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Barrick’s copper production down, Lumwana at risk

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Copper division assets

The global copper division includes Barrick Gold Corporation’s (ABX) Zaldivar copper mine in Chile and its Lumwana mine in Zambia. Barrick’s copper business projects include the Jabal Sayid project in Saudi Arabia and the Kabanga nickel project in Tanzania.

Copper

Weak operational performance

Copper production in 3Q14 was 131 million pounds, down 6% over the same period last year. The lower production at Zaldivar mine was mainly responsible for this. Zaldivar processed fewer tons and used a higher proportion of sulfide material, which has a lower recovery rate. Production at the Lumwana mine was 6% higher than 3Q13.

Copper C1 cash costs were $1.82 per pound, which is an increase of 8% over the same prior year period. This is primarily due to the impact of lower production levels over production costs.

Lumwana economic viability at risk

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The Zambian government is proposing to increase the royalty on open-pit mines to 20%, compared to 6% that Barrick Gold (ABX) is currently paying. If approved, this move will challenge the economic viability of the Lumwana mine, and Barrick might have to reclassify a substantial portion of the mine’s reserves as resources. This increase, if ratified, will be negative for Barrick’s copper volumes and profitability in the future. The Lumwana mine contributed ~57% of the copper production in 3Q14.

Production guidance for 2014

Production guidance for 2104 has been raised to 440–460 million pounds. C1 cash cost guidance has been reduced to $1.90 to $2.00 per pound, primarily due to an earlier-than-expected restart of operations at the Lumwana mine in July.

Weak copper prices

Copper prices are declining globally due to a supply glut and the weakening Chinese economy, a fundamental driver for copper prices. This decline has led other copper producers, including Freeport-McMoRan Inc. (FCX), BHP Billiton Limited (BHP), and Southern Peru Copper Corp (SCCO), to cut their costs and capital expenditures.

Investors may consider the Standard and Poors depositary receipt (or SPDR) S&P Metals & Mining exchange-traded fund (or ETF) (XME), which provides exposure to metals and the mining sector.

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