First Impressions From Barrick Gold's Q4 Results

| About: Barrick Gold (ABX)


Barrick Gold reported Q4 results.

Production is expected to drop along with costs.

ABX is not a good buy after the rapid increase in gold prices.

Barrick Gold (NYSE:ABX) has just published its fourth-quarter report. Just like shares of other gold miners, ABX's shares experienced a sharp rise at the beginning of this year along with gold prices. The question now is whether this momentum could be sustained.

In 2015, Barrick Gold produced 6.12 million ounces of gold at all-in sustaining costs (AISC) of $831 per ounce. Going forward, the company expects lower production levels and lower costs. This year, it targets to produce 5-5.5 million ounces of gold at an AISC of $775-825 per ounce. The production target drops to 4.6-5.1 million ounces of gold in 2018 while costs are expected to drop to $725-775 per ounce of gold.

The current plan implies Barrick's long-term gold price view of $1,200 per ounce and the short-term view of $1,000 per ounce. The short-term price estimate may not seem like a very realistic scenario now, but gold prices were trading around $1,050 per ounce just two months ago.

The current strategy (lower production and lower costs) will differentiate Barrick from its peers in case of additional gold price downside. Frankly, the $1,000 per ounce estimate does not look like an overshoot to me. The fear spike in gold was fast, but the return to the previous levels may be just as fast, especially if the overall market found a bottom at 1,800 on the S&P.

That said, Barrick's cost progress is serious and will certainly help the company to achieve further debt reduction. The company finished the fourth quarter with $10 billion of debt and $2.45 billion of cash on the balance sheet. According to Barrick, this year's debt reduction target is $2 billion. This is certainly an achievable number, especially if gold prices manage to stabilize somewhere between $1,100 and $1,200 per ounce.

Things are not that rosy on the copper front, as Barrick finished the year with copper AISC of $2.33 per pound. The number is expected to decrease to $2.05-2.35 per pound, but there's still a significant possibility that copper production will be a drag on the overall results in 2016. As I'm writing this, copper prices are slightly above $2.05 per pound and, in my view, further negative surprises from China are possible this year.

At first glance, Barrick's results look good despite problems on the copper side. The company's strategy is clear, and the execution has been great so far. The medium-term goal to push debt under $5 billion looks achievable, especially if gold prices offer a little help.

The years of gargantuan projects are finally gone for Barrick, although I think that a higher gold price environment might revitalize the Pascua-Lama project, which is currently a grave for billions of shareholder value.

In my view, the clarity of Barrick's strategy along with the cost performance helped its shares outperform its peers Newmont Mining (NYSE:NEM) and Goldcorp (NYSE:GG) at the beginning of this year. According to Newmont Mining's quarterly report, the company had AISC of $898 per ounce in 2015. Goldcorp is yet to report its earnings.

Despite the fact that Barrick Gold's report was solid, I don't think that its shares are a good buy now from a momentum point of view. The rally in gold was remarkable, and I think that it was (and still is) a good time to bail out of gold-related holdings for now. I don't expect that gold prices will be able to continue the upside movement without a serious pullback, and such a pullback will inevitably cause a pullback in shares of gold producers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.