ABX:CC - Barrick Gold: You Can't Win If You Have No Patience

2023-09-05 08:30:00 ET

Summary

• Barrick Gold Corporation stock fell back toward its March 2023 pessimistic lows as investors fled.
• The company's Q2 earnings release highlighted production challenges as it also dealt with higher costs.
• However, Q3 comps should improve further as GOLD laps its most challenging quarter in 2022.
• Underlying gold futures are holding up robustly, providing a more robust tailwind for GOLD to outperform in the second half.
• I make the case why investing in GOLD needs patience, even though the worst is likely over. Buy while the market remains highly pessimistic and ride through the volatility.

I had anticipated that the selling pressure in Barrick Gold Corporation ( GOLD ) could abate soon. However, sellers have had other ideas. Accordingly, GOLD significantly underperformed the S&P 500 ( SPX ) ( SPY ) since my previous May update, as gold futures topped out in May.

The recent volatility in the underlying futures has likely exerted downward pressure on GOLD, even though it reported a pretty solid second-quarter or FQ2 earnings release .

Several key metrics suggested that Barrick Gold executed well despite facing higher production costs due to lower-than-expected production in Q2. Given the fixed costs leverage due to Barrick Gold's relatively high CapEx ratio, downward swings in production could have a marked impact on its earnings and free cash flow or FCF metrics.

However, Barrick Gold registered an adjusted EPS of $0.19 in Q2, up from Q1's $0.14. As such, the leading gold mining company benefited from the upward swing in gold prices despite being hampered by its production challenges. Notwithstanding the near-term impact, management telegraphed its confidence in achieving a more robust second-half production outlook.

Accordingly, Barrick Gold expects to deliver a full-year gold production of between 4.2M and 4.6M ounces. Q2's 1.01M ounces came in at the lower end of its quarterly average based on its guidance range. Moreover, Barrick Gold's all-in sustaining costs, or AISC, surged to $1,355 per ounce, well above its full-year guidance range of $1,170 to $1,250 per ounce.

Therefore, market operators likely assessed the possibility of a worse-than-anticipated execution in the second half, reflecting the uncertain macroeconomic conditions. Despite that, the company assured investors it expects a softer cost outlook, as indicated in its full-year guidance range.

In other words, we should expect the worst in Barrick Gold's operating performance to likely be over as production and revenue growth are expected to improve further. As such, it should help to lift its earnings and FCF accretion, which should help normalize its depressed valuation multiples, assessed to be "trapped" in the highly pessimistic zone.

Accordingly, I gleaned that GOLD last traded at a forward EBITDA multiple of 5.1x, well below the one standard deviation zone under its 10Y average of 6.9x. Hence, I assessed that the market has likely priced in significant execution risks despite potentially much easier comps from Q3 onwards.

Keen investors should recall that underlying gold futures remain much higher than last year's hammering over the same period, which saw the underlying futures bottoming out in October 2022. As such, I believe the futures market positioning is favorable for GOLD, indicating that market operators are confident that the Fed is close to or at the peak of its rate hike regime.

With that in mind, high-conviction investors should find the current opportunity enticing if they gleaned robust buying sentiments at its critical support zone.

My analysis indicates that GOLD buyers held the $15.5 support level, initially formed at its March 2023 lows.

As such, buying sentiments remain constructive as Barrick Gold heads into a more optimistic Q3 reporting season, with underlying futures expected to hold their consolidation zone.

While the $18 level proved to be a significant resistance zone, I assessed that the risk/reward upside from the current levels is attractive, providing ample buffer, defended by its robust support zone just below.

Given the steep pullback, investors considering adding more exposure should capitalize if they are confident of Barrick Gold's execution in Q3. The company's efforts are expected to be bolstered by a more supportive macroeconomic backdrop and robust underlying gold prices.

As such, I remain bullish on GOLD at the current levels.

Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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