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Barrick Gold - a big year buoyed by gold prices

Emilie Stevens, Equity Analyst | 12 February 2020 | A A A
Barrick Gold - a big year buoyed by gold prices

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Barrick Gold Corp Com Stk

Sell: 32.95 | Buy: 33.11 | Change 0.10 (0.30%)
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A strong fourth quarter marked the end of a good year for Barrick, with underlying earnings per share for the year rising 45.7% to $0.51. That reflects increased gold and copper production, following the merger with Randgold, acquisition of Acacia Mining and formation of a joint venture with Newmont, paired with a buoyant gold price. Together that more than offset a slight increase in average costs.

Barrick reported a fourth quarter dividend of $0.07 per share, up from $0.05 the previous quarter. This reflects the group's policy or reviewing dividend payments on a quarterly basis.

The shares were broadly unmoved on the news.

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Our View

Since acquiring Randgold back at the start of the year Barrick's made its presence felt as the world's second largest gold miner. Former Randgold CEO Mark Bristow has been piecing together deals left, right and centre.

An audacious bid to acquire Newmont, ended instead in a joint venture combining the two group's Nevada assets. We think that's probably for the best.

There are massive asset disposals left to complete, the merger with Randgold is still bedding in, and Barrick's recently taken full control of UK-listed Acacia Mining. Plenty to keep the corporate finance team busy.

Mega-mergers always come with risks. Smashing together two corporate giants creates potential for inefficiencies if not handled correctly as well as risking the loss of key staff, but we generally like the look of what Bristow's been up to.

Battles with the Tanzanian government over the former Acacia mines have been resolved. Barrick brokered a $300m settlement in March, and in return for splitting the mines with the Tanzanian government is getting operations back up and running.

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, but 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 all-in sustaining cash cost per ounce, which covers both extraction and maintenance costs, of $894 is among the lowest in the industry. And since the price miners receive for their product is set by the wider market, keeping 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 the balance sheet. However, the prospective yield is a lowly 0.96% and as with any dividend there are no guarantees.

With global uncertainties boosting the gold price, miners have risen such that the shares trade on 2.8 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, there's scope for a de-rating.

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Fourth Quarter and Full Year Results

Gold revenues rose 7.7% quarter-on-quarter to $2.1bn and finished the year 32.2% higher at $7.6bn. This reflects increased production, with higher average gold prices.

Gold produced rose 10% over the quarter to 1.4m oz, with full year volumes rising 21% to 5.5m oz. However that growth was driven in large part by acquisitions. The average price of gold stayed relatively flat quarter-on-quarter at $1,483 per oz. However, over the year the average price of gold was up 10% at $1,396.

Despite falling over the fourth quarter, all-in sustaining costs per ounce for the year (which includes the cost of extraction plus expenditure required to maintain current production levels), rose 11% to $894 per ounce. The increase reflects higher costs in the recently formed Nevada Gold Mines joint venture.

Despite higher Copper revenues in the fourth quarter, full year revenues fell 10% to $984m.That reflects a 4% decline in the average price per pound to $2.77. All in sustaining costs for Copper were 11% lower over the year at $2.52 per pound.

Free cash flow for the year was just over $1.1bn, a significant increase on last year's $365m. Following disposals totalling $750m and accounting for cash acquired in the merger with Randgold, the group's net debt position has nearly halved over the year - now standing at $2.2bn.

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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.

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