African Barrick Gold. Update. Investment summary: Earnings revision. Tanzanian power. ABG currently trading at 12% discount to book value

Transcription

1 Update 1 May 2012 African Barrick Gold Year End Revenue (US$m) PBT* (US$m) EPS* (c) DPS (c) P/E (x) Yield (%) 12/ /11 1, /12e 1, /13e 1, Price Market cap Share price graph 365p 1,497m Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items. US$1.6188/. Investment summary: Earnings revision African Barrick Gold s (ABG) Q1 results were broadly in line with our forecasts, with the exception of unit working costs which were 9.2% lower than our expectations for the quarter and depreciation, which was 20.7% lower. In its report of 17 April, Edison reduced its Q112 EPS forecasts for ABG from 10.0 US cents to 6.7c as a result of power inconsistency problems in Tanzania, increased maintenance and waste stripping constraints. In the event, ABG s Q1 EPS was 8.6c below our original estimate, but above our revised one. In addition, ABG has today announced it has received final, official approval for the PAF waste rock permit (see page 4) at North Mara, which will allow it to progress the major waste stripping programme in the Gokona pit in order to open up higher grades zones in H212, as planned. Notwithstanding the recent drift in the gold price, Edison has revised its earnings forecast for FY12 upward again by 3.7c/share (or 7.2%) to 54.8cps. Tanzanian power Compared to a planned 70:30 ratio of grid power to back-up diesel power, ABG achieved a 60:40 ratio. The cost of back-up diesel power is three times that of grid power with the result that Edison estimates that ABG s cost base was inflated by some 12.5% as a result of the power issue alone. Notwithstanding the higher cost however, in order to guarantee at least some level of power supply consistency, management has taken the decision to operate Buzwagi solely on diesel power during the day and grid power during the night in order to minimise disruptions and downtime. ABG currently trading at 12% discount to book value ABG s shares have fallen by c 57% in dollar terms relative to the price of gold since it was listed two years ago (see 17 April note). As a result, it has become the cheapest of its peers on a number of valuation measurements, including EV/EBITDA and (from FY14) yield. It is also now the cheapest of the three London gold mining majors in terms of its resource multiple of US$57.37/oz and is trading at a share price that is less than its book value of US$6.73 per share (of which US$1.42, or 0.88, is in cash). Share details Code Listing Sector Shares in issue ABG LSE Mining 410m Price 52 week High Low 624p 350p Balance sheet as at 31 December 2011 Debt/equity (%) N/A NAV per share (US$) 6.73 Net cash (US$m) 584 Business African Barrick Gold was historically the Tanzanian gold mining business of Barrick and is one of Africa s five largest gold producers with output from four mines: Bulyanhulu, Buzwagi, North Mara and Tulawaka. Valuation e 2013e P/E relative 83% 103% 95% P/CF EV/Sales ROE 10% 8% 9% Revenues by geography UK Europe US Other 0% 0% 0% 100% Analyst Charles Gibson +44 (0) mining@edisoninvestmentresearch.co.uk African Barrick Gold is a research client of Edison Investment Research Limited

2 2 Edison Investment Research Update African Barrick Gold 1 May 2012 Q1 results Amid evidence of additional maintenance at Buzwagi and Bulyanhulu as a consequence of past power inconsistency and on-going delays in water and waste dump permitting (thereby causing lower capitalised stripping costs and higher operating costs) at North Mara, in its report of 17 April, Edison reduced its Q112 EPS forecasts for ABG from 10.0c to 6.7c. In the event, ABG s Q1 EPS (reported on 19 April) was 8.6c below our original estimate, but above our revised one. While production was 3.4% below our expectations, unit working costs were 9.2% below. Of note, was a US$4.3m decline in depreciation which was largely responsible for earnings US$7.6m above Edison s expectations (probably as a result of capex timing). A detailed account of ABG s Q112 results compared to both Q411 and Edison s prior expectation is as follows: Exhibit 1: ABG Q112 results vs Q411 and prior Edsion expectations Note: US$ 000s unless otherwise indicated; *As calculated by Edison (NB EBITDA does not have a standardised meaning under IFRS); *Q112a/Q411a; **Q112a/Q112e Q411 Q112e Q112a *Change (%) **Variance (%) Operational Tonnes milled (kt) 1,729 1,794 1, Grade (g/t) Total production (oz) 160, , , Gold price realised (US$/oz) 1,655 1,690 1, Total cash costs per oz sold (US$) Unit costs (US$/t) Financial Sales 285, , , Cost of sales 140, , , EBITDA before central costs* 144, , , Depreciation & amortisation 37,139 41,446 32, Gross profit 107,743 69,890 81, Corporate administration 16,075 14,990 15, Exploration and evaluation 7,389 7,389 6, Other charges -6,505-5,754-5, Profit before net finance costs 77,774 41,757 54, Finance income Finance expense 2,408 1,850 2, Net finance cost -2,095-1,412-2, Net profit before taxation 75,679 40,346 52, Taxation expense 20,595 11,700 16, Marginal tax rate (%) Net profit 55,084 28,645 36, Minority 2,401 1,005 1, Minority (%) Net profit attributable 52,683 27,640 35, Weighted av shares in issue ( 000s) 410, , , Basic EPS (US$)

3 3 Edison Investment Research Update African Barrick Gold 1 May 2012 Bulyanhulu (43% of ABG production in Q112 vs 40% in Q411) The issues primarily affecting Bulyanhulu in Q112 were: Mine sequencing, which resulted in a focus on low grade, bulk mining areas within the mine The consistency of the electrical power supply The increased maintenance and replacement of critical components (not least as a result of power instability), which reduced plant availability As a result, production was 4,198oz below Edison s expectations. However, unit working costs were also well controlled and fell compared to the previous quarter, compared to Edison s expectation of a rise: Exhibit 2: Bulyanhulu Q112 and FY12 operating statistics, actual and estimated Note: * Q112/Q411; **Q112a/Q112e Q411 *Q112e Q112a *Change **Variation Q212e Q312e Q412e (%) (%) Ore milled (kt) Head grade (g/t) Contained gold (oz) 70,510 71,388 68, ,820 74,236 75,127 Mill recovery (%) Ounces produced (oz) 64,433 66,034 61, ,509 68,668 69,492 Ounces sold (oz) 65,132 66,034 62, ,509 68,668 69,492 Cash costs (US$/oz) Implied total cash costs (US$000's) 43,621 47,325 43, ,744 48,324 48,903 Cash cost per tonne milled (US$/t) Whereas the focus of mining will have been on lower grade areas of the mine in H1, the grade is anticipated to increase for the remainder of the year such that the average for FY12 will be approximately 9g/t. Recoveries are also expected to increase after the replacement of the regrind motor and further enhancement of the process plant and flotation circuit. Finally, the overall operation will also benefit from the increase in the back-up power supply from 85% currently to 100% in Q3. In the medium term, mill throughput is unlikely to vary by more than 10% from 1Mtpa, or 250kt per quarter. By contrast, the target grade at Bulyanhulu is 11g/t, which management expects to be attained in approximately five years time. Bulyanhulu has a relatively old plant. In the longer term, additional benefits to incremental performance may be achieved via the modernisation, automation and optimisation of process flow routes. In the meantime, growth potential continues to exist in the form of the tailings retreatment operation, for which a (full) feasibility study is currently underway, and potential future production from the Upper East Zone (at which the decline is being rehabilitated and a test stope scheduled to be established prior to anticipated production at the end of FY14). North Mara (24% of ABG production in Q112 vs 26% in Q411) As in FY11, operations at North Mara continued to be affected by the waste stripping programme in the Gokona and Nyabirama pits. Although this will result in access to higher grade material in the medium term, in the interim, it has resulted in a higher proportion of lower grade stockpile material

4 4 Edison Investment Research Update African Barrick Gold 1 May 2012 being processed. In addition, waste stripping activities at the Gokona pit were constrained by permitting delays related to the newly constructed potentially acid forming (PAF) waste dumps, which resulted in lower capitalised waste stripping costs (and therefore higher operating costs). Exhibit 3: North Mara Q112 and FY12 financial and operating statistics, actual and estimated Note: * Q112/Q411; **Q112a/Q112e. Q411 Q112e Q112a **Change **Variation Q212e Q312e Q412e (%) (%) Ore milled (kt)* Head grade (g/t) Contained gold (oz) 52,191 50,638 44, ,049 69,350 85,650 Mill recovery (%)* Ounces produced (oz) 41,704 40,004 35, ,970 57,560 72,803 Ounces sold (oz) 40,000 40,004 38, ,970 57,560 72,803 Cash costs (US$/oz) 926 1,112 1, Implied total cash costs (US$ 000s) 37,023 44,500 43, ,131 42,131 42,131 Cash cost per tonne milled (US$/t) On 1 May however, ABG announced it has received final, official approval for the PAF waste rock permit at North Mara mine, with immediate effect. The granting of the PAF permit, together with the non-acid forming (NAF) permit (which was granted in late 2011) will allow ABG to progress the major waste stripping programme in the Gokona pit at North Mara in order to open up higher grades zones in the open pit in the second half of 2012, as planned. The permit will also allow ABG to avoid having to implement alternative, sub-optimal engineering initiatives, which might have affected the project in the future. All other remaining issues relating to the environmental discharge protection order (EPO) are expected by Q312. North Mara s reserve and resource grades are 3.0g/t and 2.8g/t respectively. As soon as its waste stripping programme is complete in Q212, the head grade at North Mara will begin to revert back towards these levels, exceeding 3g/t in Q412, such that the average for the year will be c g/t. In the longer-term, upside potential exists in the possible de-bottlenecking of the process plant at North Mara. In addition, community relations improvements around the Gokona pit have created the potential to increase the open pit reserve by approximately 300koz via an additional lateral cutback (albeit at the expense of reducing the underground resource by c 150koz). ABG s mining licence at North Mara has now expired. By law, its renewal is a purely administrative matter and, by default, is on the same terms as those previously. Any changes by contrast have to be referred to Tanzania s Mining Advisory Board and also be agreed with ABG. Until then, the mining occurs on terms deemed to be the same as those that existed under the previous, expired licence. Since the mass invasion of the mine during Q2 and the related shooting incidents, the atmosphere around North Mara has been described as one of uneasy calm. However, the company has now begun erecting a wall around the property, which should be operational by the end of the year. It has also actively engaged the government in addressing the matter, in particular since the government won the local seat at the last election.

5 5 Edison Investment Research Update African Barrick Gold 1 May 2012 Buzwagi (25% of ABG production in Q112 vs 24% in Q411) Although it recovered strongly from the power supply problems that affected it during Q411, milling activity at Buzwagi remained below nameplate capacity during Q1, mainly as a result of a number of unplanned maintenance shutdowns, partly as a result of the continued instability of the grid power supply, but also as a result of the mining of more abrasive ore, which resulted in the need for increased fleet maintenance and therefore reduced availability. In addition, the mining of a high proportion of talc (associated with high grade ore in particular), which was too fine to be picked up by grade control drilling, had an adverse effect on recoveries. By contrast, the stripping ratio returned to more normal levels (4.3 vs 6.8 in Q411, when management commenced the Stage 2 waste stripping programme). Unit working costs were also significantly lower than Q411 as a result of the capitalisation of deferred stripping expenditure and lower contracted services costs: Exhibit 4: Buzwagi Q112 and FY12 operating statistics, actual and estimated Note: *Q112/Q411; ** Q112a/Q112e Q411 Q112e Q112a *Change **Variation Q212e Q312e Q412e (%) (%) Ore milled (kt) ,047 1,092 1,092 Head grade (g/t) Contained gold (oz) 43,346 38,581 44, ,104 55,860 62,567 Mill recovery (%) Ounces produced (oz) 37,916 32,794 36, ,039 47,481 53,182 Ounces sold (oz) 38,547 32,794 33, ,039 47,481 53,182 Cash costs (US$/oz) 853 1,213 1, ,112 1, Implied total cash costs (US$ 000s) 32,894 39,792 37, ,505 51,324 48,048 Cash cost per tonne milled (US$/t) Compared to a target milling rate of 12,000 tonnes per day in Q112, Buzwagi achieved a throughput rate of c 10,000tpd. To date in the second quarter, it is reported to have achieved close to 12,000tpd a rate, once achieved, it expects to maintain for the remainder of the year. Concurrently, recoveries are anticipated to improve both as a result of an improvement in the mill feed grade and chemical adjustments to the metallurgical process in order to nullify the effect of the talc.

6 6 Edison Investment Research Update African Barrick Gold 1 May 2012 Tulawaka (8% of ABG production in Q112 vs 10% in Q411) After a Q4 characterised by the mining of higher grade underground stopes, Q112 witnessed a decline in head grade as ore from the underground mining area was blended with lower grade supplemental ore from the West pit extension. Exhibit 5: Tulawaka Q112 and FY12 operating statistics, actual and estimated Note: Reflected as 70%; * Q112/Q411; ** Q112a/Q112e Q411 Q112e Q112a *Change **Variation Q212e Q312e Q412e (%) (%) Ore milled (kt) Head grade (g/t) Contained gold (oz) 16,664 11,574 11, ,256 12,217 12,539 Mill recovery (%) Ounces produced (oz) 15,967 10,787 11, ,559 11,387 11,686 Ounces sold (oz) 15,190 10,787 11, ,559 11,387 11,686 Cash costs (US$/oz) Implied total cash costs (US$000's) 13,669 8,426 10, ,255 9,255 9,255 Cash cost per tonne milled (US$/t) The process plant will begin to operate under a batch processing method in Q2, which will result in reduced production in the short-term, before an expected increase in the grade profile in H212. Work will also continue throughout 2012 to construct a second underground portal to facilitate an increase in mining rates from underground. Tulawaka s mine life has now been confirmed to the end of Exploration programmes are continuing and management reports consistent hits from underground drilling as a result of which it hopes to be in a position to make a commitment to further mine life extensions by the end of 2012.

7 7 Edison Investment Research Update African Barrick Gold 1 May 2012 Forecast changes As a result of its first quarter results and the assumptions detailed above, Edison has revised its FY12 estimates for ABG as follows: Exhibit 6: Edison ABG FY12 financial forecasts, by quarter Note: US$ 000s unless otherwise indicated; *As calculated by Edison (NB EBITDA does not have a standardised meaning under IFRS); ** Per ounce sold Q112a Q212e Previous Q212e Current Q312e Previous Q312e Current Q412e Previous Q412e Current FY12 Previous FY12 Current Operational Total production 144, , , , , , , , ,978 (oz) Gold price 1,697 1,650 1,642 1,700 1,650 1,700 1,650 1,686 1,658 realised (US$/oz) Total cash costs (US$/oz)** Financial Sales 267, , , , , , ,216 1,255,827 1,252,309 Cost of sales 152, , , , , , , , ,982 EBITDA before 114, , , , , , , , ,327 central costs* Depreciation & 32,864 41,446 39,290 41,446 39,290 41,446 39, , ,733 amortisation Gross profit 81,715 76,562 78, , , , , , ,594 Corporate 15,155 14,990 14,990 14,990 14,990 14,990 14,990 59,960 60,125 administration Exploration and 6,515 7,389 6,515 7,389 6,515 7,389 6,515 29,556 26,060 evaluation Other charges -5,054-5,754-5,054-5,754-5,054-5,754-5,054-23,016-20,216 Profit before net 54,991 48,429 52,292 96,819 93, , , , ,193 finance costs Finance income ,752 1,752 Finance 2,311 1,850 2,288 1,850 2,288 1,850 2,288 7,400 9,175 expense Net finance cost -2,045-1,412-1,793-1,412-1,793-1,412-1,793-5,648-7,423 Net profit before 52,946 47,017 50,499 95,407 91, , , , ,770 taxation Taxation 16,506 13,635 14,645 27,668 26,638 35,621 38,996 88,624 96,785 expense Marginal tax rate (%) Net profit 36,440 33,382 35,855 67,739 65,217 87,209 95, , ,985 Minority 1,177 1,172 1,258 2,378 2,289 3,061 3,351 7,616 8,076 Minority (%) Net profit attributable 35,263 32,211 34,596 65,361 62,927 84,148 92, , ,909 Mean shares in issue ( 000s) 410, , , , , , ,085 Basic EPS (US$) Of note is the higher production forecast than previously (+2.6%) at similar costs and the 7.2% increase in Edison s full-year EPS forecast.

8 8 Edison Investment Research Update African Barrick Gold 1 May 2012 Forthcoming announcements ABG is currently engaged in feasibility studies at four projects: Gokona Underground, Bulyanhulu Upper East Zone, Bulyanhulu tailings and the Tulawaka East Zone. Further to this and after successful drilling, it has initiated scoping studies at Nyabirama and Nyanzaga and continues to assess the best method to develop the resource at Golden Ridge. We expect future developments and announcements by ABG over its projects in approximately the following order: Q212: Announcement of findings of Bulyanhulu tailings feasibility study (see our note, dated 18 October 2011). Q212: Completion of Nyanzaga scoping study and initiation of pre-feasibility study (subject to board approval). Q212: Completion of resource drill-out programme beneath the planned Gokona and Nyabigena open pits followed by the publication of a revised underground resource (mid-year), which will be incorporated into an updated feasibility study on the proposed underground operation. Q212: Completion of Nyabirama drill programme and resource modelling, followed by scoping study. Q312: Mid-year reserve and resource evaluation. Q312: Bulyanhulu Upper East Zone test stope initiated, after which we expect board approval will be sought for the project. Q312: Additional Gokona pit cut-back update. The potential for this is dependent on the re-siting of an existing road, which in turn is dependent on the local community. The update will be made once ABG has had the chance to analyse the impact of resequencing the current mine plan. Q3-Q412: Decision on Tulawaka extension beyond end-2012.

9 9 Edison Investment Research Update African Barrick Gold 1 May 2012 Valuation On the basis of ABG s recent share price performance and Edison s estimates (see Exhibit 6), a comparison of ABG s key valuation measurements compared to its principal peers is as follows: Exhibit 7: PE multiple comparison between ABG and peers, Year Price 2012e 2013e 2014e African Barrick Gold 365p Randgold Resources 5,500p Petropavlovsk 483p Arca Gold BUGS index Source: Edison Investment Research, Bloomberg Bold numbers indicate the cheapest measurement in each year. Note that cash on ABG s balance sheet equates to US$1.42 ( 0.88) per share. If this is deducted from its market price, then ABG s adjusted P/E multiple is 8.18x FY12 earnings, falling to 6.87x in FY13 and 4.53x in FY14. Exhibit 8: EV/EBITDA multiple comparison between ABG and peers, Year Price 2012e 2013e 2014e African Barrick Gold 365p Randgold Resources 5,500p Petropavlovsk 483p Arca Gold BUGS index Source: Edison Investment Research, Bloomberg Exhibit 9: Yield comparison between ABG and peers, Year Price 2012e 2013e 2014e African Barrick Gold 365p Randgold Resources 5,500p Petropavlovsk 483p Arca Gold BUGS index Source: Edison Investment Research, Bloomberg As can be seen therefore, while Petropavlovsk remains the cheapest of the London gold mining majors in terms of its P/E multiple to 2014, when the balance sheet positions of the companies are taken into account, African Barrick is the cheapest in terms of its EV/EBITDA multiple. ABG also has the highest yield of the three majors in FY14.

10 10 Edison Investment Research Update African Barrick Gold 1 May 2012 Exhibit 10: Financials US$m e 2013e 2014e Year end 31 December IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue , , , ,570.3 Cost of sales (339.6) (375.9) (479.5) (570.0) (658.0) (610.0) (694.8) Gross profit EBITDA Operating profit (before amort. and except.) Intangible amortisation Exceptionals (216.5) Other (6,510), (10,714), (26,033), (23.0) (20.2) (20.2) (20.2) Operating profit (144.1) Net interest (13.2) (5.7) (0.6) (7.2) (7.4) (5.6) (4.9) Profit before tax (norm.) Profit before tax (FRS 3) (150.8 ) Tax (20.4) (8 4.4) (8 6.5) (117.9) (96.8) (113.3) (171.7) Profit after tax (norm.) Profit after tax (FRS 3) (171.2) Average number of shares outstanding (m) N/A EPS - normalised (c) N/A EPS - normalised fully diluted (c) N/A EPS - (IFRS) (c) N/A Dividend per share (c) Gross margin (%) N/A EBITDA margin (%) N/A Operating margin (before GW and except.) (%) N/A BALANCE SHEET Fixed assets 1, , , , , , ,602.0 Intangible assets Tangible assets 1, , , , , , ,064.1 Investments Current assets , , , Stocks Debtors Cash ,247.4 Other Current liabilities (1,321.0) (1,531.6) (129.7) (169.6) (18 2.9) (175.5) (195.5) Creditors (114.6) (148.2) (129.7) (169.6) (18 2.9) (175.5) (195.5) Short-term borrowings (1,206.4) (1,38 3.4) Long-term liabilities (223.8 ) (18 3.7) (254.4) (326.2) (423.0) (536.3) (708.0) Long-term borrowings (93.8) Other long-term liabilities (130.1) (18 3.7) (254.4) (326.2) (423.0) (536.3) (708.0) Net assets , , , , ,504.9 CASH FLOW Operating cash flow Net Interest (12.0) (4.5) 0.8 (3.9) (7.4) (5.6) (4.9) Tax (20.4) (8 4.4) Capex (414.2) (248.4) (275.6) (28 1.5) (336.0) (270.5) (156.4) Acquisitions/disposals Financing 8.6 (0.1) 1,096.3 (1.0) Dividends (30.2) (12.2) (259.5) (32.7) (56.2) (66.9) (101.4) Net cash flow (331.5) (66.8) Opening net debt/(cash) , ,313.7 (401.0) (58 4.2) (616.5) (8 18.5) HP finance leases initiated Other (0.0) (0.0) (0.0) Closing net debt/(cash) 1, ,313.7 (401.0) (58 4.2) (616.5) (8 18.5) (1,247.4) Sources: Company accounts, Edison Investment Research EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. 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