Barrick Gold Corp

Barrick Gold Corp (TSX: ABX) is a mining company principally engaged in the production and sale of gold. The Company holds a geographically diversified asset portfolio and operates 15 gold mines across North America, South America, Australia, and Africa.

Key Highlights

• Riding on the wave of higher gold prices:Through agile management and operational efficiency, the company increased its operating cash flow by 80% in Q3 2020 to USD 1.9 billion and free cash flow by 151% to USD 1.3 billion. This is a record set by the company on a quarterly basis for free cash flow.

Source: Company Presentation

• On track of achieving the guidance: Year-to-Date gold production of 3.6 million ounces is keeping the company on track to achieve the full year production guidance of between 4.6 and 5.0 million ounces.

Source: Company

• Increased dividend:The company has announced a dividend for the third quarter of 2020 of USD 0.09 per share, a 12.5% increase on the previous quarter’s dividend. The continuous hike in the dividend reflects the healthy financial status of the company.

Source: Company

• Healthy balance sheet: The on-going robust performance of the company’s operations and continuous improvement has strengthened its balance sheet. The company holds total liquidity of USD 7.7 billion, including a cash balance of US D4.7 billion, and a debt net of the cash position of USD 0.4 billion at the end of Q3 2020. There are no material debt repayments due before 2033.

Source: Company 

Financial Overview of Q3 2020

Source: Company

• In Q3 2020, the company reported revenue of USD 3.54 billion, increased by 29% compared to USD 2.67 billion in the previous corresponding period, primarily due to an increase in the realized gold price.
• EBIT reported by the company in Q3 2020 was USD 1.6 billion, this is non-comparable to last year’s EBIT as the company had an impairment reversal and other income, cumulatively more than USD 2.7 billion.
• Net earnings attributable to equity holders of the company for Q3 2020 were USD 882 million compared to USD 1.63 billion in Q3 2019. 

Risks associated with investment

The company’s financial performance is mostly dependent on the price of gold, which directly affects the company’s profitability, margins, and cash flows. The gold prices can be affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all of which are beyond the company’s control. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

Due to the ongoing economic environment, the investors are moving towards defensive asset classes to arrest the current volatility in the equity markets. Gold, being one of the safest asset class, has generated a robust return in the recent time and currently trading close to all-time high levels. Higher gold prices are likely to improve the company’s cash flow and margins. The company mentioned that it is on track to achieve its full-year guidance. Therefore, based on the above rationale and valuation we have given a ‘Buy’ rating at the closing price of CAD 30.66 on December 7, 2020. We have considered Agnico Eagle Mines Ltd, Newmont Corporation, Gold Fields Ltd etc. as the peer group for the comparison.

1-Year Price Return (as on December 07, 2020). Source: Refinitiv (Thomson Reuters)

Kirkland Lake Gold Ltd

Kirkland Lake Gold Ltd (TSX: KL) is a Canada-based gold mining and exploration company which has a diversified portfolio of exploration projects. The production profile of the group includes Macassa mine situated in northeastern Ontario and the Fosterville gold mine located in the State of Victoria, Australia. 

Key Highlights:

• Lowering Stake in Novo Resources Corp: On December 03, 2020, the company sold 18.45 million common shares of Novo Resources Corp and 9.225 million warrants of Kirkland Lake Gold to purchase Shares to qualified purchasers for gross proceeds to Kirkland Lake Gold in the amount of USD 45.2 million.
• Robust top line: The company’s third quarter FY20 operations have been supported by elevated gold prices. The company’s realized price increased to USD 1,907/oz against USD 1,482/oz in pcp. Higher realized price was further supported by higher sales volumes (332.0 kozs versus 256.3 kozs in pcp), which drove the top line of the group. We expect the price of the yellow metal to remain elevated in the foreseeable future due to the lack of investment options on account of the ongoing downturn.

 Source: Company Presentation

• Solid Operational Performance: The company remained on track to achieve its previously issued FY20 guidance, and its unit costs remained in line with guidance for 9MFY20, which is a key positive. The company would increase its capital expenditure for its new projects/initiatives at Detour Lake and is likely to ramp up its exploration activities in Q4FY20.

Source: Company Presentation

• Low Balance Sheet Risk: Debt/Equity Ratio of the company stood at 0.01%, which reflects negligible balance sheet risk for the company. Also, it implies that the majority of the group’s capex funding comes from the internal cash flow generation.

Q3FY20 Financial Highlights:

• KL announced its quarterly results, wherein the company posted impressive revenue growth of 66% to USD 632.843 million, as compared to USD 381.430 million in pcp.

Source: Company Presentations

• The third quarter of FY20 was marked by strong EBITDA growth of 30% on y-o-y basis to USD 384.3 million, supported by net earnings growth and positive impact from increased D&D expense and income tax expense.

• Net earnings stood higher at USD 202.022 million compared to USD 176.604 million in Q3FY19.

Source: Company Presentations                

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Performance of the Kirkland’s stock is highly exposed to the volatility in the gold prices, a sharp pull-back in the gold prices in the wake of recovery in the broader economy could weigh on the KL’s stocks. Further, the company is also exposed to crude oil prices, currency exchange and interest rate risks.

Valuation Methodology (Illustrative): EV to EBITDA based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company has a strong fundamental with a robust balance sheet, with a cash balance of US$ 848.5 million at September 30, 2020, with virtually zero debt, a solid operating platform in leading mining jurisdictions, high-quality projects with significant exploration upside and a strong leadership team committed to achieving goals, creating shareholder value and maintaining a responsible and sustainable mining business. The group has reported strong financial performance in the third quarter of the financial year 2020. Further, the acquisition of Detour Gold Corporation adds a third cornerstone asset to the company's portfolio, with a strong contribution in the group's revenue, profit, free cash flow and bringing down All-in sustaining costs ("AISC") per ounce sold. We have valued the stock using EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Yamana Gold Inc, Barrick Gold Corp, Alamos Gold Inc, etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 53.44 on December 7, 2020.

KL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

ARC Resources Ltd.

ARC Resources Ltd. (TSX: ARX) is a Canada based energy-producing company which is engaged in the acquisition, exploration, development, and production of conventional oil and natural gas.  The company produces light, medium, and heavy crude, condensate, NGLs, and natural gas.

Key Highlights:

• Ample Liquidity: The company reported significant liquidity levels of CAD 950 million as a committed credit facility and an additional of CAD 40 million as the working capital facility. The company has used CAD 171.1 million from its credit facility within the third quarter of FY20. In total, the company has available liquidity of CAD 1.1 billion, which seems sufficient to cater to the working capital requirements and as well as capex planning.                                 

Current Liquidity Breakup (Source: Company Presentation)

• Prudent Hedging Strategy: In order to arrest the volatility of crude oil and natural gas prices, the company hedged a significant part of its production to ensure sustainable cash flows. The company hedged ~40% of crude oil and natural gas production for FY21, which indicates enhanced risk management.

Source: Company Presentation

Q3FY20 Financial Highlights:

• ARX announced its quarterly results, wherein the company posted Revenue from commodity sales at CAD 290.2 million, improved from CAD 276.8 million in the previous corresponding period (pcp). The improvement was supported by an increase in income from Commodity sales from production.
• Total expenses stood lower at CAD 292.2 million, lower than CAD 348.5 million, supported by lower commodities purchased from third parties and a significantly lower Impairment of financial assets (CAD 1.4 million versus CAD 39.2 million in pcp).
• Net loss before income tax widened to CAD 94.4 million, from CAD 71.2 million in pcp, due to a higher loss on risk management contracts amounting CAD 94.3 million, as compared to CAD 2.4 million in pcp.
• Net loss and comprehensive loss stood higher at CAD 66.1 million, as compared to CAD 57.2 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company’s business is directly correlated to the crude oil and natural gas prices. Volatility on commodity prices and change in demand dynamics would impact the company’s performance.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

For FY20, the company expects its production at around 157 Mboe/day to 160 Mboe/day, higher than 139 Mboe/day in FY19, which is impressive. ARC increased its 2020 planned capital investments to CAD 350 million from CAD 300 million, with a continued focus on balance sheet strength and investment in profitable projects with efficient execution. Capital activity for the remainder of 2020 will be focused on natural gas development at Dawson and Sunrise, allowing the group to maximize throughput of low-cost natural gas production during the winter months to capture the anticipated strength in natural gas pricing. At current commodity price levels, funds from operations generated in 2020 are anticipated to fund the Company's dividend payments and capital program as well as reduce the Company's net debt balance. Further, the stock was offering a dividend yield of ~4.12%, which is decent considering the than the prevailing interest rate scenario.

We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Crescent Point Energy Corp, Huskey Energy Ltd etc. on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 5.82 on December 7, 2020.

ARX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Canadian Natural Resources

Canadian Natural Resources (TSX: SNQ) is one of the leading oil and natural gas producers, located in western Canada, and has operations across the North Sea and Offshore Africa.

Key Highlights:

• Issuance of medium-term notes: Recently, the company issued short-term notes amounting CAD 800 million while the Management intends to use for refinancing the company’s outstanding indebtedness and for general corporate purposes. The company would also use the proceeds for the capital expenditure program and working capital requirements. 

Medium-term notes issuance details (Source: Company Reports)

• An income Play: Despite a slowdown in the overall operating performance, the company has increased its total dividend payment at CAD 1,448 million in 9MFY20, higher than CAD 1,299 million, a year ago which indicates business resilience through efficient operations and its high quality, long life low decline asset base. At the last closing price, the stock was offering a dividend yield of ~5.35%, which is lucrative considering the current interest rate scenario.

Dividend History (Source: Company Presentation)

• Diversified revenue-base: The company has a diversified revenue structure, which would help in lowering the overall risk-profile of the group. A balanced source of income reduces the adverse effects of single-source income during economic cycles. The company has vast and balanced resource base across the globe, which is likely to support future operations.                

Source: Company Reports

Q3FY20 Financial Highlights:

• CNQ announced its quarterly results, wherein the company posted revenue of CAD 4,504 million, lower than CAD 6,160 million in the previous corresponding period. The decline was primarily attributed to lower realization prices on account of decline in the crude oil prices (WTI benchmark price stood at USD 40.94/bbl versus USD 56.45/bbl).
• Earnings before taxes stood significantly lower at CAD 417 million, as compared to CAD 1,364 million in the previous corresponding period (pcp), due to lower revenue, a marginally higher Depletion, depreciation and amortization costs, partially offset by a foreign exchange gain and lower transportation, blending and feedstock.
• Net earnings stood at CAD 408 million, as compared to CAD 1,027 million in Q3FY19.
• Cash and cash equivalent stood at CAD 175 million, while total assets stood at CAD 73,730 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Volatility in crude oil and natural gas pricing would dampen the realization price and the overall performance of the company.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations: The stock of CNQ appreciated from its recent lows, due to a price recovery in the international crude oil prices. The stock gained ~50% and ~25% in the last one month and three-months, respectively. The company has exceptionally low maintenance costs, which was ~75% lower than the peer average in FY19, and continuation of the above trend augurs well for cost efficiencies which would subsequently support the margins. At the last close, the stock traded above its technical support of 50-days, 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Devon Energy Corp, Cenovus Energy Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 31.76 on December 07, 2020.

CNQ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Enbridge Inc

Enbridge Inc. (TSX: ENB) is an energy infrastructure company with business platforms that include a network of crude oil, liquid and natural gas pipelines, regulated natural gas distribution utilities and renewable power generation. 

Key highlights 

• An income play: The company is having a long history distributing dividend, and as each year passes, we saw an increment in this distribution. This translates in an essential factor for regular income-seeking investors with a long-term horizon. The group paid a quarterly dividend of CAD 0.81 per common share on 1^st December 2020. At the last closing price, the stock was offering a dividend yield of 7.6%, which is lucrative looking at the current interest rate environment.

Source: Company 

• Strong Financial Position:The company is maintaining its sector-leading financial strength and flexibility as 2020 funding needs has already met, and the company has initiated pre-funding of 2021. At present, the company is equipped with over CAD 14 billion of liquidity.

Source: Company 

• Revenues to be recognized from Unfulfilled Performance Obligations:CAD 63 billion of total revenues from performance obligations are expected to be fulfilled in the near term, out of this CAD 1.8 billion and CAD 6.6 billion are expected to be recognized by the end of December 2020, and year ending 2021.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company reported total operating revenues of CAD 9.11 billion decreased by 21%, as against CAD 11.5 billion in the previous corresponding period.
• Operating income in Q3 2020, increased by 32% to CAD 2.09 billion, as compared to CAD 1.58 billion in Q3 2019, on the back of low operating and admin expenses, as the company has initiated some cost-saving measures to bring the operational costs level down.
• Earnings attributable to common shareholders stood at CAD 990 million against CAD 949 million in the previous corresponding period. 

Risk associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the supply of and demand for crude oil, natural gas, natural gas liquids and renewable energy, prices of these commodities, exchange rates, inflation, interest rates. 

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The resilient business model positioning the group strongly to weather the current challenging time as 98% of the group's EBITDA is supported by cost of service, long-term take-or-pays or similar structures. Also, resilient, and diversified business model helps the group to generate predictable cash flows.  In Q3 2020, the Company’s Mainline System volumes began to modestly recover with an increase of approximately 115 thousand barrels per day (kbpd) when compared with the previous quarter. The Company anticipates a continued, but a gradual recovery in demand as economic activity resumes in North America. In the near term, after the completion of the secured capital program, along with embedded growth within each business, the Company expects to generate 5% to 7% DCF per share through 2022 and support its growing free cash flow.

Therefore, based on the above rationales and valuation, we have given a ‘Buy’ rating at the closing price of CAD 42.60 on December 7, 2020. We have considered Fortis Inc, Emera Inc, Inter Pipeline Ltd, etc., as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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.