Replies to post #2813 on Barrick Gold Corp (ABX)

[JohnCM]

Barrick Gold: Complete Analysis Of The Second Quarter 2018 Results

Jul. 30, 2018 11:02 AM ET
Fun Trading - Seeking Alpha

Summary

Barrick Gold released its second quarter results on July 25. The market was not impressed.

ABX reported a net loss for the quarter of $94 million or a loss of $0.08 a share, and negative $171 million in free cash flow.

I view the recent stock slide as an opportunity to accumulate the stock at $11, which appears to be an excellent entry point for the long-term.

Investment Thesis

Barrick Gold (ABX) is one of the largest gold producers in the world that should be part of your long-term gold portfolio, in spite of an over-sized company which has been struggling for years from recurring mines issues and a high-level debt burden on its balance sheet. I view the recent stock slide as an opportunity to accumulate the stock at $11, which appears to be an excellent entry point for the long-term.

The debt was over $12.75 billion in 4Q'14 and has been cut to $6.39 billion (net debt $4.3 billion) at the end of the second quarter. The debt reduction has been driven mainly by selling the company's non-core assets to optimize its balance sheet.

In the conference call, Catherine P. Raw, the CFO, said:

Subsequent to the end of the quarter, Barrick completed a make-whole purchase of the outstanding principal of the 2021 notes, $629 million, reducing our total debt to just under $5.8 billion.

The debt is expected to reach $5 billion at the end of this year which is quite an achievement and represents repayment of over $10 billion over the past five years. The company has less than $100 million in debt due before 2020, and more than 85% of Barrick Gold outstanding debt matures after 2032.

However, despite an impressive comeback in 2016, the stock price has been sliding down regularly.

The company continues to expect full-year gold production of 4.5-5.0 million ounces, at the cost of sales of $810-$850 per ounce, and all-in sustaining costs of $765-$815 per ounce. Meanwhile, guidance for Copper has been slightly reduced to 345-410 million Lb.

Barrick Gold expects gold production in the third quarter to be over 1.2 million ounces, up from just over 1 million ounces in the second quarter.

Gold Production for second-quarter 2018 was quite low but still in-line with previous guidance. Gold production for the third quarter is expected to be 1.2 million ounces.

Production of gold is down 25.5% from a year ago, and up 1.7% sequentially. The gold output is a multi-year low as just a bit better than the preceding quarter.

Greg Walker said in the conference call that scheduled maintenance shutdowns impacted production at the Barrick Nevada roaster and the Pueblo Viejo autoclave and he was pleased to announce that both these shutdowns were successfully optimized.

AISC (by-product basis) is still one of the best in the industry with $856 per ounce in 2Q'18, which gives a $450 per ounce profit margin based on $1,306/ Oz for gold.

The second half of the year the company expects a stronger performance from Barrick Nevada and Pueblo Viejo (Moore pit,) as well as the restoration of full production processing capacity at Porgera much earlier than anticipated following the earthquake in late February.

Greg Walker said in the conference call:

On the copper side, production for the second quarter was 83 million pounds at an all-in sustaining cost of $3.04 a pound, and C1 cash costs of $2.10 a pound. Looking forward, copper production is expected to improve progressively over the third and fourth quarters, driven by a steady improvement in grade and the crusher reliability at Lumwana, as well as the optimization of the stacking procedures at Zaldivar.

2 - Balance Sheet analysis

Barrick reported its second quarter 2018 results on July 25, 2018. The company delivered earnings that missed expectation on both earnings and revenues and the stock got severely punished by the market. ABX reported a net loss for the quarter of $94 million or a loss of $0.08 a share, adjusted earnings of $81 million or $0.07 a share, and operating cash flow of $141 million.

One crucial financial element that deserves some serious attention is the ability of the company to deliver sufficient free cash flow.

Free cash flow for the quarter was negative $172 million. Planned maintenance activities at Barrick Nevada and Pueblo Viejo and unplanned downtime at the Lumwana crusher impacted negatively free cash flow despite a slightly lower CapEx sequentially.

Free cash flow is an important clue that should always be carefully evaluated when looking at a long-term investment. ABX passes the test here on a yearly basis.

Gold reserves are down by 25% last year to 64.55 M Oz, as it sold off some non-core assets and changed its plan for a South American asset. The past two years divestitures have degraded Barrick’s mining footprint and a few analysts have raised concerns about dwindling gold reserves and rising costs at its mines.

Conclusion

Barrick Gold presents a rock-solid balance sheet despite weak second-quarter results with a surprising negative $172 million in free cash flow.

It is the bottom line for investors that should view the recent stock weakness not as a reason to sell but an opportunity to accumulate instead, at least slowly, it is what we are doing.

The timing of the second quarter release coincided with a selling pressure in the gold price adding more gloom to the weak results. Furthermore, the CEO Kelvin Dushnisky is leaving the company to join AngloGold Ashanti (NYSE:AU) as its chief executive officer effective September 1, 2018, which added more uncertainty.

As I said many times, trading ABX in correlation with the gold price is imperative, and these results are another undeniable evidence.

Technical Analysis (short term).

ABX is the perfect example of a negative breakout ending a six months ascending triangle pattern. In general, ascending triangles are bullish but not in this case, the dropping of the gold price triggered a sell-off instead which accelerated with the disappointing results. The stock is testing the March low at $11 (double bottom) and I recommend a buy at $11 and lower.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABX over the next 72 hours.

Additional disclosure: I will buy back a long-term position starting next week.