Barrick Gold Q1 Earnings: Don't Miss The Forest For The Trees

seekingalpha05-03

Barrick Gold Corporation's Q1 results were weaker than expected, but the long-term potential of the business remains very strong and production, margins and free cash flow are at an inflection point....

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Juan Jose Napuri We're nearing the halfway mark of the Q1 Earnings Season for the Gold Miners Index (GDX) and the results have been encouraging overall. This was evidenced by strong results out of Agnico Eagle (AEM) and Alamos Gold (AGI), and one of the more recent companies to report was Barrick Gold Corporation (NYSE:GOLD). While Barrick had a softer Q1 report, this was largely expected after pre-releasing its production numbers in April and guiding for higher costs sequentially. However, it's important to note that while some of the headline numbers were down year-over-year, this does not reflect the overall strength of the business and its potential at all. In fact, gold and copper prices averaged $2,075/oz and $3.86/lb, respectively, with prices currently sitting at ~$2,300/oz and ~$4.50/lb. Meanwhile, Q1 was the weakest quarter of the year by a wide margin, and we should see production improve to ~1.0 million ounces going forward and closer to ~1.1 million ounces on a quarterly basis in 2025. Finally, the company has still yet to see minimal contribution from its two lower-cost growth projects in its gold segment which will provide near-term and medium-term production and margin gains: Pueblo Viejo Expansion (ramp-up phase), and Goldrush (400,000 ounces per annum on 100% basis). In this update, we'll dig into the Q1 results, recent developments, and why Barrick looks like a solid buy-the-dip candidate: Barrick Gold Pour - Company Video Barrick Gold Production & Sales Barrick Gold released its Q1 results this week, reporting attributable quarterly production of ~940,000 ounces of gold, a 1% decline from the year-ago period. The lower production was largely expected with the Pueblo Viejo Expansion ramping up slower than expected after a structural failure of its crushed ore stockpile feed conveyor (the replacement conveyor is now complete) which would have more than made up for lower production because of maintenance at the Sage autoclave (Turquoise Ridge Complex), lower grades at the Carlin Complex and lower grades at Kibali if the PV Expansion was delivered on time as previously expected. It's also important to note that Porgera barely contributed to the quarter with attributable production of just 4,000 ounces of gold following its restart, but is expected to see its production increase by 4x in coming quarters to ~20,000 ounces going forward, before increasing further in 2025. And when commenting on Porgera, Barrick Gold's CEO Mark Bristow stated the following: \"The only thing I would say is going surprisingly well. It's like a bit sometimes like running in the dark. You don't particularly know what next challenge you're going to get. But since we moved to the official startup, and then we engaged with the Halla province on restarting the gas powered power stations, which are in the next door province re-erecting the pylons that carry the power through to the mine. We've done all that. We've commissioned the generation facility and we're feeding the mine. So, you know, and we're ramping up and we did a lot of pre-work on ramping up, but so far it's going well. So far we're ahead of plan.\" - Barrick Gold, Q1 2024 Earnings Call Transcript. Hence, while there were a few headwinds that weighed on Barrick's Q1 performance, the results were hardly reflective of its long-term potential from a gold production standpoint. And this is especially true if it looks to bring on additional growth projects at the end of this decade, like Fourmile (up to 400,000 ounces per annum). Plus, as noted, we will see near-term growth from Pueblo Viejo starting in H2 2024 as this asset ramps up to closer to ~900,000 ounces per annum (100% basis) following its 14 million tonne per annum expansion, and medium-term growth from Goldrush which should produce 130,000 ounces this year, improving to 400,000+ ounces by 2028 or an additional ~250,000 ounces attributable to Barrick. So, what does this look like conceptually? Barrick Gold Quarterly Gold Production & Conceptual Growth Potential (Near-Term, Medium-Term, Long-Term) - Company Filings, Author's Chart & Estimates As the chart above highlights, Barrick has a path to ~1.1 million ounces per quarter of ~4.4 million ounces per annum in 2025, improving to ~4.6 million ounces later this decade with incremental growth from Goldrush and Robertson at its Cortez Complex. However, longer-term, Fourmile would be a significant high-margin and beefy contributor, and with this being 100% owned by Barrick, Newmont (NEM) would have to pay to in cash to take a respective stake in Fourmile for it to move into the joint-venture (61.5% / 38.5% Nevada Gold Mines in favor of Barrick), besides reimbursing Barrick for costs incurred at this asset. And given that Newmont is equally aware of how impressive this asset is as there aren't many 5.0+ million-ounce ore bodies at ~12 grams per tonne of gold being uncovered in Tier-1 ranked jurisdictions at brownfields sites with processing infrastructure nearby, I would expect it pay up without hesitation to earn in here and move this Fourmile into the NGM JV. And as shown, Reko Diq is also expected to be a significant gold contributor (outside its major copper boost) at the end of the decade. Fourmile 2018 Mineralized Footprint & Current Conceptual Exploration Target/Upside - Barrick Presentation Moving to copper production, it was also down year-over-year, with much lower grades from Lumwana (its largest copper mine) and slightly lower production at Zaldivar. However, Barrick noted that higher grades are expected as the year progresses and while costs were up substantially in the quarter, this was largely due to increased waste stripping, with sustaining capital up ~190% over the year-ago period. However, as the chart below highlights, Barrick's is not reflective at all of its long-term potential either, with Lumwana having the potential to turn into a ~520 million pound per annum copper producer following its planned Super Pit expansion project, and Reko Diq having the potential to add 400+ million pounds of copper per annum (in addition to 250,000+ ounces of gold) per annum once in production, with both projects expected to significantly increase Barrick's copper production and its weighted average mine life with both having multi-decade mine lives. Barrick Gold Quarterly Copper Production & Upside Potential (Incremental Super Pit Contribution + Reko Diq Quarterly Contribution) - Company Filings, Author's Chart & Estimates Even assuming a $4.00/lb copper price, the addition of another ~700 million pounds of copper per annum (once Reko Diq and Lumwana Super Pit are online) would contribute over $2.5 billion in additional revenue to Barrick's top line at higher margins which is aside from the medium-term growth from gold. Hence, there is a path for significant growth in revenue and cash flow for Barrick looking out to the end of the decade (assuming it can execute successfully). So, while many investors are caught up on the near-term results, which showed only a modest 4% increase in revenue year-over-year, they should look at the bigger picture, which is the potential for $15+ billion in revenue per annum at higher margins which will ultimately lead to a material re-rating in the stock. And as highlighted earlier, while revenue was up just 4% year-over-year, we should see a significant increase in Q2 on a year-over-year basis with the gold price averaging over $2,300/oz year-to-date, and copper prices also spending the entire quarter thus far above $4.00/lb. Barrick Gold Quarterly Revenue - Company Filings, Author's Chart Costs & Margins Looking at costs and margins, Barrick's all-in sustaining costs came in at $1,474/oz in Q1 2024 for its gold segment, up nearly 8% from the year-ago period. However, this was largely related to a 21% increase in mine-site sustaining capital offset by lower sales in its weakest quarter of the year and less contribution from its higher-margin Pueblo Viejo Mine, which is still ramping up towards full capacity. And while this translated to a 13% increase in AISC margins, this might have been below what the market was expecting. Barrick Gold All-in Sustaining Costs, Gold Price & AISC Margins - Company Filings, Author's Chart & Estimates However, as the chart above highlights, we should see Barrick go from low double-digit AISC margin expansion in Q1 2024 to ~40% growth in Q2 2024 on a year-over-year basis. This assumes Q2 AISC of $1,420/oz and an average realized gold price of $2,290/oz or AISC margins of $870/oz. And looking out to H2 2024 when Pueblo Viejo is contributing more, I would expect AISC margins to dip below $1,390/oz, paving a path to nearly $900/oz AISC margins if the gold price continues to cooperate. Hence, for any investors exiting their positions after the mediocre Q1 financial results, they are leaving right at the point of inflection for margins and production. Barrick Gold Annual Average Realized Gold Price, All-in Sustaining Costs & AISC Margins - Company Filings, Author's Chart If we take a bigger picture view on the 2024 and 2025 potential, the outlook is just as bullish. In fact, Barrick should see a breakout year for AISC margins with AISC margins of ~$880/oz based on an estimated 2024 AISC figure of $1,400/oz and an average realized gold price of $2,280/oz. Meanwhile, AISC margins should improve even further to $990/oz to $1,000/oz in 2025, which assumes a flat $2,300/oz average realized gold price (below spot levels) and lower AISC on the back of a significant increase in production and sales to ~4.4 million ounces. Hence, while the narrative continues to be that upside in the gold price is only being offset by inflationary pressures (which was the case in the 2021-2023 period), this is not the case at all here and those that miss are going to end up having to pay up later for major producers like Barrick that are actually holding the line well on costs given the benefit of Tier-1 operations with scale vs. some of their peers with smaller operations that haven't had the capital to invest in site optimization and technology/automation. So, what does this mean for cash flow and free cash flow generation? Barrick Gold Quarterly/TTM Free Cash Flow & Annual Free Cash Flow Outlook - Company Filings, Author's Chart & Forward Estimates While Barrick reported a 2% decline in operating cash flow in Q1 2024 ($760 million vs. $776 million) and a sharp decline in free cash flow to just ~$32 million (Q1 2023: $88 million), this was largely because of negative working capital changes and significantly higher capex year-over-year ($572 million vs. $526 million). However, the higher gold and copper price has Barrick on track to generate over $1.1 billion in free cash flow this year (+80% vs. FY2023) and up to $2.5 billion in free cash flow in FY2025 or nearly 4x FY2022 free cash flow generation. This is very significant and means that while Barrick is trading at an unappetizing ~45x trailing free cash flow on a ~$29 billion market cap, it's trading at a much more attractive ~12x free cash flow on FY2025 numbers. And with its improving net cash position, we will see higher dividends under its performance dividend going forward. Nevada Gold Mines Operations - Company Website So, while many investors are caught up on the weak Q1 results and the stock has been punished, I see this correction as overdone, and I would expect any pullbacks below US$16.10 to provide buying opportunities.  Summary Barrick Gold had a tough Q1 which was its weakest quarter of the year, but the business is nearing an inflection point from a production, margin and free cash flow standpoint. I would expect this to not only improve sentiment for the sector as it doesn't help when the #2 producer and a large weighting in the GDX is out of favor, but also for Barrick which has a date with the US$20.00+ level over the next 12 months if it can execute successfully.  In summary, I believe investors should ignore the weak Barrick Gold Corporation Q1 results and not miss the forest for the trees, and instead be patient for a consistent improvement in the quarterly results and free cash flow generation going forward. This should ultimately help to re-rate the stock - never mind the longer-term potential, which is a higher-margin copper/gold business as new major projects come online.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432909767"}