2023-07-17 17:35:02 ET
Summary
- Barrick Gold reported Q2 production of ~1.01 million ounces of gold and 107 million pounds of copper, a 3% and 11% decline respectively year-over-year.
- However, the Q2 results didn't do Barrick justice, with a much stronger H2 ahead with increased output from PV, Kibali, Carlin, and Cortez.
- And just as importantly, margins should improve significantly in H2 2023 vs. H1 2023, with a further increase in margins in 2024 as Barrick laps elevated capex levels in 2023.
- So, for patient investors, I see Barrick as one of the best-positioned names sector-wide from a reward/risk standpoint, with easy comparisons and an attractive valuation with it trading at just ~6.4x conservative FY2024 cash flow per share estimates.
The Q2 Earnings Season for the VanEck Gold Miners ETF ( GDX ) begins later this month, and we've already seen multiple production reports from small-cap and mid-cap producers. One of the most recent companies to report its results was the second-largest gold producer, Barrick ( GOLD ), which released a mediocre Q2 report with production of ~1.01 million ounces of gold and ~107 million pounds of copper, a 3% and 11% decline respectively on a year-over-year basis. However, while investors may have become accustomed to the unwelcome and persistent decline in year-over-year output, Barrick is gearing up for production growth, with increasing production at Pueblo Viejo, commercial production post-ROD receipt at Goldrush, and the restart of its Porgera Mine in Papua New Guinea. And even more importantly, this trend reversal will be coupled with meaningful margin expansion, translating to a return to significant free cash flow generation. Let's dig into the Q2 production results below and explain why patient investors should be rewarded for staying the course:
All figures are in United States Dollars unless otherwise noted.
Q2 Production & Sales
Barrick Gold released its preliminary Q2 results last week, reporting quarterly production of ~1.01 million ounces of gold and ~107 million pounds of copper, representing moderate declines on a year-over-year basis. In its gold segment, production was 3% lower and is sitting at ~1.96 million ounces year-to-date, tracking at just ~44.5% of its annual guidance midpoint. Meanwhile, copper production declined 11% year-over-year and is sitting at ~195 million pounds year-to-date, behind H1 2022 levels and hovering just below 44% of its annual guidance midpoint. However, while this might appear disappointing on the surface, this was largely to be expected, with Barrick signaling a 45/55 split for H1 and H2 production, suggesting production is mostly in line with plans, even if Q1 and Q2 came in a little lighter than some might have hoped.
Barrick Gold - Quarterly Gold Production (Company Filings, Author's Chart)
Looking at the above chart, some investors might point out that regardless of the sequencing and weighting this year, gold production is declining, and is clearly in a steep downtrend. However, there are some nuances worth pointing out relative to pre-2020 levels, with Porgera offline temporarily (61,000 ounce headwind vs. Q2 2019), the company having sold Lagunas Norte (39,000 ounce headwind vs. Q2 2019), Golden Sunlight being shut down (6,000 ounce headwind vs. Q2 2019), and Morila also being sold (6,000 ounce headwind). In addition, its 50% stake in KCGM was sold for $750 million in cash to Saracen (57,000 ounce headwind vs. Q2 2019). Hence, while production may look light relative to the same quarter in 2019 (~1.01 million ounces vs. ~1.35 million ounces), half of this decline is related to assets that were sold or reached the end of their mine lives, or have stayed offline longer than initially expected (Porgera).
Pueblo Viejo Life Of Mine Plan (100% Basis) (Company Website)
Plus, it's important to note that Barrick's Q2 2023 performance did not do the company justice, with a softer quarter from Pueblo Viejo (~77,000 attributable ounces) where work to tie-in and commission the major plant expansion affected production in the period. However, as the life of mine plan shows above, Pueblo Viejo will come roaring back with the 14.0 million tonne per annum expansion now complete, with Barrick's quarterly attributable production (60%) expected to average ~135,000 ounces from 2024 to 2027 and ~150,000 ounces per quarter next year, translating to ~75% and ~95% growth vs. Q2 2023. Meanwhile, although the Carlin Complex bounced back in Q2 after a maintenance-heavy start to the year, Cortez and Turquoise Ridge underperformed, with combined attributable production of ~178,000 ounces (mine sequencing and autoclave maintenance). And while Cortez may be a ~600,000 ounce attributable producer currently, it's operating at a fraction of its long-term potential, with output set to ramp to ~750,000 ounces by 2027.
Barrick Gold - Quarterly Production by Asset (Company Filings, Author's Chart)
Moving over to other assets and their Q2 performance, Kiabli's output improved sequentially (~87,000 ounces vs. ~64,000 ounces) with better grades, and Veladero also saw a step up in out (~54,000 ounces vs. ~43,000 ounces) due to higher grades as well. Unfortunately, this was partially offset by the softer production from North Mara, Hemlo, Tongon, Turquoise Ridge, Pueblo Viejo, and Cortez, with production only up slightly vs. Q1 2023 levels despite the monster quarter from Carlin (~248,000 ounces, and its best quarter since Q4 2021), and Kibali. That said, while production and sales were only marginally higher, Barrick should benefit from an average realized gold price of $1,970/oz or higher, helping to offset the lower average realized copper price in the period due to softness in Q2 and provisional pricing adjustments.
Overall, Barrick's production was mediocre in H1 and is tracking slightly behind its 45% front-weighted guidance using the midpoint of H1 2023 guidance. However, it was a harsh winter in Nevada, the company didn't get much help from Pueblo Viejo with the company putting the finishing touches on the major expansion, and it's only marginally behind guidance with a significant step-up in production expected at Cortez, Pueblo Viejo, Kibali and Carlin in H2 2023 vs. their H1 production figures. Hence, I'm optimistic that Barrick can deliver roughly in line with its FY2023 guidance midpoint (4.4 million ounces of gold). Plus, it's worth noting that regardless of where FY2023 production lands, we should see a significantly better year in 2024, with increased contribution from Porgera, increased production from Goldrush assuming the timely receipt of its ROD, and a monster year from Pueblo Viejo, with the potential for 600,000+ ounces of attributable production from this high-margin asset.
Costs & Margins
Although increasing production is important to Barrick's top line (assuming commodity prices cooperate), the bigger story here is costs and margins, which are set to improve dramatically at the same time. In fact, as Barrick shared in its preliminary Q2 report, all-in sustaining costs [AISC] are expected to come in "up to 2% lower" vs. Q1 AISC, suggesting that its Q2 all-in sustaining costs should come in near $1,345/oz. And while these costs aren't anything to write home about when compared to Q2 2021 AISC of $1,087/oz and Q2 2022 AISC of $1,212/oz, it's important to note that these unit costs are finally coming off their peak of $1,370/oz in Q1 2023, and look far worse than they should given that this is a high-capex year from a sustaining capital standpoint and Barrick's denominator was much lower (~1.0 million ounces vs. ~1.04 million ounces in the year-ago period). So, while we'll likely see a moderate decline in year-over-year AISC margins in the upcoming quarter ($625/oz estimates vs. $649/oz in Q2 2022), we will see significant margin expansion beginning in Q3 2023, both sequentially and on a year-over-year basis.
Barrick - All-in Sustaining Costs (Company Filings, Author's Chart & Estimates)
Barrick Gold - Gold Price, AISC & AISC Margins + Forward Estimates (Company Filings, Author's Chart)
In fact, if we look at the above chart, AISC margins have the potential to improve to $700/oz in Q3 2023 assuming improved all-in sustaining costs of $1,250/oz and an average realized gold price of $1,950/oz. This would translate to a 12% improvement sequentially (Q3 2023 vs. Q2 2023) and a ~55% increase year-over-year vs. the $453/oz AISC margins in Q3 2022. To summarize, while Barrick has struggled to hold the line on margins over the past two years as it's come up against near unprecedented inflationary pressures combined with increased investment and a declining production profile, this is expected to flip starting in Q3 with extremely easy comps on deck. I would expect this to translate to improved sentiment for Barrick, which has seen its margins lag most million-ounce producers, but will not benefit from a period of outperformance due to its easier comparisons relative to peers.
Valuation
Based on ~1755 million shares and a share price of US$17.35, Barrick trades at a market cap of ~$30.4 billion, down from a peak of market cap of ~$54.0 billion in August 2020. However, while Barrick's share price has come under severe pressure over the past three years as margins and free cash flow have dropped because of higher capex and inflationary pressures, trough margins already look to be in the rear-view mirror. This is because inflationary pressures appear to be easing while the gold price is up sharply off its Q3 2022 lows, and Barrick is near the peak of its current investment cycle, with guided total attributable capex of ~$2.4 billion this year. However, with the PV Plant Expansion nearing completion, the new Lumwana mining fleet being purchased this year (shift to owner-mining), the completion of major solar power projects (NGM, Loulo-Gounkoto), and higher sustaining capital spend at NGM (haul truck replacements, natural gas conversion project, underground infrastructure development) that will drive up 2023 AISC, 2024 through 2026 should be less capital-intensive and benefit from easy comparisons. The result? Barrick should see a meaningful increase in its free cash flow and considerably lower AISC in 2024.
Barrick - Total Attributable Capex & Total Gold Capex (2022-2027) (Company Filings)
Assuming Barrick was trading at $25.00 per share today in line with its historical multiples (9.3x cash flow), there wouldn't be much of an opportunity here. However, with Barrick trading at just ~6.4x conservative FY2024 cash flow per share estimates or a 31% discount to its historical multiple, the stock is sitting near a trough multiple with trough margins behind us. And it isn't just AISC margins that will climb over the next few years, it's also production. This is because Barrick will enjoy increased production at Pueblo Viejo (Expansion), commercial production at Goldrush, and the restart of Porgera, with this combination of increased sales, lower sustaining capital, and a cooling off of inflationary pressures set to pull AISC back below $1,125/oz (FY2023 guidance: $1,170/oz - $1,250/oz). So, for patient investors, Barrick should look entirely different in H2-2024 (especially if gold prices cooperate), with ~1.1 million ounces of quarterly gold production at sub $1,100/oz costs or ~$825/oz AISC margins assuming a $1,925/oz gold price.
Barrick Gold - Historical Cash Flow Multiple (FASTGraphs.com)
Even if we apply a fair multiple of just 9.6x cash flow (a 3% premium to its historical multiple given Barrick's improved capital discipline under the current leadership of Mark Bristow) and using conservative FY2024 cash flow per share estimates of $2.72 which assumes a sub $1,900/oz gold price, this would place Barrick's fair value at US$26.10. This points to a 52% upside from current levels to its 18-month target price, with a total return closer to 57% when including expected dividend payments. That said, I prefer a minimum 35% discount to fair value to justify starting new positions in large cap producers, which places Barrick's ideal buy zone at US$16.95 or lower. Hence, if we see further weakness in the stock, I would view this as a low-risk buying opportunity. I see Barrick as one of the most attractively valued producers from a risk-adjusted basis, with a mid single-digit operating cash flow multiple and a diversified portfolio with multiple Tier-1 assets.
Summary
While some small-cap producers like Lundin Gold ( LUGDF ) have doubled off their lows due to near flawless execution and significant free cash flow generation, Barrick has been left in the dust, with it trading at arguably its most attractive valuation in the past three years outside of the brief spike lower last year following its Q3 earnings. This is because it's trading at only a slightly higher cash flow multiple with a much higher gold price. And while this may not be showing up in its financial results yet , H2-2023 should look much different from H1-2023, and H2-2024 will be considerably better, with Barrick set to benefit from higher sales, higher margins, and up against easy comps, a recipe for a meaningful re-rating as positive sentiment should return to the stock.
Barrick Gold - 10-Year Base Case Production with Reko Diq & Lumwana Super Pit (Company Presentation)
And while forgotten in this period of negative sentiment, Barrick has a solid development pipeline that will fuel its next leg of growth, with Reko Diq, the possibility of a Super Pit at Lumwana, and 100% ownership of Fourmile, one of the best discoveries made over the past decade in North America with what looks like it could ultimately be a 4.5+ million ounce resource at 10.0+ grams per tonne of gold. And just as important as its pipeline is that Barrick is one of the few major producers with a lower share count vs. 2020, with opportunistic share repurchases and the discipline not to do any mega deals in a less favorable portion of the cycle, contrary to peers like Kinross ( KGC ). So, for investors looking for a disciplined and attractively valued producer offering reasonable shareholder returns (2.3% to 5.8% annualized dividend yield with high end based on performance level IV), I see Barrick as one of the more attractive reward/risk bets sector-wide and a Buy below US$17.00.
For further details see:
Barrick Gold: Don't Miss The Forest For The Trees