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Alberto Abaterusso
Alberto Abaterusso
Articles (1384) 

Barrick Gold Issues Results on 2nd Quarter Production

The gold miner remains the best option in the gold mining industry

July 12, 2018 | About:

Shares of Barrick Gold Corp. (ABX) tumbled 3.7% to $12.92 on Wednesday. The stock was trading at $13.01 early on Thursday, up 0.66%.

More downsides in the market value of the stock are expected to follow after the company announced production results for the second quarter.

At first glance, production results don’t look very stimulating. The production of gold collapsed 25.5% to 1.067 million ounces in the second quarter of 2018 compared to 1.432 million ounces in the second quarter of 2017. Copper output also went down to 83 million pounds in the second three months of the current year compared to 104 million pounds a year ago. That was a 20.2% decline in the quarterly volume of the red metal.

The picture below shows the change in the second quarter production of gold at each mine compared to the same period last year.

As you can see in the table, Barrick Gold Corp. experienced a reduction in the production of the yellow metal at each of its assets, except for Turquoise Ridge. Turquoise Ridge is an underground mine in Nevada. It represents a mineral reserve asset with one of the highest average grades in the gold mining industry. The average grade is 15.56 grams of gold per ton of ore. At Turquoise Ridge, Barrick Gold Corp. is financing the construction of a third shaft that should double the annual production to 500,000 ounces of gold starting between 2022 and 2023.

Extensive planned maintenance shutdowns at the roaster of Barrick Nevada and at the autoclaves of Pueblo Viejo in the Dominican Republic are the main reasons for the decline in the production of gold.

Issues with the Tanzanian government also affected production. In Tanzania, Barrick Gold Corp has 63.9% equity interest in Acacia Mining plc (ACA.L). The English gold mining subsidiary was not allowed to export concentrate because of the government of Tanzania said it had underreported past revenues.

During the second quarter of 2018, operations at Porgera Joint Venture in Papua New Guinea were still recovering after an earthquake hit the country on Feb. 26.

However, investors shouldn’t be concerned about this production decline. A bit of the slump is a ‘normal ‘consequence of the fact that a structural change is taking place at Barrick Gold Corp.

The company decided to share its title of largest gold producer in the world with Newmont Mining Corporation (NEM). As a result, the structure changes involve technological innovations and seizing on untapped mineral deposits through strategic cooperation with leading underground mining companies that have mineral resources in other continents. Barrick Gold is in a strategic cooperation with Chinese operator Shandong Gold Group Co. Ltd.

The grasp of innovative technologies will consent the Canadian gold producer to better identify and target the precious metal from mineral deposits that are still open at depth. 

The adoption of  innovative technology will shorten the time that is needed to reach the deposit and unearth the metal. These new methods will lower operating costs and allow better control over the quality of the reserves. In fact, Barrick Gold Corp. is targeting a further cut in costs. The company's All-In Sustaining Cost is among the lowest in the industry.

In two to three years, Barrick Gold Corp. will have reached such a level of flexibility at operations that its balance sheet will be among the least exposed to volatility in the industry.

Barrick Gold Corp. is also fully engaged in reducing leverage. The company has a total debt amounting to $6.4 billion and is is hoping to reduce it significantly before the end of the current year.

This is a smart move, because with the Federal Reserve predicted to proceed with subsequent hikes in the interest rates, it will be less expensive for the company to settle the corporate loan before maturity. The deleverage will be accomplished with operating cash flow and cash available on hand. Barrick Gold Corp. has about $2.5 billion in cash on hand and securities.

These long-term catalysts can be acquired today at a compelling market value. The stock in Barrick Gold Corp. is trading underneath the 50 and 200-SMA lines. The current share price is mimicking the 100-SMA line. Compared to the 52-week range, it is only $2 above the low of $11.07 and far from the high of $18.35 per share.

However, since I expect more downsides following preliminary production results, I would suggest not to acquire shares of Barrick Gold Corp. if the market hasn’t fully processed the information.

The company is expected to release its earnings on July 25. With an average realized gold price of $1,306 per ounce and an AISC at around $852 per ounce, Barrick Gold Corp. will likely miss consensus on earnings by 2 cents, generating a negative surprise of 13.3%.

In addition, the company sold 1.04 million ounces of gold and 74 million pounds of copper at an average realized copper price of $3.12 per pound.

The company is still targeting a gold production between 4.5 million and 5 million ounces for full fiscal 2018 at an AISC of $765 to $815 per ounce of metal sold. That means that the production of the yellow metal is expected to be higher in the second six months of 2018 while costs are expected to be lower.

At Lumwana in Zambia, operational changes forced Barrick Gold Corp. to revise downwards copper production to around 378 million pounds at an AISC of $2.55 to $2.85 per pound.

This new level of copper production may allow for appreciation of the stock if the ore grade improves at Lumwana.

The stock in Barrick Gold Corp. has a price-book ratio of 1.63 times versus an industry median of 2.06 times and an EV-to-Ebitda ratio of 5.71 times versus an industry median of 9.9 times.

(Disclosure: I have no positions in any security I have mentioned in this article.)

About the author:

Alberto Abaterusso
If somebody asks what being a value investor means, Alberto Abaterusso would answer, “The value investor is not just the possessor of the security that represents the company, but he is the owner of that company. As an owner of the company the value investor is actively involved in the dynamics of that company and his first concern is how to have sales progressively growing. Also, the value investor is probably one of the most demanding persons in the world concerning sales.”

Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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