The third-quarter earnings season for the Gold Miners Index (GDX, Financial) is just around the corner, and the world’s second-largest gold producer will report its results in early November. Unfortunately, its preliminary results came in a little softer than I expected at approximately 1.04 million ounces of gold (flat year over year), which has left the company needing a massive fourth quarter to meet even the low end of its 2023 guidance (4.2 million to 4.4 million ounces of gold). On the positive side, the company is up against extremely easy year-over-year comparisons because of the violent decline in the gold price last fall, with Barrick set to enjoy a roughly $200 per ounce higher average realized gold price while also benefiting from not having to lap near peak inflation for energy and elevated steel prices in the year-ago period. Besides, while the lower production is not ideal, things look even better for 2024 with a massive year expected from Pueblo Viejo (full-year post plant expansion to around 14 million tonnes per annum) and the restart of Porgera. Let’s inspect the results a bit more closely.
Production and sales
Barrick Gold released its third-quarter results last week, reporting quarterly production of approximately 1.04 million ounces of gold and 112 million pounds of copper, with gold production flat and copper down 6% year over year. The culprit for the weaker copper production was lower output from Lumwana, and the weaker than expected gold production can be attributed to fewer ounces from Pueblo Viejo (around 79,000 ounces versus about 121,000 ounces), Kibali (around 99,000 ounces versus about130,000 ounces) and North Mara (around 62,000 ounces versus about 71,000 ounces), which offset the better quarter from its largest mining center in Nevada, made up of multiple mining complexes. And while Carlin had a marginally better quarter year over year (230,000 ounces versus 229,000 ounces) and Cortez saw 30% higher production, its Cortez Complex was up against easy comparisons with mining transitioning from pipeline to a new phase at the Crossroads Pit. Hence, while production was flat, it was a little softer than I expected given easy comparisons from some of its key assets. Finally, Pueblo Viejo was up against difficult comps, but the ramp-up was slower than expected, with Barrick noting this was attributed to equipment design deficiencies.
Fortunately, Barrick is gearing up for a much stronger fourth quarter with the company guiding for "a significant increase in Q4 production volume,” which would suggest at or above 1.15 million ounces of gold in the period. However, even if the company hits this level, it will still come in just shy of the bottom of its fiscal year 2023 guidance range and well below its guidance midpoint of 4.4 million ounces of gold with around 3 million ounces produced year to date. And while this is not the end of the world, it is a little disappointing to see what looks to a slight miss on deck for 2023 from a key component of the Gold Miners exchange-traded fund. However, while I might normally be eager to take profits on the stock ahead of this third-quarter report, the stock is priced the cheapest since its brief visit to the $13.00 level in November 2022, and the outlook from a financial standpoint is considerably better.
Costs and margins
For starters, Barrick has noted it expects all-in sustaining costs to come in 6% to 8% lower than second-quarter 2023 levels ($1,355 per ounce), implying all-in sustaining costs of $1,260 per ounce at the midpoint. This would translate to a nearly 1% decline from third-quarter 2022 levels ($1,269 per ounce), but the major difference is the gold price. During the third quarter of 2022, Barrick got little help from gold, reporting an average realized price of $1,722 per ounce, resulting in all-in sustaining cost margins of $453 per ounce. However, in the upcoming quarter, Barrick’s average realized gold price should come in at $1,925 per ounce or better, translating to AISC margins of around $665 per ounce or a 47% increase year over year. And although it has been a volatile quarter for the gold price, I would expect AISC margins to expand significantly versus the prior-year period as well, with AISC margins likely to average $655 per ounce assuming an average realized gold price of $1,880 per ounce and AISC of $1,225 per ounce. Given this material improvement in margins, we should see a corresponding improvement in sentiment, with Barrick labeled as a high-cost miner unable to consistently generate free cash flow.
In fairness, this label was perfectly accurate in 2022, with its costs soaring on a two-year basis and the company generating anemic free cash flow with second-half 2022 free cash outflows of approximately $130 million. However, there is little value in judging a company against its worst two to three quarters of the past few years, and while its operating costs have risen considerably, this is hardly a Barrick-specific issue and was related to unprecedented inflationary pressures, supply chain headwinds and made worse by lower production (denominator). Plus, while all-in sustaining costs were up 19% year over year in 2022 while free cash flow fell off a cliff, Barrick was in a heavy investment phase with the company working to complete a massive expansion at Pueblo Viejo and seeing elevated sustaining capital across its portfolio. And although this trend will continue in 2023 with another heavy capital expenditure year, we should see a return to more normalized sustaining capital spend in 2024, with the added benefit of higher production. Hence, although AISC will increase year over year in 2023, we should see a material drop in AISC in 2024, with the potential for costs to come in below $1,140 per ounce (7% below 2022 levels).
Finally, Barrick will also benefit from a lower weighted average share count in the second half of 2023 and 2024 with approximately 24.3 million shares repurchased last year, and this combination of higher margins, higher production and fewer shares should translate to a material increase in operating cash flow, free cash flow and free cash flow per share. Hence, although the company’s 2022 and first-half 2023 financial results left a lot to be desired and the third-quarter results were not as strong as I expected, the stock is much better positioned to deliver meaningful beats on a year-over-year basis. The recent granting of a special mining lease at Porgera does not hurt either, with this more than 600,000-ounce mine set to restart next year, translating to an additional 150,000-plus ounces for Barrick on an attributable basis with its shared ownership of Barrick Nuigini Ltd. However, despite this much better outlook and a return to reserve growth given continued exploration success, Barrick continues to trade at a depressed multiple.
Valuation
Based on around 1.75 billion shares and a share price of $15.80, Barrick trades at a market cap of $27.7 billion and an enterprise value of $28.3 billion, making it the number two gold producer globally by capitalization, besides being the number two name from a volume standpoint, with Newmont (NEM, Financial) extending its leading following the approved acquisition of Newcrest (NCMGF, Financial). However, from a valuation standpoint, the stock is trading at one of its largest disconnects of the past decade, hovering at just 5.6 times 2024 cash flow per share estimates versus a historical multiple of 9.3 times, a peak multiple in the past decade of 13 times in the third quarter of 2020 and in line with where the stock bottomed in September 2022. Plus, while the stock may have been cheap last year, it was less well positioned, given that it still had to lap moderately difficult comps in the first half of 2022 with sticky inflationary pressures with a similar gold price and elevated growth capital with the PV Expansion still underway.
That said, the current setup is much different. This is because Barrick has completed its Pueblo Viejo Plant Expansion, which will translate to lower growth capital next year (higher free cash flow), it has a new special mining lease in hand to restart its massive Porgera Mine in Papua New Guinea and the company is up set up to report meaningful margin expansion given that it is lapping easy comparisons from the year-ago period. In fact, fiscal 2024 AISC margins could improve to $760 per ounce (40%) or better assuming a $1,900 per ounce average realized gold price next year. I would argue that given the size of gold’s base and the multiple attempts at taking out resistance, this looks to be a conservative assumption for the gold price over the next few years. This is because $1,800 per ounce area resistance from the prior bull market now looks to be new support, with any trades below this level quickly getting bought up on a monthly closing basis and the metal building out a massive base, and one of the largest bases since the S&P 500’s base from 1972 to 1982, which fueled an 18-year bull market. Obviously, there are no guarantees this plays out similarly and the resolution for gold may not be to the upside, but this pattern now has enough fake-outs and false breakdowns and multiple sentiment wash-outs that it would not be surprising to see a breakout finally above the key $2,000 per ounc level.
To summarize, Barrick is the cheapest it has been in years at barely 5.6 times fiscal 2024 cash flow estimates, and this is despite relatively conservative gold and copper price assumptions, with the former trading in a massive base and continuing to make higher lows, and the latter having a very favorable supply-demand picture with a long lag time for putting new mines into production and a tailwind for demand because of the push toward electrification. Plus, Barrick’s balance sheet is also among the strongest sector-wide (around $600 million in net debt), allowing the company to invest in growth like Reko Diq and Lumwana with much less leverage than past cycles, not to mention a leader at the helm (Mark Bristow) that is far more disciplined from a mergers and acquisition and overall capital allocation standpoint. Therefore, I see Barrick as one of the best ways to get exposure to the gold price in the sector, and I see an attractive reward-risk setup if the stock dips back below $15.
