Barrick Gold: Prepare For More Upside Post Earnings

| About: Barrick Gold (ABX)

Summary

ABX will be releasing strong third-quarter results this week as the company is set to witness a 60% jump in its margins on each ounce of gold.

ABX can deliver more margin upside in the long run as it increases its production from five core mines that account for 70% of production and have 12% lower costs.

ABX has reduced the maintenance downtime at its most important mine by more than two months, which will lead to enhanced throughput and lower the cost base.

In fact, ABX could increase its margin on each gold ounce by more than 40% by 2019 as it will reduce overall AISC to just $700 an ounce.

Later this week, gold miner Barrick Gold (NYSE:ABX) will release its results for the third quarter. Investors will be expecting Barrick to sustain the momentum that it has gained over the past week, rising close to 8% on the back of a rally in natural gas prices.

In fact, the spot price of gold has moved up nearly 1% from the recent low of $1,252 per ounce to $1,265 per ounce. This has given Barrick shares a shot in the arm going into its quarterly report. In my opinion, once Barrick releases its results this week, the stock will receive another shot in the arm since it is on track to deliver solid growth. Let's see why.

Why Barrick will witness strong growth

There are two reasons why Barrick Gold is on track to deliver robust earnings growth for the third quarter - improved pricing and lower costs. In the recently-concluded third quarter, Barrick should witness an average realized price of $1,334 an ounce. In comparison, in the year-ago period, Barrick's average realized price of gold came in at $1,125 an ounce.

This indicates that on a year-over-year basis, the company's average realized price per ounce of gold should increase by more than 18%. This increment in the gold price will lead to an improvement in margins. But, investors should not miss the fact that the growth in Barrick's margins will also be driven by a consistent cost base.

For instance, in the third quarter of 2015, Barrick's all-in sustaining costs stood at $771 an ounce. This year, the company believes that it will be able to sustain an identical all-in sustaining cost of $770 an ounce. Now, in the first six months of the year, Barrick has managed to stick to its yearly guidance so far this year. This means that the company's margin on each ounce of gold will increase from $354 in the third quarter of last year to $564 an ounce in the recently-concluded quarter.

This represents an increase of almost 60% in Barrick's margin on each gold ounce. As such, it is not surprising to see why Barrick's earnings per share are expected to increase to $0.21 per share in the third quarter as compared to $0.11 per share last year.

More importantly, I believe that Barrick's gold margins are set to rise in the long run as well after its upcoming results. This is because the company has more room to bring down its cost profile, while the price of gold could rise in the long run. Let's take a closer look.

Core mines will lead to lower costs

By 2019, Barrick Gold believes that it will be able to bring down its all-in sustaining costs to $700 an ounce as compared to an average of $770 an ounce this year. I won't be surprised if Barrick is actually able to bring down its costs to such levels since the company is aggressively focused on enhancing production from its core mines.

More specifically, Barrick Gold has a total of five core mines that will account for 70% of its total production this year. The striking thing about these mines is that they have a very low cost profile. In fact, Barrick's five core mines have overall all-in sustaining costs of $675 an ounce, which is much lower than its projected overall all-in sustaining costs of $770 an ounce for the year.

This is the reason why Barrick has been looking to improve its operational efficiency at the core mines. Cortez, for example, is one of Barrick's most important mines since it contributes the most to production and has the lowest cost base. More specifically, this mine is expected to produce 980,000 ounces to 1.05 million ounces of gold this year at all-in sustaining costs of just $535 an ounce at the mid-point.

Now, in order to improve its productivity and throughput at this mine, Barrick has improved the conveyor belt mechanism and lowered the maintenance downtime to just 12 days from 76 days. Due to this massive decrease in the maintenance downtime at Cortez, Barrick will be able to enhance its production as it will see more uptime, thereby increasing the contribution of this low-cost asset to its overall production.

Thus, it is evident that Barrick is taking steps to lower its cost base from a long-term perspective, which will allow it to record further growth in its margin profile. More importantly, a long-term increase in gold prices will also aid the growth in Barrick's margins. For instance, in 2018, it is anticipated that gold will hit a price of $1,500 an ounce.

If gold prices hold on to these levels and Barrick is able to achieve its $700 cost target, the company's operating margin on each ounce of gold will increase to $800 an ounce. This will be an increase of more than 41% from the margins that Barrick witnessed last quarter. Thus, it is evident that there is more upside to be had at Barrick Gold as costs go down further and gold prices rise.

Conclusion

On one hand, Barrick Gold's upcoming results will give the stock a shot in the arm due to substantial margin improvements over last year, while on the other, its long-term prospects appear to be in good shape due to its focus on enhancing production from core assets. As such, it will be a good idea to remain invested in Barrick Gold shares going forward since better pricing and lower costs will lead to more upside.

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.