Wait Before Selling Barrick Gold Stock

| About: Barrick Gold (ABX)

Summary

Barrick Gold Corporation released its Q1 2016 results.

Barrick will be able to lower the free cash flow break-even gold price to $1,000 per ounce.

The company will operate profitably even during a period characterized by a downtrend in the precious metal prices.

However, given that it is a cyclical stock, you may consider to sell shares and take profit. The other face of the coin is when to invest in this miner.

Barrick Gold Corporation (NYSE: ABX) released its Q1 2016 results on April 26, 2016 and reported adjusted net earnings of $127 million or $0.11 per share, beating analysts' expectations by $0.01.

With this article, I will succinctly present Q1 2016 financial and operating results of the company and I will explain the main reason why Barrick is performing well regardless of gold price trends.

Financial results of the gold stock, a summary:

In Millions of USD (except for per share items)

3 months ending 2016-03-31

3 months ending 2015-12-31

3 months ending 2015-09-30

3 months ending 2015-06-30

3 months ending 2015-03-31

Revenue

1,930.00

2,238.00

2,315.00

2,231.00

2,245.00

Cost of Revenue, Total

1,324.00

1,691.00

1,662.00

1,600.00

1,618.00

Gross Profit

606.00

547.00

653.00

631.00

627.00

Operating Income

325.00

-3,099.00

75.00

286.00

388.00

Net Income

-83.00

-2,622.00

-264.00

-9.00

57.00

Cash and Short-Term Investments

2,323.00

2,455.00

3,317.00

2,122.00

2,455.00

Total Assets

25,366.00

26,308.00

32,397.00

33,193.00

26,308.00

Total Debt

9,126.00

9,968.00

12,321.00

12,823.00

9,968.00

Total Equity

7,173.00

7,178.00

9,775.00

10,169.00

7,178.00

Cash from Operating Activities

451.00

2,794.00

2,096.00

841.00

316.00

Capital Expenditures

-270.00

-1,713.00

-1,402.00

-1,013.00

-514.00

Cash from Investing Activities

341.00

250.00

-508.00

-966.00

-468.00

Cash from Financing Activities

-927.00

-3,275.00

-956.00

-425.00

-283.00

Click to enlarge

Source: Google Finance

Revenues and gross profit decreased from Q1 2015 to Q1 2016, respectively by 14% and 3.3%.

The company improved its financial flexibility by reducing debts. ABX says it has cut total debt by $842M YTD.

"In 2015, the company's total debt was reduced by $3.1 billion, or 24 percent; our debt reduction target for 2016 is at least $2 billion," the company said in its Q4 2015 earnings release.

The company initiated a program to reduce its net debt by at least $3 billion in 2015.

Operating results:

Since the company said that there is still a lot of lifting to do in 2016, this is, in my opinion, a clear sign that the gold producer (one of the larger Canadian gold mining stocks) isn't relying on a substantial increase in the gold price in 2016. But this will not be a problem for Barrick and I explain why.

Look at the table below: the costs-to-revenue ratio decreased in the first quarter of 2016 compared to the first quarter of 2015 while the average grade of Barrick's proven reserves presumably increased during the same period.

Assuming that ABX is about 85% gold:

Quarter

Revenue

Costs

Costs to Revenue

Multiplier Profit Gold Price

Q1 2016

$1,640.50

$1,125.40

0.69

3.18

Q1 2015

$1,908.25

$1,375.30

0.72

3.58

Click to enlarge

As I wrote in my previous article on Barrick, ABX is smartly neutralizing falling gold prices by increasing operations at higher-grade mines (less gold production) and reducing operations at high-cost lower-grade mines; reducing overall production cost is improving profitability regardless of gold price trends.

The gold price fell by 3%, $1,182.560 average per troy ounce in Q1 2016 from $1,218.450 average per troy ounce in Q1 2015.

A fall in gold price by 3% would have led to a -9.5% drop in the earnings, if production and costs were constant over the period Q1 2015-Q1 2016. Instead, the adjusted net earnings of the company increased with 105%, from $62M in Q1 2015 to $127M in Q1 2016.

This means that the company is operating well and is able to increase the income even during a period characterized by a negative trend in gold prices.

ABX decreased production by 8%, from 1.39 million ounces of gold produced in Q1 2015 to 1.28 million ounces of gold produced in Q1 2016. All-in sustaining cash costs per ounce also fell from $927 per ounce in Q1 2015 to $706 per ounce in Q1 2016 (analysts were expecting $837 per ounce).

The company continues to expect full-year production of 5.0-5.5 million ounces of gold at lower all-in sustaining costs of $760-$810 per ounce, down from a previous outlook for $775-$825 per ounce.

At the end of 2016, I expect a higher average grade of reserves (very important information) compared to the one of 2015. The average grade of reserves was higher in 2015. The average grade of (proven) reserves was 1.63 g Au/t in 2014 (1.41, 1.39 and 1.41 g Au/t, respectively, in 2013, 2012 and 2011).

Concerning the production of copper, which makes about 15% of ABX's business, the story is quite the same.

The following picture shows ABX's key statistics, operating results and financial results of Q1 2016 compared to Q1 2015, divided per gold and copper segment:

Conclusion:

The company managed to neutralize, let's say, falling prices of the precious metal by increasing operations at higher grade mines (less gold production) and reducing operations at lower grade mines, in which costs of extractions are of course higher than those of higher grade mines.

"While we produce fewer ounces than we have in recent years, we are generating significantly more free cash flow per share" (here).

Barrick is doing the right thing trying to reduce overall production cost. This means that the company will operate profitably even during a period characterized by a downtrend in the precious metal prices.

The company's priorities for 2016 are:

  • lowering the free cash flow break-even gold price to $1,000 per ounce
  • reducing total debt by $2 billion
  • Improving efficiency and productivity across all operations and maintaining strict capital discipline. The miner also lowered its FY 2016 capex guidance to $1.35B-$1.55B from a previous outlook of $1.35B-$1.65B.

The fact that Barrick is capable of operating profitably even during a downtrend in the gold prices means that the company will generate a more stable and "foreseeable" stream of adjusted net earnings than some of its peers. Therefore, the next quarters' earnings announcements should not produce a significant impact on the value of this stock.

The investor should instead look at its nature of being a cyclical stock and taking into account the impact of the seasonality effects of gold on the share price of this stock regardless of the fact that the company is operating well in the gold industry.

Is it time to sell the shares and take some profit?

"We're seeing gold weaken this morning, we've seen a weakening trend over the past couple of sessions", Bank of Montreal's Andrew Kaip tells Bloomberg. "Seasonality is weighing on peoples' minds; I wouldn't be surprised if we see profit-taking."

If you bought shares of ABX in summer 2015 and you are considering to divest, I would wait a little bit before selling some shares and take some profit: gold stocks usually are characterized by an upswing from March through late May or the first part of June.

Until now, ABX gained almost 160% since July-August 2015, outperforming its peers and the Market Vectors Gold Miners ETF (NYSEARCA:GDX):

Click to enlarge

When will the time likely offer an interesting entering point?

If you consider investing in this miner, I would wait till late July when the yearly low is usually made following a drop in gold prices.

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.