US- and Canada-listed global gold mining behemoth Barrick Gold has released a good June quarter result showing a surge in profit on a higher gold price. Guidance for 2020 was maintained, with Barrick on track to hit its full-year forecast.
We believe the investment case for precious metals – and gold in particular – is compelling as a coronavirus-induced monetary and fiscal splurge further debases fiat currencies, and drives further inflation. Barrick Gold is well leveraged to this scenario.
Barrick’s result was impressive overall, but the driving force was a higher gold price. Barrick’s net earnings surged 84 per cent year-on-year to $US415 million ($573 million). Supporting the profit surge was a strong April-June revenue move of 48 per cent to $US3.1 billion. This more than doubled Barrick’s net earnings to $US357 million.
Gold production fell 15.1 per cent year-on-year, to 1.1 million ounces, with a key driver being a fall in production at the Cortez mine (Barrick’s interest is 61.5 per cent) and COVID-19 disruptions. Gold output at Cortez in northern Nevada fell 34 per cent year-on-year to 20,719 ounces, on lower mining activity. Barrick’s other operations performed as expected for the quarter.
Gold production for 2020 was downgraded and is guided to be in the range of 4.6 million to 5.0 million ounces, with Barrick on track to meet its forecast. Copper production jumped 23.7 per cent year-on-year to 120,000 tonnes. Two of Barrick’s three copper producers reported better numbers, with the standout being Lumwana in Zambia. Barrick maintained its copper production guidance for 2020 with a forecast in the range of roughly 200,000 tonnes to 227,000 tonnes.
All-in sustaining costs (ASIC) for gold deteriorated 18.6 per cent year-on-year, to $US1031 an ounce, mainly because of lower gold production. ASIC guidance in 2020 was unchanged and is forecast to be in the range of $US870 to $US920 an ounce, making for healthy margins at current gold prices.
The revenue surge pushed free operating cash flow higher by 138 per cent year-on-year, to $US1.03 billion for the quarter. This performance fed into the balance sheet, which improved as of June 30. Net debt fell $US2.2 billion year-on-year to June 30 to $US1.4 billion. The resulting gearing improved to 17 per cent. Barrick has focused on ensuring its balance sheet remains in very good shape to support ongoing growth.
A higher realised gold price was the key to the strong June-quarter financial performance, with the reporting of a 31 per cent year-on-year increase in its realised gold price, to $US1725 an ounce.
After reaching record highs above $US2050 an ounce, the gold price has corrected back below $US1950 an ounce. Beyond the current price correction, however, we believe the devaluation of fiat currencies will persist (thanks to expanding government stimulatory programmes) and will push investors to the safety of gold. These same programmes are also, in our view, brewing up a future inflationary storm that will be a tailwind for the gold price.
We have high regard for Mark Bristow (former Randgold CEO), now established as chief executive and president of Barrick Gold. A sound balance sheet to support growth and a suite of gold assets to generate growth opportunities warrants support for the stock in our view.