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 hold 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.

Investment Rationale

• Operating the World’s Largest Gold Mines: The group is having a tier one portfolio of assets and operates 5 of the 10 largest gold mines in the world.

Source: Company Presentation

• Taking Strong Measures to Achieve ESG Goals: 2030 emissions reduction target increased from 10% to 30%, with the ultimate aim to achieve net-zero emissions by 2050. Further, the group is managing and minimizing its environmental impacts with all operational sites now certified against the ISO 14001:2015 global best practice standard and each site empowered to manage its own environmental issues overseen by the group-level strategic leadership. Also, implementation of the new Global Industry Standard on Tailings Management well underway. Further, in 2020, the group recycled 79% water and reused vs a target of 75%.

• Resurgence in COVID-19 Cases bringing Gold in the Investor’s Limelight: Gold is again gaining ground amid the resurgence of COVID-19 Delta variant cases across the world, along with increasing concerns that a recovery in the global economy and fuel demand may slow. 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 as well.

• Started 2021 on Strong Note: During the first quarter of 2021, ABX reported strong results from Tier One assets with leading margins. Copper revenues increased 31% compared to the prior quarter due to stronger copper prices driving solid profitability with disciplined cost control. Net cash increased by USD 0.5 billion after advance tax payment in Nevada, and Sustainability Report highlights improvements against most ESG metrics. Further, a solid start to 2021 puts Barrick on track to achieve production targets.

• Operating Performance Expected to Improve in H2FY21: The group’s H2 expected to be higher than H1 driven by mine sequencing and planned maintenance at Nevada Gold Mines, Commissioning of Phase 6 leach pad at Veladero by the end of Q2, the ramp-up of underground operations at Bulyanhulu and higher grades at Lumwana.

• Expanding Copper Portfolio Margin: The group reported Increased margins from the copper portfolio due to the successful turnaround of Lumwana over the past two years, disciplined cost control and higher copper price supported by strong fundamentals.

• Solid Q1FY21 Performance: During the quarter under review, the company reported a Strong free cash flow of USD 763 million, net cash improved by USD 0.5 billion from Q4 after advanced tax payment of USD 72 million in Nevada and delivered Industry-leading cash return to shareholders in 2021. Sustainable quarterly dividend of USD 0.09 per share in Q1 and USD 750 million return of capital approved by shareholders at AGM equating to USD 0.42 per share in 2021 – to be paid in three equal tranches in June, September and December.

• Barrick Achieved Zero Net Debt Target: In the fourth quarter of FY20, major gold explorer Barrick Gold achieved its zero net debt target in the three months ended to December 2020. 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, among the best in the gold sector.

• Tanzania and Barrick Demonstrate Value: Since Barrick and Tanzanian established a joint venture in October 2019 to manage the company’s gold mines in the country and to discuss the partnership’s future plans and prospects. Moribund North Mara and Bulyanhulu have been revived, returned to profitability and are now truly world-class assets, with the potential to become Barrick’s seventh Tier One gold complex.  It has also made significant progress in dealing with legacy social and environmental issues and is returning substantial value to its Tanzanian stakeholders. Barrick has also invested USD 800 million (TShs 1,851 billion) in the country’s economy, spent USD 2 million (TShs 4.6 billion) on community development and recruited 600 new local employees, with Tanzanian nationals now making up 96% of the mines’ workforce. Barrick is continuing to work closely with the Mining Commission on its local content program, and local content spending already accounts for 73% of the mines’ purchases.

• MACD Registered a Breakout: On the daily price chart, the leading momentum indicator, Moving Average Convergence Divergence (MACD), is rising, which is a bullish indicator. Moreover, the MACD oscillator has registered a crossover above the 9-day SMA signal line, which is another bullish indicator.

Source: REFINITIV, Analysis by Kalkine Group

• Risk Associated to Investment: The market prices of gold and, to a lesser extent, copper are the primary drivers of the group’s profitability and its ability to generate free cash flow for the company’s shareholders. 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. Further, the functional and reporting currency for all of the group’s operating segments is the US dollar. Most of their operating and capital expenditures are denominated and settled in US dollar. Therefore, a plunge in the US Dollar against the basket of the majors could also impact the group’s financials and profitability.

Financial Highlights: Q1FY21

• Revenue jumped by 9% on a YoY basis to USD 2,956 million primarily led by higher copper prices and higher gold realization prices on a YoY basis.
• Average Gold Realization prices improved by 11.83% to USD 1,777/oz.
• Net earnings for the first quarter of 2021 were USD 538 million compared to USD 400 million in the same prior year period. The increase was primarily due to a higher realized gold price of USD 1,777 per ounce in the three months ended March 31, 2021, compared to USD 1,589 per ounce in the same prior year period.
• In the first quarter of 2021, the group generated free cash flow of USD 763 million compared to USD 438 million in the same prior year period. The increase primarily reflects higher operating cash flows, partially offset by higher capital expenditures. Free Cash Flow nudged by 83%.
• In the first quarter of 2021, the group generated USD 1,302 million in operating cash flow, compared to USD 889 million in the same prior year period. The increase of USD 413 million was primarily due to a higher realized gold price of USD 1,777 per ounce for the three months ended March 31, 2021 compared to USD 1,589 per ounce in the same prior year period and higher realized copper prices, partially offset by lower gold sales volume and higher cash taxes paid.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 25.92% of the total shareholding. Van Eck Associates Corporation  is the entity holding maximum shares in the company at 4.98%. Flossbach von Storch AG is the second-largest shareholder, with a holding of 3.18%. The institutional ownership in the company stood at 63.07% and strategic ownership stood at 0.58%.

Valuation Methodology (Illustrative): Price to Cash Flow 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.

Stock Recommendation: The group is building its core strategy of continuing exploration success. Barrick’s 10-year plan has been bolstered further by significant advances in resource replacement and prospect development during the first quarter of the year.

Also, Nevada Gold Mines, the joint venture formed in July 2019 by industry leaders Barrick and Newmont, is maturing rapidly, with a high-confidence 10-year plan in place and the focus shifting to a 15-year plan. The world’s largest gold mining complex, NGM is majority-owned and operated by Barrick.

Moreover, the company exited last fiscal with zero debt and with an improved credit rating of Baa1 from Moody’s, which is among the best in the gold sector. Also, the company’s focus on strengthening its balance sheet in recent years has given the group the financial strength to endure any short-term impacts to the operations while supporting its strategy of participating in the industry’s inevitable consolidation.

Further, the group has captured the benefit of higher gold and copper prices through disciplined operational execution, driving strong operating cash flow and record free cash flows. Also, the group introduced a 10-year production outlook, highlighting a stable asset base and ability to generate strong cash flow well into the future. Based on technical analysis, the stock has support at CAD 23.63 level.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation on the stock at the closing price of CAD 26.45 on July 7, 2021.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on July 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at July 8, 2021 price as well.

Disclaimer

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