We’re now more than halfway through the Q2 Earnings Season for the Gold Miners Index ((Source: Company Presentation)
Barrick Gold released its Q2 results this week and reported quarterly gold production of ~1.15 million ounces, a 14% drop year over year from the 1.35 million ounces reported in Q2 2019. However, this didn’t stop the company from bumping up its quarterly dividend from $0.07 per share to $0.08 per share as the rising gold prices more than offset the lower production, which was partially impacted by COVID-19. Meanwhile, the company also lowered its net debt significantly on a sequential basis, with net debt down 25% to $1.4 billion, a massive improvement considering the unprecedented circumstances. Finally, while we saw flat to down production at most mines on a year-over-year basis, Barrick’s copper portfolio had an incredible quarter, with copper production up 24% year over year. Let’s take a closer look at the quarter below:
(Source: Company Presentation)
As we can see in the table above, Barrick’s gold operating results suffered quite a bit in Q2 from both a cost and production standpoint. Beginning with Nevada, Barrick’s 61.5%-owned Phoenix, Long Canyon, and Cortez mines had decent quarters despite COVID-19 related challenges for the sector with quarterly production flat at Phoenix, up 53% sequentially at Long Canyon, and up 3% at Cortez. However, the performance at these smaller Nevada mines was overshadowed by a significant decline at Carlin, where quarterly gold production fell from 256,000 ounces to 234,000 ounces. This was due to scheduled maintenance at the Goldstrike roaster, which resulted in much lower tonnes processed on a sequential basis (~2.84 million tonnes vs. ~3.3 million tonnes).
(Source: Suzanne Featherston, ElkoDaily.com)
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Meanwhile, at the company’s 60%-owned high-grade Pueblo Viejo Mine in the Dominican Republic, gold production fell by 22% due to a total plant maintenance shutdown. The Pueblo Viejo Mine produced 111,000 ounces attributable to Barrick vs. 143,000 ounces in Q1 2020, but we should see production bounce back in the back half of the year with scheduled shutdowns now complete. During the quarter, all-in sustaining costs rose over 15% to $720/oz, though still at industry-leading levels. It’s worth noting that this was mainly due to higher royalties from the higher gold (GLD) prices and the much lower throughput (~1.09 million tonnes processed vs. ~1.47 million tonnes processed).
(Source: Royal Gold Company Presentation)
Elsewhere in Barrick’s portfolio, Veladero and Porgera both showed considerable declines year over year, with the latter mine’s weakness due to the decision from the government not to extend the mining lease in Papua New Guinea. Quarterly production at Porgera was down more than 60% to 24,000 ounces, while Veladero was affected by a nation-wide quarantine that saw gold production fall 35% to 49,000 ounces. The good news is that these two mines combined make up less than 15% of Barrick’s total gold production, so the headwinds aren’t a huge deal.
Finally, at the company’s African mines, we saw solid production across the board, with quarterly gold production of 390,000 ounces across the African portfolio, up 1% sequentially from Q1 2020. The stand-out performer in Africa continues to be Barrick’s 45%-owned Kibali Mine, where we saw 90,000 ounces of gold produced at industry-leading costs of $739/oz. Meanwhile, on the copper side, Lumwana had an incredible quarter in Zambia, with the best quarterly production in years, according to Barrick. Copper production at the mine came in at 72 million pounds in Q2, up 12% sequentially, and 46% year over year, while cash costs fell to $1.55/pound due to higher grades and better cost control. The increased copper production offset a portion of the lower output in Barrick’s gold portfolio. Let’s take a look at the financial metrics given the mixed operating results:
(Source: Author’s Chart, Company Data)
Despite challenging operating results at a few mines, Barrick’s financial metrics are better than ever, with free-cash-flow soaring on a sequential basis, and net debt reduced even further. As we can see above, Barrick has done an outstanding job of decreasing its net debt the past year, with net debt down by $2.4 billion from Q2 2019 to $1.4 billion. This de-leveraging and a massive increase in free cash flow prompted the company to double its quarterly dividend in the past year to $0.08 per share, returning quite a bit of value to shareholders. Given that free cash flow hit a new high in Q2 2020 at $520 million, up over 800% year over year, I would not rule out a further dividend increase in the next 12 months closer to $0.095 per share. Assuming this occurs, this would provide investors with an annual forward dividend yield of closer to 1.30% at today’s prices, an exceptional yield for a company that’s become a powerful growth stock given the increased metals prices.
If we move over to annual earnings per share, the softer operating results have not put a dent in Barrick’s improving earnings trend, which is on track for an earnings breakout year in FY2020. As we can see above, annual earnings per share [EPS] is expected to increase for the second year in a row based on FY2020 estimates of $0.86, and this would translate to 68% growth year over year despite a challenging operating environment. More importantly, this would translate to an earnings breakout which is a very bullish development as up until now, Barrick’s annual EPS has been stuck in a sideways range for years. Typically, earnings breakouts are very bullish developments long term, and I would expect more growth investors to gravitate towards Barrick given this much-improved earnings trend.
(Source: YCharts.com, Author’s Chart)
Moving over to Barrick’s revenues, there’s a lot to like here as well, with quarterly revenues also hitting new highs. While gold production was down nearly 15% year over year, the company’s average realized gold price increased by 31% ($1,725/oz vs. $1,317/oz), which more than offset the lower production. This is how Barrick managed to post 45% growth in revenues year over year despite a tricky quarter operationally. The Q2 revenue of ~$3.06 billion translated to a new multi-year high in revenues for Barrick, and Q3 2020 estimates are on track for yet another new high based on estimates of $3.37 billion. Assuming the company can meet these estimates, this would translate to 26% growth year over year after lapping a year of 46% growth in Q2 2019. These are incredible growth metrics, and they confirm that the earnings trend above is sustainable as it’s being driven by margin expansion and robust sales growth. So what does the technical picture look like?
As I’ve pointed out for several quarters, the best way for investors to play Barrick is by watching its position vs. its monthly moving average (teal line), as Barrick’s best returns come when it’s above this key moving average. As of the July monthly close, Barrick remains in a healthy position above this key moving average, which is why it continues to sit in the green zone on the above chart. As long as the bulls continue to defend $22.50 on a monthly closing basis, I would view any 18% pullbacks as buying opportunities. This is because the bulls typically play strong defense on corrections within the green zone. While there’s no guarantee we’ll see anywhere near the returns we saw in the 1980s and 1990s (see below chart), the green zone has been the sweet spot for buying the dip on Barrick. Therefore, I would view any pullbacks to $24.70 as low-risk buying opportunities.
Barrick Gold had a challenging Q2 operationally, but despite the headwinds from COVID-19 and maintenance shutdowns, the company saw exponential growth in free cash flow, a significant improvement in its balance sheet, and also marginally increased the quarterly dividend. Given that we’re on track to see an earnings breakout year despite the COVID-19 headwinds, I believe that any sharp corrections of 18% or more will continue to be buying opportunities, as Barrick’s earnings trend looks the best it has in years. Therefore, while I am not long the stock currently as I am focusing more on mid-tier and intermediate producers, I believe any pullbacks below $24.70 on Barrick would be low-risk buying opportunities.
Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.