Barrick Gold’s Financial Performance In 2018 To Be Marred By Lower Volume

Barrick Gold Corp (NYSE: GOLD), one of the largest gold mining companies in the world, is set to announce its fourth quarter results on February 13, 2019, followed by a conference call with analysts. The market expects the company to report revenue of $1.95 billion in Q4, 12.4% lower than in Q4 2017. Adjusted earnings for the quarter are expected to be $0.12 per share compared to $0.22 per share in the year-ago period. Full-year adjusted EPS is expected to be $0.42 in 2018, 44% lower than $0.75 in 2017. The lower EPS is likely to be the result of lower gold and copper volume, lower realized prices, and high impairment cost, slightly offset by lower interest expense on the back of early debt repayment.

We have summarized our key projections for Barrick Gold’s 2018 results in our interactive dashboard – Lower Prices And Production To Affect Barrick Gold’s Financials In 2018. We have a price estimate of $14 per share for the company, which is higher than its current market price.

Key Factors Affecting Earnings

Declining shipments: Over the last four years, total gold and copper production by Barrick Gold has seen a steady decline. Gold production has decreased from 6.1 million ounces in 2015 to 5.3 million ounces in 2017. Similarly, copper production has declined from 513 million pounds in 2015 to 413 million pounds in 2017. As per the company’s preliminary report, production of gold and copper would further reduce to 4.5 million ounces and 383 million pounds, respectively, in 2018. The reduction in volume in 2018 is mainly driven by the impact of the 50% divestment in the Veladero mine on June 30, 2017, Barrick Nevada’s lower grade and recovery through the oxide mill and autoclave, lower tonnage processed at Lagunas Norte, and lower grade at Pueblo Viejo, partially offset by higher production at Turquoise Ridge. This is expected to lead to over a 14% decline in gold shipments and close to a 6% decline in copper shipments in FY 2018, thus adversely affecting revenues.

Lower prices: Gold and copper prices witnessed a lot of volatility in 2018. Gold prices declined from Q1 2018 till Q3 2018, mainly due to rising interest rates in the US and a strengthening dollar which made investing in the greenback more lucrative. However, there was a marginal recovery in gold prices in Q4 with central banks around the world buying more gold as a hedge against the expected economic uncertainty over the next two years. We expect realized gold prices to be $1,226 per ounce in Q4 2018, marginally higher than $1,216 in the preceding quarter. Copper prices declined in the second half of 2018 due to trade tensions between the US and China. However, prices have recovered a bit towards the end of 2018. We expect realized price per pound of copper to be $2.80 in Q4 2018.

Higher AISC: The all-in sustaining cost (AISC) per ounce of gold has steadily increased since 2016 and is expected to be $815 in 2018, 8.7% higher than in 2017. Increase in cost is mainly driven by the impact of fewer gold ounces sold, and higher direct mining costs attributable to higher fuel prices, and planned maintenance at the Pueblo Viejo autoclaves. The AISC per pound of copper is expected to see an increase of 17.5% to $2.75 in 2018, primarily due to higher direct mining costs relating to lower capitalized waste stripping, higher maintenance costs, combined with higher fuel and consumable costs at Lumwana.

Full year picture

For the full year 2018, we expect total revenue to decline by 13.7% to $7.2 billion compared to $8.3 billion in 2017. This is most likely to be the result of lower revenues from gold and copper sales on the back of decreasing shipments and lower price realization. Higher AISC is expected to have an adverse effect on profitability, slightly offset by lower interest expense (in July 2018, the company  repurchased $629 million of 4.4% Notes due 2021). Additionally, in contrast to a huge impairment reversal in 2017, we expect a significant impairment charge, of close to $500 million for Barrick Gold in 2018, driven by asset impairment charges relating to Lagunas Norte, the Kabanga project, and Acacia’s Nyanzaga project in Tanzania. Net income margin is expected to be close to 1% for the year, a sharp decline compared to 17.2% in 2017 (margin was higher in 2017 due to non-recurring gains).

Future is replete with opportunities and one major challenge

2019 promises to be a turnaround year for Barrick Gold with its $6.5 billion merger with Randgold Resources, that took effect on January 1, 2019. The merged entity, with a revenue generating capacity of $10 billion annually, now owns five of the world’s ten lowest-cost gold mines. Additionally, Randgold’s superior grade quality (average grade of 3.7 grams per ton over the last three years is much higher than Barrick’s average of 1.55, and the average of 1.12 grams per ton for the top five producers), lower mining costs, better working capital management, and an efficient supply chain logistics framework would likely help Barrick Gold Corp to achieve synergies with this merger. Expectations of higher volume, revenue, and margins would help support growth in the company’s stock price. The only major challenge during 2019 and beyond would be to take on Newmont Mining, which along with a merger with Goldcorp (expected to conclude in Q2 2019), would become the world’s largest gold company. It would be interesting to follow what further strategies Barrick Gold devises to take on the might of Newmont in 2019 and beyond.

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