2024-01-17 14:00:01 ET
Summary
- Barrick Gold missed its guidance midpoint for the third consecutive year and Q4 costs/production came in below my expectations.
- Fortunately, we should see higher production at more competitive costs in 2024, and I would expect a meaningful improvement in AISC margins even at a $1,980/oz gold price assumption.
- In this update we'll dig into the Q4 production results, the forward outlook, and where the stock's updated buy zone lies:
It's been a volatile start to the year for the precious metals sector in what's typically the best month of the year from a seasonal standpoint, with an average return for the sector of ~2.6% in January over the past 30 years. This is certainly disappointing for investors, especially with the metal's price notching a record seven weekly closes above the $2,000/oz level, and can be attributed to softer 2024 guidance than expected from some producers, continued negative sentiment sector-wide, and mixed production results overall.
Unfortunately, Barrick Gold ( GOLD ) was one company to deliver underwhelming Q4/FY2023 production results, and annual production came in below its guidance midpoint for the third consecutive year. This isn't the end of the world and we should see a recovery to ~4.3 million ounces of gold (+6% year-over-year), but the weaker Q4 production will result in lower Q4 margins than I anticipated (~$600/oz vs. ~$700/oz), and a less robust Q4/FY2022 financial report overall. In this update we'll dig into the Q4 production results, the forward outlook, and where the stock's updated buy zone lies:
Gold Bugs Index Returns By Month - Author's Chart & Data
All figures are in United States Dollars and production results are on an attributable basis unless otherwise noted.
Q4 and FY2023 Production
Barrick Gold released its Q4 production results this week into a weaker day for the gold price and was met with its sharpest weekly decline in years with the stock down ~12% for the week. This can be attributed to a weaker Q4 report than I expected with production of just ~1.05 million ounces of gold, translating to a 6% decline year-over-year. The lower production was partially due to a decline in production year-over-year from its massive Carlin Complex (~224,000 ounces vs. ~265,000 ounces), a decline in production from Pueblo Viejo which had challenges ramping up (~90,000 ounces vs. ~98,000 ounces), Loulo-Gounkoto (~127,000 ounces vs. ~139,000 ounces) after lapping difficult comparisons and lower output from Kibali (~93,000 vs. ~97,000 ounces) among its bigger assets. And while Phoenix, Turquoise Ridge, Cortez, and Veladero saw higher output among non-Tier 1 assets, this was offset by dips in production at Tongon, North Mara, and Bulyanhulu.
Barrick Gold Quarterly Production by Mine - Company Filings, Author's Chart
Barrick Attributable Gold Production (NGM) - Company Filings, Author's Chat
Unfortunately, the Q4 results that were about 50,000 ounces weaker than I anticipated led to production of just ~4.05 million ounces of gold in 2023, below the initial guidance midpoint of 4.2 million, and led to Barrick's third consecutive year missing its annual guidance midpoint. This is quite disappointing given that it has offset solid progress in other areas, with the company doing a phenomenal job optimizing operations to make them more sustainable, extending mine lives and growing resources/reserves, delivering above expectations with exploration surprises (Fourmile growth), and improving its balance sheet. And while these achievements plus a strong copper pipeline (Reko Diq, Lumwana Super Pit) are infinitely more important to the overall strength of Barrick's business, it's no surprise that the stock has been punished after a third consecutive production miss.
Barrick Gold Actual Annual Production vs. Annual Guidance Midpoint - Company Filings, Author's Chart
Digging into the annual results in detail, Carlin's attributable production was ~868,000 ounces (FY2022: ~966,000 ounces) and well below the 955,000 ounces expected for the year. This offset what was a better year at Cortez and Turquoise Ridge, where output increased to ~549,000 ounces and ~316,000 ounces, respectively, but Cortez still came in well behind guidance of ~615,000 ounces. And while Barrick did guide to Cortez and Carlin being slightly below guidance and group production being within ~3% of full-year guidance, the company came up short on both with output a little over 3% below the low end (4.2 million ounces) and Carlin well below the low end (~868,000 vs. ~910,000 ounces) with Cortez also sharply below (~549,000 vs. ~650,000 ounces). Unfortunately, this wasn't helped by the weaker than planned year at one of its lowest-cost operations, Pueblo Viejo, with production coming in at just ~335,000 ounces vs. a guidance midpoint of 495,000 ounces.
Barrick Gold Annual Gold Production & 2024 Estimates - Company Filings, Author's Chart
Looking at the bigger picture, Barrick's annual production has been in a steep downtrend since its 2007 peak given the divestment of several assets (50% KCGM, 50% Round Mountain, Ruby Hill, Cowal, Bald Mountain, cessation of mining at Eskay Creek, Lagunas Norte and Golden Sunlight, reduced interest in Porgera + lower production at Goldstrike), offset by construction of Pueblo Viejo, the merger with Randgold that added several African assets, and the Newmont joint-venture which has significantly improved its Nevada operating portfolio with meaningful synergies (including improved ore routing). That said, with Porgera temporary offline and a reduced interest, the Goldrush ROD delayed (now in hand) and a weaker year at its largest operations, production fell to its lowest levels in years at ~4.05 million ounces last year. It's important to note that Barrick is not alone in this trend of declining production, and the below charts highlight just how difficult it's become to grow production while maintaining costs with fewer discoveries, lower grade/smaller discoveries overall, and much higher costs to construct new projects.
Annual Gold Production Major Producers - Company Filings, Author's Chart
Gold Discoveries & Budget - Barrick Presentation
As the chart above highlights, annual gold production from a sample of the largest producers peaked at ~22 million ounces in 2006 and has declined nearly 20% since then.
So, what's the result of the lower production?
Unfortunately, with output coming in below my expectations in Q4 and sustaining capital appearing to have come in higher than I expected, Barrick is now guiding for all-in sustaining costs [AISC] to be 8%-10% above Q3 levels, translating to Q4 AISC of $1,368/oz at the mid-point. This is an increase year-over-year and while it will be more than offset by a higher gold price (~$1,970/oz), AISC margins look like they will come in at ~$600/oz vs. my previous estimates of $700/oz. On a positive note, this is still an improvement year-over-year from easy comps and one reason I was constructive on Barrick and added to my position at US$14.00 earlier this year. However, the level of improvement was below my estimates and I've since exited my position for a small gain. Let's look at the 2024 outlook:
Barrick Gold Quarterly AISC, AISC Margins & Q4 Estimates - Company Filings, Author's Chart & Estimates
2024 Outlook
While 2023 was another year to forget for Barrick, there is reason to be optimistic about 2024 and the company's future. This is because Barrick should see ~6% production growth this year to closer to ~4.3 million ounces of gold based on higher production from Carlin, higher production from Phoenix, strong years at similar production levels from Loulo-Gounkoto, and initial contribution from Porgera which has been granted a Special Mining Lease. In addition, Pueblo Viejo should have a much better year, and even if we assume production only comes in at ~825,000 ounces based on commentary from the Q3 Conference Call that 800,000 ounces looks more than doable on a 100% basis, this would result in Pueblo Viejo's attributable production increasing nearly 50% year-over-year (~335,000 ounces ----> ~495,000 ounces).
Barrick Gold Annual Gold & Copper Outlook - Barrick Presentation
Barrick - 5-Year Outlook On Production, Costs, Capex - Company Website/Investor Day
More importantly to Barrick's FY2024 financial results, we should see a step down in sustaining capital spend after two years of significant investments, and the combination of a higher denominator and lower sustaining capital (plus increasing production from one of its highest-margin assets) should allow Barrick to report AISC below $1,190/oz in FY2024. And if we assume an average realized gold price of $1,970/oz to be conservative (Q1 already averaging ~$2,030/oz), we would see a more than 20% improvement in AISC margins. In fairness, this is largely because of being up against easy year-over-year comparisons after a rough stretch with inflationary pressures and declining production. Still, I would expect this margin improvement to help put a floor under the stock and help improve sentiment for the sector with the No. 2 name hopefully able to wiggle its way out of the penalty box.
Valuation
Based on ~1.75 billion shares outstanding and a share price of US$15.60, Barrick trades at a market cap of ~$27.3 billion and an enterprise value of ~$27.8 billion. This makes Barrick the No. 2 capitalization name in the sector and it certainly hasn't helped the index as a whole with the two largest names stuck in steep downtrends. However, while sentiment may be understandably bad for Barrick, much of this does look priced in at this point at a valuation of just ~5.6x FY2024 cash flow per share estimates ($2.84). And even if we use a more conservative multiple of 8.0x cash flow which is in line with its 10-year average and well below its 15-year average (8.5x), Barrick's fair value would come in at US$22.70. Notably, this valuation is just as attractive from a P/NAV standpoint with the company trading at a rare discount to its estimated net asset value of ~$36.0 billion, leaving it trading at just ~0.77x P/NAV. And using a more fair multiple of 1.1x for a producer of this scale with multiple Tier-1 assets, this also points to ~40% upside from current levels.
Barrick Gold Historical Cash Flow Multiple & Margins/Valuation vs. Peers - FASTGraphs.com, FinBox
That being said, I'm looking for a minimum 35% discount to fair value to justify starting new positions in major producers to ensure an adequate margin of safety. And if we apply this discount to a conservative fair value estimate of US$22.70 for Barrick, its ideal buy zone comes in at US$14.80 or lower. So, although I like the stock's setup heading into 2024 with easier comparisons and margin expansion on deck if the gold price cooperates, I remain on the sidelines for now.
Summary
Barrick had a softer H2 and FY2023 than I anticipated and margins are set to come in well below my expectations for Q4 and FY2023. That said, the company had a tough year with Pueblo Viejo not ramping up nearly as expected and major plant maintenance at its Nevada operations in Q1 didn't help. That said, the stock has a better year on deck, it will hopefully do a better job of managing expectations to be able to deliver at or above its guidance midpoint this year following a few misses on its midpoint and I remain bullish on resource/reserve growth with Barrick using some of the most conservative pricing for reserves, making new discoveries with Fourmile looking like a monster, and there looks to be a path to ~6.5 million gold-equivalent ounces by the end of the decade with growth already bought and paid for. Hence, with a very reasonable valuation and a trough multiple on trough earnings, I would view further weakness below US$14.80 as a buying opportunity.
For further details see:
Barrick Gold: Down, But Not Out