Barrick Gold Corporation (TSX: ABX) is a mining company that produces gold and copper with 16 operating sites in 13 countries. It is headquartered in Toronto, Ontario, Canada. It has mining operations in Argentina, Canada, Chile, Côte d'Ivoire, Democratic Republic of the Congo, Dominican Republic, Mali, Papua New Guinea, Saudi Arabia, Tanzania, the United States and Zambia.

Investment Rationale:

• Higher Gold Prices Drive Strong Cash Flow: 2020 was the best year for gold as an asset class. In the calendar year 2020, gold prices surged approximately 23%, compared to a 15% return in 2019 and a negative 3.2% return in 2018. Despite lower demand for physical gold (mainly in China and India), a glut of funds channelized towards the Gold ETFs took the gold to a record high in 2020. And obviously, it had significantly bolstered the financial performance of gold explorers and miners. Higher gold prices had expanded margins, profit, and cash flows of the gold miners. In the case of Barrick Gold, the company reported a 151% surge in free cash flow in the third quarter of 2020 to USD 1.3 billion on a sequential-quarter basis. This was a record level of quarterly free cash flow for the company. Free cash flow rose 161% on a YoY basis. Operating cash flow also nudged by 80% to USD 1.9 billion against USD 1.031 billion reported a quarter before and USD 1.004 billion a year ago.

Source: Company Filing

• Strong Balance Sheet: Rising gold prices resulted in stronger operating cash flows. The positive free cash flow generated, together with the proceeds from various divestitures, have allowed the company to continue to strengthen the balance sheet and increase returns to shareholders. Total assets were USD 46.1 billion on September 30, 2020, approximately USD 1.7 billion higher than assets recorded on December 31, 2019. As at September 30, 2020, the total debt was CAD 5.2 billion, compared USD 5.5 billion on 31st December 2019. Debt/Equity ratio also declined to 0.16 at the end of Q3FY20 as compared to 0.19 on December 31, 2019.

Source: Company Filing.

• Industry Leading Margin profile: The company has reported industry leading margins in the third quarter of FY20, with EBITDA stood at 58.1% vs 43.4% industry average, operating margin stood at 46.2% vs industry average of 25% and Net margin of 35.9% vs 11.9% industry average. This shows the competitive advantage ABX is having over the competition.

• Strong Financial Position and Liquidity: The company has sufficient financial resources to meet its business requirements for the foreseeable future, including capital expenditures, working capital requirements, interest payments and dividends. To date, the group has not experienced significant negative impacts to liquidity as a result of the COVID-19 pandemic. During third quarter of 2020, cash balances continued to grow and debt, net of cash, was further reduced. Total cash and cash equivalents as on September 30, 2020 were USD 4.7 billion as compared to USD 3.3 billion as on December 2019, implies a growth of 42% over the past 9-Months.

    Source: Company Filing

• Promising Gold Outlook: The Federal Reserve’s new inflation target of an average of 2% has created even more long-term potential for the precious metals price and mining sector, and we believe that gold prices would be averaging above US$ 1,800/ounce for an extended period. Also, looking at the current scenario, the company believe that the market should remain in its current range as it doesn’t expect to see real bond yield pushing much further into negative territory, nor pushing into positive territory anytime soon.

• Higher Copper Prices Also Benefiting the Overall Group’s Performance: Copper prices are sitting near 7-months high. Barrick’s Copper revenues in the third quarter of 2020 increased by 19% compared to the prior quarter, primarily due to the higher realized copper prices, partially offset by decreased copper sales volume. The average market price in the third quarter of 2020 was USD 2.96 per pound, an increase of 22% from the prior quarter. The realized copper price in the third quarter of 2020 was higher than the market copper price as a result of the impact of positive provisional pricing adjustments recorded, consistent with the prior quarter, as the copper price continue to rise. Copper prices in the third quarter of 2020 positively influenced by an increase in manufacturing activity in China and other jurisdictions after operations that closed due to the coronavirus subsequently reopened.

• Risk Associated with Investment: The company primarily exposed to volatility in the gold prices. A significant drop in the gold prices in the international market could take a toll on the group’s performance. Further, surging coronavirus cases in North America and Europe could hamper its production as well. Also, the company is exposed to forex risk.

Financial Highlights: Q3FY20 (Figures are in US Dollar)

 Source: Company Filing

• For the three-month period ended September 30, 2020, gold revenues increased by 25% compared to the same prior year period primarily due to an increase in the realized gold price, partially offset by a decrease in sales volumes.
• The average market price for the three-month period ended September 30, 2020 was USD 1,909 per ounce versus USD 1,472 per ounce for the same prior year period.
• For the three-month ended September 30, 2020, attributable gold production was 151 thousand ounces, lower than the same prior year period, primarily because of Porgera being placed on care and maintenance on April 25, 2020, combined with the sale of the group’s 50% interest in Kalgoorlie on November 28, 2019 (included in the Other category above).
• For the three-month period ended September 30, 2020, cost of sales applicable to gold was 3% lower than the same prior year period primarily due to lower sales volume.
• For the three-month period ended September 30, 2020, gold all-in sustaining costs decreased by 2% on a per ounce basis compared to the same prior year period, primarily due to a decrease in total cash costs per ounce, while mine site sustaining capital expenditures on a per ounce basis was in line with the same prior year period.
• Copper revenues for the three-month ended September 30, 2020 increased by 387% compared to the same prior year period, primarily due to higher copper sales volumes and the higher realized copper price.
• In the third quarter of 2020, the realized copper price was higher than the market copper price as a result of the impact of positive provisional pricing adjustments recorded in the third quarter of 2020, whereas negative provisional pricing adjustments were recorded in the same prior year period.
• Attributable copper production for the three-month period ended September 30, 2020, decreased by 9 million pounds compared to the same prior year period, primarily due to lower production at Zaldívar which was mainly as a result of lower heap leach tonnes stacked.
• For the three-month ended September 30, 2020, cost of sales applicable to copper was 214% higher than the same prior year period, primarily due to increased sales volume.
• For the three month ended September 30, 2020, copper all-in sustaining costs, which have been adjusted to include the company  proportionate share of equity method investees, was 10% lower per pound than the same prior year period primarily reflecting lower C1 cash costs per pound, combined with lower minesite sustaining capital expenditures on a per pound basis
• For the three-month ended September 30, 2020, total consolidated capital expenditures on a cash basis increased by 9% compared to the same prior year period, primarily due to higher project capital expenditures, namely the water management initiatives at North Mara, the Gounkoto underground expansion, the re-start of underground mining operations at Bulyanhulu and the commencement of early works expenditures for the proposed plant and tailings expansion project at Pueblo Viejo.
• For the three-month ended September 30, 2020, net finance costs were 35% lower than the same prior year period, primarily due to a decrease in interest expense attributed to the absence of non-cash interest expense on the silver streaming agreement at Pascua-Lama.
• In the third quarter of 2020, the group generated USD 1,859 million in operating cash flow, compared to USD 1,004 million in the same prior year period. The increase of USD 855 million was primarily due to the higher realized gold price, partially offset by lower gold sales volume and higher cash taxes paid.
• Adjusted net earnings per share nudged by 173% to USD 0.41 in Q3FY20 against USD 0.15 in Q3FY19.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 27.27% of the total shareholding. Fidelity Management & Research Company LLC is the entity holding maximum shares in the company at 4.67%, and Van Eck Assoicates Corportaion is the second-largest shareholder, with a holding of 4.48%. The institutional ownership in the company stood at 66.84% and strategic ownership stood at 1.45% respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics 

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation: Barrick Gold is capturing the benefit of higher gold prices through agile management and operational efficiency. The group reported another strong quarter position, with an increase in operating cash flow by 80% quarter-on-quarter to USD 1.9 billion and 151% increase in free cash flow to USD 1.3 billion in the third quarter of 2020. This was a record level of quarterly free cash flow for the company. Debt net of cash was reduced by 71% to USD 417 million, compared to USD 1.4 billion in the prior quarter, and the quarterly dividend was increased again, the third time in the past year, rising by 12.5% to 9 cents per share.

Going forward, we continue to believe that gold prices would remain between USD 1,800 – USD 1900/oz range, as despite vaccine roll out a lot of uncertainties hovering over the global economic revival, which would keep the safe-haven gold in the investor’s limelight.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 29.95 on January 13, 2021.

1-Year Price Chart (as on January 13, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 14, 2021 price as well.

Disclaimer

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