Will Barrick Gold Get Stronger After Earnings?

| About: Barrick Gold (ABX)

Summary

ABX will release its Q2 report next week and it is likely that it will beat forecasts on the back of a higher realized price of gold and lower costs.

Though ABX’s production will drop 8% year-over-year due to divestments, a rise of 9% in gold prices in Q2 will help the company beat top line forecasts.

ABX could generate over $800 million in EBITDA in Q2 owing to its low-cost core mines that account for 70% production, which will be substantially higher than last year’s EBITDA.

Gold miner Barrick Gold (NYSE:ABX) has scheduled its earnings release for the second quarter on July 28, which is next week. In my opinion, the upcoming earnings report will prove to be a test for Barrick's stock prices, which have already rallied over 190% in 2016. However, I am quite confident that Barrick will come out with flying colors when it reports its next set of results and it will be able to sustain its rally. Let's see why.

Barrick will beat revenue expectations

On a year-over-year basis, Barrick is expected to declare a drop of 7.5% in revenue to $2.06 billion. This is not surprising as Barrick's production in the first quarter of 2016 was also lower than the year-ago quarter on the back of asset divestments. For instance, in the past year, Barrick has divested a spate of gold mines such as Cowal in Australia for $550 million and four mines in the U.S. late last year for$720 million as it looks to increase its focus on more profitable mines and repay its debt.

However, in the first quarter, after adjusting for mines sold, Barrick's production had increased on a year-over-year basis on the back of its cornerstone mines. What's more, for the second quarter, I believe that Barrick's production will be higher than the first quarter. This is because the company's production plan for 2016 is 5.25 million ounces at the mid-point, and it has already produced 1.28 million ounces in the first quarter.

Now, on an average, Barrick should produce 1.33 million ounces in the remaining three quarters of the year to meet its production target, which is why its production should ideally increase on a sequential basis, though this will be below the production of 1.45 million ounces reported in the second quarter of 2015.

Thus, Barrick's production is slated to drop slightly over 8% on a year-over-year basis. But, in my opinion, Barrick's revenue decline will be far lower than the drop in production. This is because the average realized price of gold should go up as compared to last year. Had gold prices remained constant, an 8% decline in Barrick's revenue would have looked ideal, but that's not the case.

As shown in the chart given below, gold prices have gained tremendous pace this year and were higher in the second quarter of 2016 as compared to the same period in 2015.

More specifically, gold prices in the second quarter of 2015 had averaged $1,192 an ounce, but this has increased to $1,301 an ounce in this year's second quarter. This means that the price of gold has increased slightly more than 9% in the second quarter of 2016. This is why even if Barrick Gold's production drops 8% from last year, the drop in its top line will be lower than expected since the price of gold has increased.

The bottom line will get stronger

The bottom line is where Barrick will shine in the second quarter. Analysts anticipate that its earnings will shoot up to $0.15 per share as against $0.05 per share in the year-ago period. This impressive rise in the company's earnings will be driven by two factors - higher gold prices and lower costs. As already discussed, gold prices gained strong momentum in the second quarter, and to capitalize on the same, Barrick has managed to bring down its costs impressively of late.

For instance, in the second quarter of 2015, Barrick's all-in sustaining cost per ounce of gold was $895, while in the first quarter of 2016, it came down to $706 an ounce. This massive drop in Barrick's costs does not come across as a surprise since the company is on track to achieve 70% of its overall production from its core mines, which have all-in sustaining costs of less than $700 an ounce.

The reason why Barrick's core mines have a lower all-in sustaining cost profile is because their average grade is 1.88 grams per ton, which is 42% higher than the company's overall mine grade of 1.32 grams per ton. Now, having a higher grade means that Barrick will be able to mine gold ores at lower costs from its core mines. This is because it needs to put in less effort to extract the yellow metal, thereby leading to a drop in costs.

Therefore, Barrick will get 70% of its second-quarter production of 1.33 million ounces from its core mines, which equates to around 930,000 ounces. Assuming that the cost of this production will come in at the mid-point of Barrick's core mine all-in sustaining cost guidance of $660-$730 an ounce, or at $695 an ounce, Barrick will have a margin of $606 an ounce on each ounce of gold in the second quarter (remember that gold prices averaged $1,301 an ounce in the second quarter).

Barrick's core mines will help it earn over $563 million in the second quarter after accounting for development costs but before interest, taxes, and depreciation. On the other hand, the remaining 30% of production, which will be driven by its other mines that have relatively lower grades, could add $238 million to its EBITDA. This is assuming all-in sustaining costs of $706 an ounce that Barrick reported last quarter and average gold prices of $1,301 an ounce for the second quarter.

Thus, Barrick's total EBITDA could come in at $800 million in the second quarter, which will be around 16% higher than last-year's EBITDA. However, investors should not forget that if Barrick is able to lower its costs further in the second quarter, the EBITDA will rise further.

As such, it is not surprising to see that analysts have been quite positive regarding Barrick's earnings of late. Over the past three months, the company's EPS forecast has been raised from $0.11 per share to $0.15 per share, while in the past month itself, six of the 17 analysts covering the stock have raised their earnings forecast.

Conclusion

Thus, Barrick Gold is on track to report a strong second quarter due to lower costs and rising gold prices. Looking ahead, as the company is on track to reduce costs further over the next couple of years, its margins should increase along with an improvement in gold prices. So, in my opinion, investors should continue to hold Barrick shares going into earnings as it can sustain its positive momentum on the back of strong results.

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.