2023-05-03 16:49:05 ET
Summary
- Barrick Gold released its Q1 results this week, reporting quarterly production of ~952,000 ounces at all-in sustaining costs of $1,370/oz, translating to declining production year-over-year.
- However, the slow start to the year and increased costs were expected given that Barrick has another relatively capital-intensive year and production was guided to be back-end weighted.
- And while the headline Q1 results may have disappointed some investors, the worst quarter of the year is in the rearview mirror and we're at an inflection point for margins.
- So, with a very reasonable valuation in a rising gold price environment, and GOLD offering a mix of growth and value with an improving technical picture, I plan to accumulate on sharp pullbacks.
The Q1 earnings season for the Gold Miners Index ( GDX ) has finally begun and the results have been mixed, with Alamos Gold ( AGI ) and Agnico Eagle ( AEM ) coming out of the gate strong, offset by a mediocre report and tough start to the year for Newmont ( NEM ). Unfortunately, Barrick ( GOLD ) didn't have a great start to the year either for similar reasons to Newmont, with two of its largest operations seeing lower production (Pueblo Viejo, Carlin), and relatively weak production from other key assets like Kibali.
However, with the Pueblo Viejo Expansion near completion, inflationary pressures easing, key maintenance out of the way and rising production, we look to be near trough production and trough margins, with a much better few years ahead. And if the gold price can continue to cooperate, we could see a 50% plus increase in AISC margins by 2026, with a path to sub $1,100/oz AISC and a much higher production profile, with further growth in the tank at the end of this decade from Reko Diq, Robertson, and potentially Fourmile. So, with Barrick trading at a very reasonable valuation relative to historical levels, I would expect any sharp pullbacks to provide buying opportunities.
Q1 Production and Sales
Barrick Gold released its Q1 results this week, reporting quarterly production of ~952,000 ounces of gold and ~88 million pounds of copper, a sharp decline from the ~990,000 ounces of gold and ~101 million pounds of copper produced in the year-ago period. However, as noted in my previous update, this related to a slow start to the year at several key operations, with Phase 1 mining at Long Canyon complete, annual roaster maintenance at the Carlin Complex and the conversion of the Goldstrike autoclave from resin in leach to carbon in leach, plus harsh weather, which significantly impacted production at its shared Nevada operations (61.5%/38.5%) with Newmont.
Barrick - Quarterly Production by Mine (Company Filings, Author's Chart)
Elsewhere in the portfolio, we saw lower grades at Kibali related to mine sequencing, the commissioning and ramp-up of the Pueblo Viejo throughput expansion which will significantly increase overall production once its complete (currently sitting at 93% completion), lower grades at Bulyanhulu, and lower grades and tonnes processed at Veladero and Tongon. While some assets partially offset this, with a better quarter at Hemlo, Cortez, Turquoise Ridge, and North Mara, the increased production came from smaller and higher-cost assets on balance, resulting in a significant dip in Barrick's overall production, sales and margins.
The result of increased sustaining capital at Pueblo Viejo and the Carlin Complex combined with lower production volume was that all-in sustaining costs at these two assets rose to $1,689/oz and $1,037/oz, respectively, up sharply from $1,139/oz and $948/oz in the year-ago period. Meanwhile, the company also was contending with higher fuel prices and inflationary pressures on consumables relative to Q1 2022, plus the impact of solely residual leaching from Long Canyon, with this high-margin asset not contributing in the period (Q1 2022 AISC: $664/oz). Hence, this was an unusually ugly quarter from a headline standpoint for Barrick, with its consolidated AISC up 17% year-over-year to $1,370/oz.
However, there was lots to be encouraged about as well if one looked past the headline figures. For starters, Porgera is awaiting a new Special Mining Lease to restart, and once the ramp-up and optimization of the Wangima pit is complete, Barrick will see a ~330,000-ounce lift in average attributable production. Meanwhile, Barrick has made significant progress on its massive 200MW solar farm to supply its Nevada operations, with project spend at $89 million vs. an estimated capital cost of $100 million. Elsewhere, construction of Phase 7A at Veladero was completed on budget, the Loulo-Gounkoto Solar Project is 62% complete and should displace significant fuel consumption, and the PV Expansion is near complete, increasing production to 800,000 ounces per annum with this one of Barrick's highest-margin operations.
For those unfamiliar, Barrick and the Independent State of Papua New Guinea signed the New Porgera Progress agreement at quarter end, reiterating the commitment of re-opening the Porgera Mine.
Looking at Barrick's financial results, the lower production and sales combined with a lower average realized copper price which lapped difficult comps (Q1 2022: $4.68/lb) led to lower revenue, which fell 7% year-over-year to ~$2.64 billion. Combined with increased costs and higher total capital expenditures of $688 million, free cash flow slid to $88 million, a 78% increase relative to Q1 2022 levels. However, the weaker margins were not company-specific, the company continues to maintain a strong balance sheet, and Q2, Q3, and Q4 should all look much better, especially if the gold price can continue to hold its ground and remain above the $1,900/oz level.
Barrick Gold - Quarterly Free Cash Flow & Trailing Free Cash Flow (Company Filings, Author's Char) Barrick - Quarterly Net Debt, Free Cash Flow, Quarterly Dividend (Company Filings, Author's Chart)
Understandably, some investors might be less enthusiastic about the company after looking at the above chart of free cash flow, and that's excusable if one doesn't dig into the details and takes a rearview mirror approach. However, it's important to note that Barrick is in a very heavy capex period currently with multiple growth projects underway, including the massive Pueblo Viejo Expansion. However, we should see significantly less capital spending once the Nevada Solar Farm, Pueblo Viejo Expansion, new open-pit haul fleet (Nevada) and Loulo-Gounkoto Solar Plant Expansion are complete. Combined with a higher gold price and higher production, we will see a much different free cash flow picture in 2024. Let's take a look at costs and margins:
Costs and Margins
Moving over to costs, the trend has clearly been higher for Barrick, with cash costs coming in at $986/oz and all-in sustaining costs [AISC] of $1,370/oz, resulting in AISC margins of $532/oz (Q1 20222: $712/oz). At first glance, this trend might disappoint investors, and it's understandable to be turned off by the margin compression experienced since 2020 in a relatively flat gold price environment. However, it's important to note that these cost pressures are not company specific and there's little value in judging a cyclical company on its margins in a period of what looks to be peak inflation and during its weakest quarter of the year from a sales standpoint. Instead, looking at annual results makes more sense and why it's best to ignore the weak Q1 results.
Barrick Gold - Quarterly AISC (Company Filings, Author's Chart) Barrick - Quarterly AISC & AISC Margins (Company Filings, Author's Chart)
If we look at the intermediate picture, Barrick's Q1 AISC may have come in above its guidance midpoint of $1,170/oz to $1,250/oz, but this is partially because of the gold price coming in above its assumption of $1,650/oz (a good problem to have), and unit costs also were higher because of the much weaker production/sales in the period and increased sustaining capital. However, as we look ahead to H2 and the rest of the year, AISC are likely to dip materially as we see higher production from one of its largest contributors and lowest-cost assets, Pueblo Viejo, as the company ramps up the nearly completed PV Expansion.
Combined with lower energy prices and offset by a slightly higher gold price, AISC should decline as the year progresses and land closer to $1,230/oz for the full year. If we assume an average realized price of $1,930/oz this year, this would translate to AISC margins of $690/oz in FY2023, up significantly from $573/oz in FY2022 and a welcome departure from the recent trend of declining costs. However, it's also important to note that Barrick is in a high capex period currently and mine-site sustaining capital has increased immensely, putting further pressure on costs. That said, if we see mine-site sustaining capital come down to more normalized levels and the gold price continues to cooperate, AISC could decline below $1,150/oz in 2024, resulting in meaningful margin expansion at the same $1,930/oz gold price assumption.
Barrick Gold - Annual AISC, Forward Estimates & Attributable Mine-Site Sustaining Capital (Company Filings, Author's Chart & Estimates)
From 2018 to 2022, mine-site sustaining capital is up from ~$950 million to ~$1.68 billion, a significant headwind from a unit cost standpoint when combined with declining production and inflationary pressures. FY2023 guidance is for ~$1.58 billion in attributable mine-site sustaining capital.
Looking at the bigger picture, Barrick's production is on track to see continued production growth and much of this growth is coming from higher-margin assets such as Goldrush (final permitting), Pueblo Viejo (Expansion), Porgera (restart), and we're seeing costs steadily improve at assets like Hemlo that have been dragging on costs. So, lower sustaining capital, increased production from lower-cost assets, increased sales volumes, what appears to be some moderation in inflationary pressures according to Agnico Eagle, and a higher gold price, Barrick has a path to seeing AISC margins return to ~$900/oz by 2026. This would represent a ~55% increase from FY2022 levels, and this is precisely why the Q1 results and FY2023 margin performance are not a good gauge of the overall health of this business which has seen significant investments and optimization since its CEO Mark Bristow took over.
To summarize, while Barrick might look like a risky investment with shrinking margins and many key operating metrics are heading in the right direction, this looks to be trough production and trough margins, and when combined with a very reasonable multiple (~7.1x FY2024 operating cash flow estimates), that's a great time to own a sector leader, especially when it's more difficult to find value in the mid-tier space and developer space, with expensive valuations for names like Lundin Gold ( OTCQX:LUGDF ), New Found Gold ( NFGC ) and Torex Gold ( OTCPK:TORXF ).
Technical Picture
Finally, if we look at the technical picture, Barrick has hopped back above its key quarterly moving averages, and the stock performs quite well when these moving averages are in bullish alignment and its long-term moving average (red line) has a positive slope. This was the case from 1986 through 1996 and from 2004 to 2010. Obviously, this setup could change if the stock were to fall apart, but for the time being, this is a positive development. The key, however, will be Barrick closing above $19.50 on a quarterly closing basis to maintain this new bullish posture. So, if we see sharp pullbacks on an intra-quarter basis, I would expect these to provide buying opportunities with a higher probability that dips will be bought, especially given that margins are sitting at an inflection point.
Meanwhile, if we look at Barrick vs. the S&P 500 ( SPY ), the stock is coming up against a major support level, which the stock previously tested at its 2016 and 2018 lows. Both these periods led to a period of strong outperformance for the stock and, while this time could be different, the stock is certainly in a favorable zone to outperform over the next six months to one year. And its more attractive shareholder returns program certainly aids this view of potential outperformance on a total return basis, with Barrick in a position to return over 4% to shareholders through its base dividend, performance dividends, and opportunistic share buybacks.
Summary
Barrick Gold's headline Q1 figures weren't pretty, but I expected this given the pre-reported Q1 production numbers, production guided to be second-half weighted, the lapping of high-margin production from Long Canyon (Phase 1 mining complete) and the increased sustaining capital relative to prior-year levels. That said, Q1 and H1-2023 look to be the last abnormally weak period for Barrick and we should see meaningful margin recovery sequentially in Q2 as well, with Barrick's financial results set to steadily improve from now on. So, with little sign of optimism among Barrick investors, a very reasonable valuation in a rising gold price environment, and the stock offering a mix of growth and value with an improving technical picture, I plan to accumulate on sharp pullbacks.
For further details see:
Barrick Gold: Worst Quarter Of Year In Rearview Mirror