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Barrick Gold - gold price offsets lower volumes

Emilie Stevens, Equity Analyst | 6 May 2020 | A A A
Barrick Gold - gold price offsets lower volumes

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Barrick Gold Corp Com Stk

Sell: 32.95 | Buy: 33.11 | Change 0.10 (0.30%)
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Barrick reported underlying earnings per share of $0.16 this quarter, up from $0.11 over the same period last year but lower than the $0.17 reported last quarter. Higher gold prices offset lower gold sales and higher average costs as expected.

Barrick kept the quarterly dividend at $0.07 per share.

The shares rose 2.2% on the news.

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Our View

Since acquiring Randgold back at the start of 2019 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. There are massive asset disposals left to complete, and the merger with Randgold and the more recently acquired Acacia Mining still bedding in.

Mega-mergers always come with risks. Smashing together corporate giants creates the 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.

And while it's been a busy year, all this activity has readied Barrick for its next phase. Barrick's announced a 10 year plan focussed on growing production organically. It's underpinned by the group's focus on quality and Tier One assets. It's also a plan that the group can fund through its own cash flows, so it sounds like a good one to us.

With fingers in many countries and mines, Barrick's relationships with its partner countries are important, and the group's record here is encouraging. Battles with the Tanzanian government over the former Acacia mines were resolved and operations and exports are back up and running. Unfortunately it looks like it'll have to work its magic in Papua New Guinea too, where the government has announced it won't renew a mine license.

Since the price miners receive for their product is set by the wider market, keeping costs down is key. Barrick's all-in sustaining cash cost per ounce, which covers both extraction and maintenance costs, is among the lowest in the industry. It's expected to stay around $920 - 970 this year.

So far Barrick says its operations haven't been significantly affected by coronavirus, thanks to adjusted procedures and local workforces. That's impressive given that its operations span the globe, but it's something we'll be keeping a close eye on.

We think the dividend looks at least sustainable. Randgold joined the group in a net cash position, so bringing it on board in an all-share deal improved the balance sheet significantly. However, the prospective yield is a lowly 0.83% and as with any dividend there are no guarantees.

With global uncertainties boosting the gold price, Barrick's popularity has risen such that the shares trade on 1.66 times book value, below a longer term average of 1.82. 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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First Quarter Results

Underlying Gold revenues rose 8.6% year-on-year to $1.9bn, as higher average gold prices offset lower gold sales volumes.

The average price of gold was $1.589 per oz, was 22% higher than the same point last year. Gold produced was 9% lower than last year at 1.25m oz, largely reflecting a drop in production at the Cortez mine due to lower quality grades.

All-in sustaining costs per ounce rose 16% to $954 per ounce. The increase was in line with guidance and reflects both higher costs of extraction and capital expenditure required to maintain current production levels.

Underlying Copper revenues of $245m were 22% lower than the prior year, largely reflecting lower copper prices. The average realised price per pound was $2.23, down from $3.07 over the same period last year. All in sustaining costs for Copper were 17% lower at $2.04 per pound.

Barrick generated $438m in free cash over the quarter, up from $146m last year. The rise reflects a significant boost in cash generated by the business, thanks to the rise in gold prices, more than offsetting higher levels of capital expenditure. As a result net debt fell 17% over the quarter to $1.85bn.

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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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