Barrick Gold: Nevada Gold Mines Update
This is an update on Barrick Gold (GOLD), which is one of the largest senior gold miners in the world.
For those unfamiliar with Barrick, the company is a global gold miner with operations in North and South America, Africa, Asia and Australia. In 2019, Barrick announced a major acquisition of Randgold Resources, expanding its presence in Africa, and in July of 2019, it launched Nevada Gold Mines, which combined assets and talent in Nevada with Newmont (NEM), in an attempt to deliver synergies and add shareholder value.
Barrick appears to be making all the right moves: In Q1, Barrick reported excellent financial results, with operating cash flow increasing to $889 million and free cash flow of $438 million; Barrick was able to reduce its net debt by 17% and now has just $1.85 billion in debt.
Barrick has also seen limited impacts from COVID-19, as it was one of the first miners to implement safety measures and a strong response plan.
Q1 was a great quarter; however, I expect even stronger Q2 2020 financial results due to the strong performance of Barrick’s Nevada Gold Mines and higher gold prices, as I explain below.
Nevada Gold Mines Update
Barrick owns 61.5% of Nevada Gold Mines, while Newmont-Goldcorp owns 38.5%. The joint-venture includes 10 underground gold mines and 12 open pit mines, including 3 Tier 1 assets, including the Cortez/Goldrush mine and the Carlin mine.
According to Barrick and Newmont-Goldcorp, the Nevada Gold Mines joint-venture is expected to deliver up to $500 million in synergies over its first five years of operations. Nevada Gold Mines produces close to 2 million ounces of gold per year, with targeted all-in sustaining costs below $950/oz.
Here’s the latest update: Barrick has reported that NGM exceeded its production and cost targets set out at the start of the joint venture one year ago, in spite of the COVID-19 pandemic.
“By removing the fences that had previously separated geologically connected assets, mines and projects that clearly belonged together could be combined into larger and more efficient operations, with substantial savings as an immediate benefit,” says Mark Bristow, Barrick Gold CEO.
No specific production or cash cost figures were provided in the news release, but I think investors can expect similar, or better, results from these mines compared to Q1.
For some background: In Q1, Barrick’s Cortez and Carlin mines produced gold at costs just north of $1,000/oz, and I expect those costs to fall below that figure in Q2; at Carlin, AISC was temporarily higher in Q1 due to additional underground development and capitalized stripping, while the Cortez mine will see a production boost from Cortez Deep South in H2 2020.
Other Nevada mines to keep an eye on in Q2 include the Phoenix mine; in Q1, it contributed 35,000 ounces of gold, with AISC falling 12% to $914/oz; and the Long Canyon mine, which will likely contribute 30,000 – 35,000 ounces of gold at $600-650 AISC.
Gold price update
Barrick is also going to benefit greatly from higher gold prices. In Q1, Barrick produced 1.25 million ounces of gold at $954/oz AISC, and its average realized gold price was US$1,589/oz, up from $1,483/oz in Q4 2019. That figure is going to be north of $1,700/oz for Q2, or about 7% to 8% higher.
Think about the positive impact it will have on Barrick’s margins, cash flow and earnings. For Q1, its margins per ounce were about $635/oz ($1,589/oz gold price, minus $954/oz AISC); for Q2, its margins should be higher than $700/oz, assuming its average gold price exceeds $1,700/oz, and its all-in sustaining costs fall below $1,000/oz, which is expected.
Barrick produced 1.25 million ounces of gold in Q1, and I expect slightly higher production in Q2. Assuming it produces 1.3 million ounces in Q2, and achieves $950/oz AISC, Barrick should produce more than $925 million in operating cash flow (up from $889 million), and close to $500 million in free cash flow (up from $438 million), for Q2.
Barrick’s copper mining business will also likely see improved results in Q2, since copper prices have risen from $2.25/lb in April to $2.75/lb as of writing, and its AISC will likely fall below $2/lb.
Barrick Gold: Updated Recommendation
Barrick Gold is enormously profitable at current gold prices, I expect a very strong end to 2020 with prices north of $1,700/oz; the company’s balance sheet is likely to improve further this year as it uses some of its free cash flow to repay debt. There’s also the possibility of a Freeport-McMoRan (FCX) takeover of the Grasberg mine, which would add an incredible asset to its portfolio, so keep an eye on any potential M&A.
Despite what some other Seeking Alpha authors have said, the stock is not overvalued. Barrick shares currently trade at an EV/EBITDA of under 5X, and a trailing P/E of 10.63X, according to Capital IQ. (I’ve got its current EV/EBITDA at about 6X, based on my own estimates).
I expect a much higher Barrick Gold share price in the future, I don’t think it’ll have any trouble eclipsing its previous highs of $54/share, which it reached back in 2011. In the meantime, you can wait and collect its $.16 per share dividend.
What do you think of Barrick Gold? Let me know in the comments.
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Disclosure: I am/we are long GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.