Barrick Gold Corp (TSX: ABX) is one of the world’s leading gold mining companies with annual gold production and gold reserves that are among the largest in the industry. The group is principally engaged in the production and sale of gold and copper, as well as related activities such as exploration and mine development. The company holds ownership interests in fourteen producing gold mines, including six Tier One Gold Assets and a diversified asset portfolio positioned for growth in many of the world’s most prolific gold districts. These gold mines are geographically diversified and are in Argentina, Canada, Côte d’Ivoire, the Democratic Republic of Congo, the Dominican Republic, Mali, Tanzania and the United States.

Revenue Mix

Product Segment

Source: Company Report FY20

Investment Rationale

• On track to achieve 2021 Production Guidance: The company reported preliminary Q1 sales of 1.09 million ounces of gold and 113 million pounds of copper, as well as preliminary Q1 production of 1.10 million ounces of gold and 93 million pounds of copper, in line with the management’s expectations. The management stated that the group is on track to achieve 2021 guidance.

• Barrick Achieved Zero Net Debt Target: In the fourth quarter of FY20, Barrick Gold achieved its zero net debt target. The company ended the year with zero debt, net of cash, down from a peak of USD 13.4 billion in 2013, and with an improved credit rating of Baa1 from Moody’s, which is among the best in the gold sector.

Source: Kalkine Group, Company Filing

• Resurgence in COVID-19 Cases Bringing Gold in the Investor’s Limelight: Gold is again gaining ground amid a resurgence of COVID-19 cases in India and Japan, which raised concerns that a recovery in the global economy and fuel demand may slow. Over the past one month, Gold futures have gained approximately 3% as an increase in COVID cases again slowing the global economic recovery. An extended uncertainty over global growth recovery could bring the safe-haven gold into the investor’s limelight as many investors use gold to hedge their portfolio return against the broader market mayhem. A rise in gold prices would instantly have a positive impact on the gold miners, as it would increase gold realization prices, which would lead to topline growth, margin expansion, higher profit, and higher free cash flow.

Worldwide Daily COVID-19 Cases vs Gold Spot Price (as on April 21, 2021). Source: Refinitiv (Thomson Reuters)

• 27% Jump in Gold Realization Price on YoY Basis: Led by a strong rally in the yellow metal, Barrick’s average gold realization prices shot by 27% on a YoY basis to USD 1,778/oz in FY20 vs USD 1,396/oz in the same period of the previous financial year. Further, the average gold realization price is expected to expand in 2021, as gold is still hovering between the USD 1,700/oz-USD 1,800/oz range. Moreover, after the new COVID-19 strain identified and resurgence of a virus outbreak in India, Japan, and other geographies, further denting the expected recovery in the global economy may push the price of yellow metal higher. Increased realization prices would significantly bolster the group’s operating cash flow as well as free cash flow.

Source: Company Presentation

• Higher Positive Spread Between ROCE and WACC: Barrick gold’s spread between ROCE and WACC is significantly higher at 8.1%, which implies that the company is generating an 8.1% higher return above its cost of capital. A higher spread shows that the company is generating higher free cash flow for the shareholders.

• Record Free Cash Flow, A Greater Margin of Safety: For 2020, the group generated a record free cash flow of USD 3.36 billion compared to USD 1.3 billion in the prior year. This seems that the group has captured the benefit of higher gold prices through disciplined operational execution. Also, higher realization prices strengthened the balance sheet, increasing cash by 57% since the prior year and reaching zero debt. Further, the group has continued to focus on generating positive free cash flow by improving the underlying cost structures of the operations in a sustainable manner.  

Source: Company Filing

• Recorded a Technical Breakout: After trading below the crucial short-term moving average of 50-day SMA for an extended period, recently the stock registered a technical breakout on the daily price chart on April 05, 2021. And since then, the stock has consistently traded above the 50-day SMA. This implies that the stock has created new support at 50-day SMA. Also, the rally was broadly supported by the recent surge in the gold prices amid increasing uncertainties over global economic recovery. Moreover, the Moving Average Convergence Divergence (MACD), a leading momentum indicator, is rising, with the difference between 12-day and 26-day EMA is positive, which is another bullish indicator. The MACD oscillator is hovering above the 9-day SMA line, another bullish indicator.

Technical Chart (as on April 21, 2021). Source: Refinitiv (Thomson Reuters)

• Risk Associated with Investment: The market prices of gold and, to a lesser extent, copper are the primary drivers of the group’s profitability and their ability to generate free cash flow. The price of gold is subject to volatile price movements over short periods of time and is affected by numerous industry and macroeconomic factors. Also, resurgence in COVID-19 cases could further have a weigh on the Copper demand as Copper prices are significantly influenced by physical demand from emerging markets, especially China. Volatility in commodity price or any change in demand dynamics would affect the company’s financial performance.

Financial Highlights: FY20

Source: Company Filing 

• In 2020, gold revenues increased by 27% compared to the prior year, primarily due to the impact of recording a full year of production from Nevada Gold Mines, which was formed on July 1, 2019, and is consolidated and included in revenue at 100%.
• In 2020, attributable gold production was 4,760 thousand ounces, or 705 thousand ounces lower than the prior year.
• In FY20, the company reported strong performance from Barrick operated copper assets with costs at the low end, or below, the guidance range.
• The group’s total revenue for the financial year 2020 nudged by 30% to USD 12,595 million as compared to USD 9,717 million reported in the same period of the previous financial year.
• In 2020, the cost of sales applicable to gold was 5% higher than the prior-year primarily due to the impact of a full year of operation at Nevada Gold Mines, which was formed on July 1, 2019, and is consolidated and included in the cost of sales at 100%
• In 2020, total consolidated capital expenditures on a cash basis increased by 21% compared to the prior year, primarily due to the impact of the sites acquired as part of the formation of Nevada Gold Mines. Excluding the impact of the formation of Nevada Gold Mines, capital expenditures increased by 14%, mainly due to higher mine site sustaining capital expenditures as a result of increased capitalized stripping at Loulo-Gounkoto and the company’s investment in the tailings storage facility and other water management initiatives at North Mara.
• In 2020, the group generated USD 5,417 million in operating cash flow, compared to USD 2,833 million in the prior year. The increase of USD 2,584 million was primarily due to a higher realized gold price, partially offset by the higher gold cost of sales per ounce and lower gold sales volumes.
• Net earnings per share of USD 1.31 for 2020; adjusted net earnings per share of USD 1.15 for the year up 125% on the prior year.
• Exploration, evaluation and project costs for 2020 decreased by USD 47 million compared to the prior year, primarily due to lower corporate development costs as the prior year included transaction costs related to the formation of Nevada Gold Mines and the Acacia transaction. This was combined with lower business improvement and innovation costs incurred at the corporate level and lower Pascua-Lama project costs, partially offset by higher mine site exploration and evaluation expenses.
• Total assets were USD 46.5 billion at December 31, 2020, approximately USD 2.1 billion higher than at December 31, 2019, primarily reflecting the strong cash flow from operating activities and the non-current asset impairment reversal of USD 709 million of our Tanzanian assets resulting from the agreement with the GoT being signed and made effective in the first quarter of 2020.

Valuation Methodology (Illustrative): Price to Cash Flow per Share based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 25.61% of the total shareholding. Van Eck Associates Corporation is the entity holding maximum shares in the company at 4.74%. Fidelity Management & Research Company LLC is the second-largest shareholder, with a holding of 3.66%. The institutional ownership in the company stood at 62.57% and strategic ownership stood at 0.57%.

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Barrick Gold Corporation has achieved its production targets for 2020, led by consistent operating performance across the group that demonstrated management’s ability to manage the impact of the Covid-19 pandemic and other challenges. While the cost of sales per ounce was impacted, total cash costs and AISC per ounce were contained within guidance despite higher royalty expenses from the higher gold price environment.  Further, Barrick has continued to progress major capital projects, including the Pueblo Viejo plant expansion, the development of the underground mine at Gounkoto, the transition to a new heap leach phase at Veladero and the re-establishment of the Bulyanhulu mine.

Moreover, the company ended the year with zero debt and with an improved credit rating of Baa1 from Moody’s, which among the best in the gold sector. Also, the company’s focus on strengthening its balance sheet in recent years has given them the financial strength to endure any short-term impacts to the operations while supporting its strategy of participating in the industry’s inevitable consolidation. As of December 31, 2020, the group had USD 5.2 billion in cash, an undrawn USD 3.0 billion credit facility and no significant debt repayments due until 2033, positioning them with sufficient liquidity to execute on the strategic goals.

Further, the group has captured the benefit of higher gold prices through disciplined operational execution, driving strong operating cash flow and record free cash flow. Also, the group introduced a 10-year production outlook, highlighting a stable asset base and the ability to generate strong cash flow well into the future.

The stock recorded a technical breakout on the daily price chart, which suggest the stock is in bullish momentum.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 28.41 on April 21, 2021.     

1-Year Price Chart (as on April 21, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at April 22, 2021 price as well.

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Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.