2023-04-19 17:42:43 ET
Summary
- Barrick Gold released its preliminary Q4 results last week, reporting quarterly production of ~950,000 ounces of gold and ~88 million pounds of copper.
- This represented a decline on a year-over-year basis, and the weakest quarter for gold production in years, partially related to a tough winter and maintenance at its Carlin Complex.
- Although the lower output/higher costs will lead to a weak Q1 financially, we should see steadily improving results as 2023 progresses and significant margin expansion year-over-year.
- So, with Barrick being one of the better relative values sector-wide and industry-leading returns to shareholders, I would view any sharp pullbacks as buying opportunities.
The Q1 Earnings Season for the Gold Miners Index ( GDX ) is just around the corner, and one of the first companies to release its preliminary Q1 results is Barrick Gold ( GOLD ). Unfortunately, the company's quarterly gold production was down 4% year-over-year and copper production also fell by over 12% with a softer quarter from Lumwana. This has Barrick tracking at just 21.5% of its guidance midpoint (~4.4 million ounces of gold), but it's important to note that Q1 is typically the weakest of the year and production should steadily improve as the year progresses. In addition, while Q1 costs will come in well above its guidance range, they should also decline materially in H2-2023. So, with the weakest quarter out of the way, I would view sharp pullbacks as buying opportunities.
Remote Underground Mining - Carlin Complex (Barrick Presentation)
Q1 Production Results
Barrick Gold released its preliminary Q1 results last week, reporting quarterly gold production of ~952,000 ounces, a 4% decline from the year-ago period. This marked a new multi-year low for production for Barrick, and its copper production was also down by 12% (~88 million pounds) vs. ~101 million pounds produced in Q1 2022. The culprit for the weaker gold production was a soft start to the year for its Nevada joint-venture (61.5%/38.5% split) which produced just ~416,000 ounces and a slow start to the year for Kibali (lower grades) due to mine sequencing. As for its Nevada operations, Barrick had a minor headwind from lower production at Long Canyon as Phase 1 production winds down, and its Carlin Complex saw much lower production for three reasons:
- Annual roaster maintenance
- Converting the Goldstrike autoclave to conventional CIL
- Harsher weather during the quarter in the state
Barrick Gold - Quarterly Gold Production (Company Filings, Author's Chart)
If we look at operations in a little more detail, Pueblo Viejo saw a sharp decline in attributable production (~89,000 ounces vs. ~101,000 ounces), Loulo-Gounkoto's attributable production was flat, and Veladero's attributable production was down year-over-year. The lower production at these assets was offset by increased production at Hemlo, Tongon, and North Mara, but given that its largest operations were the ones with meaningful declines, the increased production at these smaller assets wasn't able to make up for the shortfall. Meanwhile, from a jurisdictional standpoint, Barrick's proportion of production from Tier-1 ranked jurisdictions was relatively flat at 48%, with these including Hemlo (Canada) and its Nevada operations (United States).
Barrick Gold - Quarterly Production by Mine (Company Filings, Author's Chart) Barrick - Quarterly Gold Production by Jurisdiction (Company Filings, Author's Chart)
If we look at its Nevada operations, its Cortez Complex had a stronger quarter, with attributable production of ~140,000 ounces (Q1 2022: ~115,000 ounces), as did Turquoise Ridge, which saw a 20% increase in production year-over-year. However, while these two operations saw a combined 39,000 ounce increase (attributable basis), this was offset by a 63,000 ounce attributable decline at Carlin for reasons highlighted above, which is the company's largest contributor. Plus, Long Canyon saw a 23,000 ounce decline year-over-year with limited production from the asset while work shifts to permitting for Phase 2. That said, Carlin should have a much stronger rest of the year based on guidance, with over an average quarterly run rate of ~250,000 ounces for Q2 through Q4 even using the lower end of annual guidance.
Barrick Gold Attributable Gold Production - Nevada Gold Mines (Company Filings, Author's Chart)
Regarding other operations, Carlin should see a slight decline in production year-over-year and Long Canyon will be a ~50,000-ounce headwind annually (2022: ~55,000 ounces), plus smaller operations like Veladero, North Mara, and Bulyanhulu will see slightly lower production. The good news is that the Pueblo Viejo Expansion will boost production at this majority owned asset, and Cortez, Turquoise Ridge, and Hemlo will see much higher production year-over-year. And if we look ahead to 2024, Barrick should see further growth from Pueblo Viejo and Porgera should start contributing, which has been a headwind to annual production since it went offline in 2020 pending a new agreement. So, while Q1 saw a year-over-year decline, annual production should increase by nearly 10% on a two-year basis (2024 vs. 2022).
Barrick - Quarterly Copper Production (Company Filings, Author's Chart)
Finally, looking at copper production, Lumwana had a softer quarter with attributable production of just ~48 million pounds, down from ~57 million pounds in Q1 2022. However, production is expected to be higher on a full-year basis based on attributable guidance of 275 million pounds (FY2022: ~267 million pounds), and Barrick's full year attributable copper production will also increase assuming it meets or beats its guidance midpoint of 455 million pounds. So, between a slight increase in gold and copper production year-over-year and favorable metals prices, Barrick should enjoy a significant increase in revenue year-over-year if the gold price continues to cooperate and there are no major operational hiccups.
Costs & Margins
As for costs and margins, Barrick noted in its prepared remarks that all-in sustaining costs [AISC] for its gold segment would be up 9-11% vs. Q4 levels, implying that AISC should come in at ~$1,366/oz this quarter assuming costs are at the midpoint. This would represent a significant increase vs. Q1 2022 AISC of $1,164/oz and while the gold price did strengthen in Q1, I would be surprised to see Barrick's average realized gold price come in above $1,900/oz. Assuming an $1,888/oz average realized gold price and Q1 2023 AISC of $1,365/oz, we would see AISC margins decline to $522/oz in the upcoming Q1 report, a ~27% decline year-over-year.
Barrick Gold - Quarterly AISC, Gold Price & AISC Margins (Company Filings, Author's Chart)
As for its copper segment, costs are expected to be higher year-over-year and are lapping tough comps from a sales standpoint, with an average realized copper price of $4.68/lb in Q1 2022. Hence, margins should decline sharply for both segments in Q1. The result is that we should see sharply lower revenue and margins in the upcoming quarter on a year-over-year basis. That said, when we look at the big picture, it looks like we saw trough AISC margins last year and near peak costs, suggesting that the bigger trend is quite favorable. In fact, even if we assume an average realized gold price of just $1,900/oz in FY2023 (year-to-date average price of $1,897/oz) and assume FY2023 AISC of $1,240/oz, we would see AISC margins improve to $660/oz (+15% year-over-year).
Barrick - Annual AISC & AISC Margins + Forward Estimates (Company Filings, Author's Chart & Estimates)
If we look out further to FY2024 when we're likely to see further easing in sustaining capital and a production profile closer to ~4.52 million ounces of gold (PV Expansion, Porgera restart, Veladero improved grades), we should see all-in sustaining costs decline below $1,150/oz. If we assume the same $1,900/oz gold price for FY2024, (which could end up being conservative) Barrick's AISC margins would improve further to $760/oz, resulting in a ~33% margin improvement vs. FY2022 levels. So, I don't see any reason to get hung up on what will be a softer quarter. Instead, I would embrace weakness in the stock, and if we were to see a sell-off on the Q1 report, this might provide a final chance to pick up the stock on sale ahead of what should be two years of meaningful margin expansion even if we assume gold prices don't remain at spot levels.
The last point worth noting is that while some companies may have solid cost profiles like Fortitude Gold ( OTCQB:FTCO ) or growing production profiles like Fortuna Silver ( FSM ) there's no guarantee that this will persist without the ability to consistently replace reserves and do so at similar or better grades. In this department, Fortitude Gold and Fortuna Silver will struggle given that the latter hasn't been able to replace silver reserves successfully nor has it replaced reserves at Yaramoko and grades are dropping at Lindero, which could offset increased production from Seguela. In the former case, Isabella Pearl high grades are winding down, and the days of sub $1,000/oz are in the rear-view mirror.
Barrick Gold - Annual Gold Production & Mineral Reserves (Company Filings, Author's Chart)
However, as I highlighted in my previous update , Barrick continues to see exploration success across its portfolio, with highlights including high-grade deposits at Carlin (North Leeville, REN, Rita K), high grades at Cortez (Goldrush/Fourmile), and high-grade intercepts down-dip and down-plunge at Kibali. So, while there are some companies sector-wide that will struggle to keep a lid on costs or may see declining production looking out to 2028-2030, Barrick should see a steady trend of improving costs and increasing production as its investments in exploration are paying off, with some cases of grades actually improving, such as the ultra-high-grade Fourmile ore body and extensions like Dorothy that were built upon last year. The result is that investors don't need to worry about a production cliff or margin cliff in Barrick's case.
Valuation & Technical Picture
Based on ~1750 million shares and a share price of US$19.10, Barrick trades at a market cap of $33.4 billion, which I see as a very reasonable valuation for a ~4.4 million ounce gold producer which has a pipeline that supports growth in gold and copper production. As shown in the chart below, Barrick has historically traded at ~9.3x cash flow, a discount to its peer group because of its exposure to less favorable jurisdictions. However, while it may have slightly less exposure to Tier-1 jurisdictions relative to Newmont ( NEM ), it has a slightly better margin profile and one of the strongest balance sheets sector-wide. Hence, under its new CEO Mark Bristow, who has shown strong capital discipline and a focus on adding low-cost ounces through exploration versus acquiring them and a focus on improving the balance sheet, I believe a more appropriate multiple for the stock is 10.0x cash flow.
Barrick Gold - Historical Cash Flow Multiple (FASTGraphs.com)
If we multiply this figure by FY2023 cash flow estimates of ~$4.54 billion and divide by 1750 million shares [US$2.59 per share], this would place Barrick's fair value at US$25.90, pointing to a 35% upside from current levels. However, based on dividends and potential further share buybacks, Barrick's total return could be closer to 40%, making it one of the more appealing ways to get exposure to the gold price sector-wide. This is especially so when many small-cap and mid-cap names have outperformed the majors and are no longer offering any margin of safety, such as Torex Gold ( OTCPK:TORXF ), Lundin Gold ( OTCQX:LUGDF ) and AngloGold Ashanti ( AU ). Plus, I would expect further growth in cash flow per share and free cash flow in FY2024, with a further decline in operating costs (increased production and lower sustaining capital next year).
GOLD - 2-Year Chart (StockCharts.com)
Finally, looking at the technical chart, Barrick eked out a slightly higher high on its recent rally, and looks set to make a higher low with its current pullback, a positive development from its intermediate chart. Meanwhile, the stock's moving averages are back to a bullish posture, which is a positive development, with the last time this occurred following a ~60% correction being November 2018, with the stock performing well on a forward 12-month basis. Obviously, history doesn't have to repeat itself, but given Barrick's quality and attractive valuation, I would expect buyers to show up on sharp pullbacks, and it appears highly likely that the lows for the year are in at US$15.50.
Summary
Barrick Gold's headline results may have spooked some investors, with its weakest quarterly production in years and all-in sustaining costs that are guided to be above $1,350/oz. However, Q1 is typically one of the weakest quarters and while costs will be up sharply year-over-year, Barrick should see margin expansion of a full year-year basis. Just as importantly, this trend should continue in FY2024 if the gold price continues to cooperate. Hence, I don't see any reason to be concerned about the higher costs and lower production in the quarter. Given that Barrick continues to trade at a discount to its peer group with attractive capital returns and an active buyback program to help support the stock, I would view sharp pullbacks as buying opportunities.
For further details see:
Barrick Gold: Ignore The Weak Q1 Results