Barrick Gold Corp. (ABX, Financial) announced earnings for the first quarter of fiscal 2018 on Monday after the closing bell.
A rising gold price, which is up 9.2% from 2017 to $1,332 an ounce, could not shelter quarterly revenues from a falling throughput.
Essentially, because of a decline in the production of the yellow metal, revenue fell to $1.79 billion in the first quarter of 2018 and at a 10.2% rate from a year ago.
Production was affected by the sale of 50% of Veladero mine in Argentina and other issues. An earthquake affecting production at Porgera (47.5% JV in Papua New Guinea) added during the quarter to operating issues, which were anticipated by Barrick Gold at Acacia (63.9% in Tanzania), at Cortez and Goldstrike mines in Nevada, at Pueblo Viejo (60% in the Dominican Republic), at Hemlo (Canada) and Lagunas Norte (PerĂş). Of course, the miner also sold less metal compared to a year ago.
If the price of the precious metal couldn’t prevent Barrick Gold to miss expectations on sales by $50 million, it, despite higher charges as fixed costs were spread over a lower throughput, helped the Canadian miner to beat those on adjusted earnings by $1 cent per diluted share delivering earnings per share of $15 cents.
Compared to a year ago, the combination of fiscal, general and administrative, and capital expenditures constraints were wider in the first quarter of 2018 for gold to pass higher cash flow (up $12 million to $507 million) and free cash flow (up $20 million to $181 million) to the company’s needs. This will raise total attributable capex in the second quarter of 2018. However, the company’s expectations for the entire 2018 are left unaltered at $1.40 billion to $1.60 billion.
We will see how the market will welcome these results and whether it will give more emphasis to disappointing sales or to higher adjusted earnings and cash flows.
In the first case a further depreciation of the stock, whose share price is at $12.92 (-11% so far this year) is highly expected to create a more convenient entry point into one of the two largest producers of gold in the world. The second largest producer of gold in the world is the U.S. Newmont Mining Corp (NEM).
Chances the market will emphasize results on earnings and cash flows are low. A 7% positive surprise in adjusted EPS will hardly have a meaningfully impact on the market value of the stock in Barrick Gold Corporation producing that positive tailwind that will lead the security.
Therefore, it is wise to give the market some time to process the news before either accumulating on Barrick Gold Corporation or initiating a new position.
The stock is already cheap. However, today there aren’t catalysts to justify a rush in the gold stock. At 1 million ounces, the production of gold is expected to be approximately on par with that of the first quarter. Plus, a higher sustaining capex will likely have an impact on free cash flow.
Higher grades and throughput at Barrick Nevada and Pueblo Viejo will be the drivers for a stronger production, but only starting sometime in the second half 2018. For full fiscal 2018, production is anticipated to reach 4.5 to 5 million ounces of gold and 385 to 450 million pounds of copper.
Therefore, I would wait the share price to retreat under $12 before buying shares.
For the 52-weeks through April 23, Barrick Gold Corp. has fallen 24% and is trading below the 200 and 100 SMA lines. The current market capitalization of $15.32 billion is at a 49% distance from the 52-week high of $19.26 per share and is $1.85 of the 52-low of $11.07 per share. Barrick Gold Corp has 1,166.89 million shares outstanding.
The average price target of $15.96 is a 23.5% upside from the current market value per share. A retracement int he range o f $11.5 to $11.7l is possible and will widen the stock's appreciation beyond 35%.
As of April 2018, 33.3% of analysts suggest buying Barrick Gold while 62.5% recommend holding. For one analyst out of a total of 24, the stock will underperform. The recommendation rating is 2.9 out of 5.
In addition, Barrick Gold has $2.4 billion in cash on hand and securities as of March 31, 2018, and a debt of less than $100 million to be refunded before 2020. The total amount of the debt is $6.4 billion but more than 75% is not due before 2033.
With the quarterly report, Barrick Gold has also informed its shareholders that it is not the intention of the company to proceed with further debt curtailments through optimization of its assets base. Targets of debt reduction will be accomplished using operating cash flow and liquidity available on hand.
The Canadian miner hopes to cut the total debt by another $1.4 billion before the beginning of 2019.
(Disclosure: I have no positions in any stock mentioned in this article.)
