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Barrick Gold - costs weigh on earnings

Barrick Gold reported second-quarter revenue of $2.8bn, down 1% from last year as higher gold prices were more than offset by lower sales volumes...

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Barrick reported second-quarter revenue of $2.8bn, down 1% from last year as higher gold prices were more than offset by lower sales volumes. Underlying cash profit (EBITDA) was down 10% to $1.4bn. Total costs of production for gold and copper were 12% and 9% higher respectively.

The period ended with net debt of $617m, from a net cash position the previous year of $636m. Free cash flow fell from £169m to $63m.

Production over the second half is expected to improve, as maintenance is completed at Nevada Gold Mines and the Pueblo Viejo expansion starts to yield results.

The board declared a dividend of $0.10 per share.

The shares were broadly flat in early trading.

View the latest Barrick Gold share price and how to deal

Our view

Clouds of uncertainty around how the next year or so will play out in broader markets means appetite for gold has been strong, and second-quarter results from Barrick reflect a healthy gold price. Earnings beat expectations, but still very much reflect the tricky cost environment that miners are facing.

Sticky inflation has pushed up production costs for both gold and copper, which continues to weigh on performance. Cost guidance now looks a little on the optimistic side, given the group's already trending a good way ahead of that guidance on gold and toward the top end on copper.

CEO Mark Bristow is a serial dealmaker. An audacious bid to acquire Newmont ended instead in a joint venture combining the two groups' Nevada assets. The Nevada estate contains three tier-1 mines, these are large, low cost and long life. Big expansion plans are underway, including the flagship $1bn Goldrush project at one of the tier-1 sites.

The expansion of the low-cost Pueblo Viejo mine is also progressing, expected to extend the mine's life beyond 2040 with production benefits expected in the third quarter. Increased production at existing mines can be a particularly powerful driver for the group - since costs rarely increase in line with output. That means rising production helps boost margins, while lower production hits the bottom line hard.

There's also been positive progression in both Gold and Copper reserve levels, as organic expansion uncovers new deposits. This is key, as it reduces reliance on acquisitions to support future production guidance.

With fingers in many regions and mines, Barrick's relationships with its partner countries are important, and the group's record here is encouraging. Papua New Guinea is an ongoing battleground, where the Porgera mine is sitting dormant. There has been progress here, and we may have production back up by the end of the year which would be a boost to production given guidance doesn't include any contribution.

But these projects don't come cheap, nor is the ongoing maintenance cost just to keep mines running. In that respect, higher operating costs are proving to be a bugbear at the minute, and something to keep an eye on. For now, prices are high enough that free cash flow returned over the half, but the net cash position seen for parts of last year has disappeared. Debt's still low, so there are no immediate liquidity concerns, but it highlights the speed at which things can change.

As it stands, returns above the standard dividend are off the table. There's an ongoing $1bn buyback, expected to be completed over the year, but no shares were repurchased over the first half. This shows, as ever, that no returns are guaranteed.

We view Barrick's large, diversified, footprint as one of the better options in the sector and it's in a position to benefit if the gold price stays elevated. But we remain cautious on the shorter-term outlook while costs continue to rise.

Barrick Gold key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 8th August 2023