 2004 due to the availability of higher-grade ore at Goldstrike open pit on completion of the ninth west layback. Full-year guidance for total cash costs has been revised to $245-$250 per ounce and production has been revised to 2,840,000-2,885,000 ounces.
Goldstrike Open Pit, United States
Ore production rates were impacted in the first half of 2005 by above average rainfall, but increased again in the third quarter. Tons of ore processed in third quarter 2005 were similar to third quarter 2004, but at higher grades as mining occurred in a higher-grade area of the pit, as mining continued in the area of the ninth west layback. In the first nine months of 2005, the mining of slightly higher-grade ore was largely offset by lower throughput compared to 2004. Lower throughput was mainly because of harder ore encountered that impacted milling rates, the above average rainfall that led to lower mining rates in the first half of 2005, and scheduled roaster maintenance in second quarter 2005. Lower total cash costs per ounce in 2005, compared to 2004, were mainly due to the higher production levels, higher toll milling credits, and the impact of the change in accounting for stripping costs (see page 19), partly offset by higher royalties and net proceeds taxes, and inflationary cost pressures.
Goldstrike Underground, United States
In third quarter 2005, mine sequencing changes were implemented to accelerate drift-and-fill mining at Meikle in view of difficult ground conditions at Rodeo. Lower mining rates, associated with drift-and-fill mining, a temporarily plugged backfill raise, and the mining of lower-grade stopes at Meikle, resulted in lower production in third quarter 2005 compared to the prior-year period. In the first nine months of 2005 the effect of incremental ore mined in 2004 at Rodeo and the reallocation of resources to drift-and-fill mining in 2005 was partly offset by a drawdown of stockpiles in the first half of 2005. Higher total cash costs per ounce in 2005 were mainly due to the lower production levels, inflationary cost pressures, higher ground support costs due to difficult ground conditions and an increase in drift-and-fill mining. Lower levels of development activity led to a greater allocation of expenses to mining costs in 2005, which also contributed to the increase in total cash costs per ounce.
Power Plant for Goldstrike, United States
The construction of a 115-megawatt natural gas-fired power plant in Nevada to supply our Goldstrike mine is on schedule, with the plant expected to be ready for operations in November 2005. Project highlights include:
- Construction costs of $29 million were incurred in third quarter 2005, with total costs of $63 million in the first nine months of 2005.
- All power generators have been received and set in place.
- Interconnections to the power grid have been tested and commissioned.
- Gas supply facilities and the gas pressure reduction station have been completed.
- Major mechanical and electrical work is complete.
- Commissioning activities commenced in September.
- The hiring of operating personnel is substantially complete and training has begun.
Eskay Creek, Canada
Fewer tons of higher-grade direct-to-smelter ore were processed in 2005, with a substitution of lower-grade ore to the mill, leading to lower gold production levels compared to 2004. As the mine approaches the end of its life (expected in 2007), lower labor, transportation and smelter costs, partly offset by lower silver by-product credits (higher silver prices were more than offset by lower volumes produced in 2005), contributed to lower total cash costs per ounce in third quarter 2005 than in the same period of 2004. In the first nine months of 2005, higher equipment maintenance and contractor costs, combined with the factors affecting the third quarter, led to an increase in costs over 2005.
Round Mountain (50% owned), United States
Ore tons mined decreased in 2005 from 2004 levels, with higher quantities of material placed on the leach pads in 2004 than in 2005. Tons processed each period do not necessarily correlate to the ounces produced in the period as there is a time delay between placing tons on the leach pad and pouring ounces. Total cash costs per ounce were higher in 2005 due to inflationary cost pressures, higher royalties and net proceeds taxes, as well as the effect of the change in accounting for stripping costs (see page 19).
East Archimedes, United States
The East Archimedes project remains on schedule and we expect production to commence by mid-2007. Project highlights include:
- Construction costs of $15 million were incurred in third quarter 2005, with total costs of $27 million in the first nine months of 2005.
- The majority of the mining fleet was received in third quarter 2005.
- About 80% of the workforce has been hired.
- The final Record of Decision was signed by the US Bureau of Land Management in the first week of October 2005.
SOUTH AMERICA
The region produced 369,000 ounces in third quarter 2005 (2004: 133,000 ounces) at total cash costs of $122 per ounce (2004: $124 per ounce), for a total of 711,000 ounces in the first nine months of 2005 (2004: 552,000 ounces) at total cash costs of $126 per ounce (2004: $104 per ounce). Lagunas Norte made a significant contribution to the region's results in third quarter 2005, which we expect to continue in upcoming quarters. Veladero had its first gold pour in September 2005, and upon completion of commissioning activities it will begin full production. We expect South America to produce 1,210,000-1,230,000 ounces and total cash costs of $120-$130 per ounce, slightly lower than previously expected and at marginally higher total cash costs per ounce.
Pierina, Peru
With the availability of higher-grade ore in third quarter 2005, partly offset by lower tons processed, gold production was higher than the prior year period. Gold production in the first nine months of 2005 was lower than in 2004 as higher quantities of run-of-mine ore were placed on the leach pad in 2004. Total cash costs per ounce increased in 2005 as the effect of inflationary cost pressures, combined with higher maintenance and ground support costs, was partly offset by higher silver by-product credits. Mining costs were also higher in 2005 as the total tons of ore and waste mined increased in 2005.
Lagunas Norte, Peru
Lagunas Norte produced 211,000 ounces in third quarter 2005, its first full quarter of production, at total cash costs of $121 per ounce, with mining of high-grade near-surface ore. Construction contracts were closed out in the third quarter and we expect the construction capital of the mine to be less than the previously announced estimate of $340 million.
Veladero, Argentina
The first gold pour at Veladero occurred in September 2005. Upon completion of ongoing commissioning activities Veladero will begin full production. Construction costs of $78 million were incurred in third quarter 2005, for a total of $213 million in the first nine months of the year.
Pascua-Lama, Chile/Argentina
In 2004, we made a decision to proceed with the development of the Pascua-Lama project in Chile/Argentina, contingent upon obtaining the necessary permits, approvals and fiscal regimes. While approvals for the environmental impact assessments are targeted in the first quarter of 2006, the timing of the receipt of these approvals, as well as the resolution of some of the other external issues, such as permitting and licensing; cross-border operating issues; and fiscal, tax and royalty issues, is largely beyond Barrick's control.
Capital and operating cost estimates for the Pascua-Lama project were based on the cost and commodity price environment prevailing at the time of the updated feasibility study, which was finalized in June of 2004. The design of the project has been optimized in the course of the permitting process to incorporate additional operating and construction efficiencies, additional environmental mitigation measures, and other project improvements. We are in the course of updating cost estimates to reflect such changes, inflationary cost pressures and higher commodity prices. Although such factors will result in some increase in capital and operating cost estimates, based on the current cost and commodity price environment, and combined with other efficiencies, we do not expect significant changes to the overall economics of the project.
AUSTRALIA/AFRICA
The region produced 341,000 ounces in third quarter 2005 (2004: 356,000 ounces) at total cash costs of $272 per ounce (2004: $241 per ounce), for a total of 1,012,000 ounces in the first nine months of 2005 (2004: 1,020,000 ounces) at total cash costs of $272 per ounce (2004: $242 per ounce). Lower production in 2005 was mainly due to the ending of open-pit mining at Plutonic in the second quarter, as well as lower production at Kalgoorlie in the third quarter, partly offset by new production from Tulawaka.
Total cash costs per ounce were higher in 2005 mainly because of inflationary cost pressures, and lower throughput and ore grades at Plutonic after open-pit mining ended in the second quarter, partly offset by higher ore grades at Bulyanhulu in the third quarter. We expect the region to meet its full-year production guidance of 1,330,000-1,365,000 ounces at slightly higher total cash costs of $275-$280 per ounce.
Kalgoorlie (50% owned), Australia
In the first nine months of 2005, tons mined were lower than in 2004 due to reduced shovel capacity. Tons processed were similar to 2004 in the first nine months of 2005 with the processing of stockpiled material. Mill throughput was higher due to improved mill utilization and the positive impact of processing finer ore sizes. A build-up of concentrate inventory occurred in 2005 due to limitations in roaster capacity. Inflationary cost pressures in 2005, combined with higher exchange rates under hedge contracts, were more than offset by the effect of the change in accounting for stripping costs (see page 19), leading to lower total cash costs per ounce in 2005. In the third quarter 2005, lower production related to lower ore grades, and higher maintenance costs due to scheduled maintenance shutdowns, led to an increase in total cash costs per ounce over the first half of the year.
Kalgoorlie is installing a mercury scrubber on its carbon kilns and is assessing process changes, controls and other management measures for the roaster facility to reduce mercury emissions. The assessment is continuing, after which we will be able to estimate any capital requirements and operating cost impact associated with such measures.
Plutonic, Australia
At Plutonic we processed fewer ore tons in 2005 than in 2004, after open-pit mining ceased in the second quarter, which, while partly offset by higher average ore grades, led to lower gold production in 2005. Lower gold production levels, combined with inflationary cost pressures, w
