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Barrick - profits down as costs soar

Barrick reported third quarter revenue of $2.5bn, down 11% year on year, largely a result of weaker gold volumes and prices.

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Barrick reported third quarter revenue of $2.5bn, down 11% year on year, largely a result of weaker gold volumes and prices.

Gold production of 988,000 ounces was down 10%, with sales down 7%. The average realised price over the quarter was down 3% to $1,722 per ounce, compared to total production costs which rose 23% to $1,269 per ounce.

Copper production rose 23% to 123m pounds, with sales rising 19%. The average realised price over the quarter was down 19% to $3.24 per pound, compared to total production costs which rose 20% to $3.13 per pound.

Underlying net profit fell $195m to $224m, driven by higher costs and lower sales prices.

There was a free cash outflow of $34m, compared to an inflow of $481m the prior year. That was driven by an extra $223m in capital expenditure and lower operating cash flow. There was net cash on the balance of $145m.

Full year costs for both gold and copper are expected to come in ahead of previous guidance. Gold production is expected at the low end of the guided range of 4.2-4.6m ounces.

The group announced a $0.15 per share dividend for the quarter. The $1bn buyback is still ongoing, with $322m repurchased to date.

The shares fell 5.3% following the announcement.

View the latest Barrick Gold share price and how to deal

Our View

By historical standards, gold prices are still high. But a drop off over the course of this year, back close to 2-year lows, mean cash flow and profits have come under pressure. Those challenges have been compounded by significantly higher costs of production as labour and energy becomes more expensive, adding another headwind to margins.

There's a lesson in that - since Barrick's fortune is to some extent out of its hands. When prices rise, profits roll, and when prices fall the pain is unavoidable. Still Barrick has done its best to influence its own destiny.

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 3 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 mines life beyond 2040. 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.

With fingers in many regions 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 have been resolved and operations and exports are back up and running. We're still waiting to see if the magic can work in Papua New Guinea too, where the Porgera mine is sitting dormant. Work with the government is still ongoing to get licences sorted so operations can resume.

But these projects don't come cheap, nor is the ongoing maintenance cost just to keeps mines running. Capital expenditure was higher than the cash generated from operations over the third quarter, causing a free cash outflow. Net cash sits just shy of $150m, so there's no immediate liquidity concerns, but it highlights the speed at which things can change. This time last year, free cash was just shy of $700m a quarter at its peak.

The strong balance sheet and high-quality production has given Barrick the confidence to mark in some considerable shareholder returns. The net cash position may have weekend, but it's still in a range that means additional returns are on the table. The recently renewed dividend policy has a set value, plus a tiered bonus based on the amount of net cash on the balance sheet. Plus, the group also announced a $1bn share buyback in the full year results back in February - although a continued rise in costs or lower gold price could cause that to come under pressure.

The gold price remains a decent level above Barrick's costs per ounce, but that margin is narrowing. We view Barrick's large, diversified, footprint as one of the better options in the sector. 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: 3rd November 2022