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Barrick Gold - Q2 results in line, merger outlook positive

George Salmon | 13 August 2019 | A A A
Barrick Gold - Q2 results in line, merger outlook positive

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Barrick Gold Corp Com Stk

Sell: 38.65 | Buy: 38.74 | Change 0.67 (1.76%)
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Barrick Gold has reported second quarter revenue of $2.1bn, up 20.5% from the prior year, boosted by higher gold production following the merger with Randgold. Adjusted earnings per share were $0.09, in-line with market forecasts.

The shares initially rose on the news, then drifted to finish the day slightly down.

The group has maintained a quarterly dividend of $0.04 per share.

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Our View

Barrick's position as the world's second largest gold miner is the result of its 2018 merger with Randgold. The move also saw former Randgold boss Mark Bristow installed as CEO.

Since then Bristow's displayed an appetite for more M&A too, but an audacious bid to acquire Newmont, which has gone on to buy Goldcorp, was abandoned. Barrick has instead settled for a joint venture to combine its Nevada assets with Newmont.

We think that's probably for the best. There are $1.5bn of asset disposals planned, the merger with Randgold still bedding in, and Barrick is moving to acquire the part of UK-listed Acacia mining it doesn't already control.

But that doesn't mean to say we don't like the deals the group is currently digesting.

Acacia has had problems with the Tanzanian government, and stands accused of under-reporting its exports. However, Barrick brokered a $300m settlement in March, and shortly after the takeover offer was approved by Acacia's board the government agreed to lift the export ban.

The JV with Newmont offers potential for meaningful cost savings, with $500m per annum targeted by 2024. It also adds tier one assets to a portfolio already boosted by the Randgold merger. The enlarged group's portfolio is not only high quality, with assets across the Americas and Africa it's got geographic diversity too (the value of which Acacia found out the hard way).

Barrick's cash cost per ounce of $651 is among the lowest in the industry. And since the price miners get for the product is set by the wider market, keeping extraction costs down is key.

We think the dividend looks at least sustainable, not least because Randgold had run with a net cash position, so bringing it on board in an all-share deal has improved leverage. However, the prospective yield is a lowly 0.9% and as with any dividend there are no guarantees.

With global uncertainties helping the gold price rise, miners have risen such that the shares trade on 2.7 times book value. That's comfortably above the longer-term average. So while we think the group is on the right track, if conditions change and the gold price moves, that leaves scope for a de-rating.

Second quarter results

Gold production was 1.4m oz, up 26.8% on a year-on-year basis. However, after excluding the Randgold assets (such as Kibali and Loulo-Gounkoto,) production was slightly down. That reflects lower grades mined at Cortez in Nevada being only partly offset by higher production at Goldstrike. Total production was also impacted by the scheduled maintenance shutdown at Pueblo Viejo in the Dominican Republic.

The average price during the quarter was $1,309 per oz, broadly stable on both a quarter-on-quarter and year-on-year basis.

Copper contributed $103m to total revenue, down 8% from a year prior as higher production was offset by a fall in realised prices. Cash costs per lb fell to $1.59.

Group operating cash flow of $434m translated to free cash flow of $55m, after $379m of capital expenditures. With this inflow countered by the Q1 dividend, net debt remained unchanged over the quarter at $3.7bn.

Looking ahead, Barrrick expects to produce 5.1m-5.6m oz of gold this year, with the biggest contributions from Nevadan assets Carlin and Cortez (part of the JV with Newmont Goldcorp). The group expects total cash costs of $650-$700 per oz, a shade more than half the expected average gold price of around $1,250 per oz.

Planned capital expenditure of $1.4-$1.7bn is weighted towards maintenance, with $300-$400m on expansion.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.