Barrick Gold: Solid Reserve Replacement Despite COVID-19 Headwinds

Summary

• Barrick Gold released its FY2020 Reserves & Resources update last month, reporting a 2% decrease in reserves year-over-year to 68 million ounces of gold.
• It's important to note that Barrick managed to maintain its near industry-leading reserves while maintaining its conservative gold price assumption of $1,200/oz, which is below the industry average of $1,300/oz.
• At a share price of $20.20, Barrick trades at barely 10x trailing free cash flow, a very reasonable valuation for a company with one strong visibility into future production.
• Therefore, if we were to see further weakness, I would view any pullbacks below $18.65 as low-risk buying opportunities.

Photo by Ivan Boryshchak/iStock via Getty Images

The Q4 Earnings Season for the Gold Miners Index (GDX) is nearly over, which means that many companies are busy reporting their year-end Reserve & Resource statements. One of the most recent names to release its Reserves & Resources update is Barrick Gold (NYSE:GOLD), one of the world's largest gold producers, which just came off a solid year despite operational challenges. While many producers have elected to increase their metals price assumptions given the strength in gold (GLD) prices, Barrick Gold has maintained its conservative business model and still managed to replace most of its reserves. At a free cash flow yield of nearly 10% and a more than 3% forward dividend yield, any re-test of its recent lows should provide a low-risk buying opportunity.

(Source: Company Website)

Barrick Gold released its FY2020 Reserves and Resources statement last month and reported gold reserves of 1.3 billion tonnes at an average grade of 1.66 grams per tonne gold. This translated to 68 million ounces of gold, which was down only slightly from FY2019 reserves of 71 million ounces, translating to a ~4% drop year-over-year at 1% lower grades (FY2019: 1.68 grams per tonne gold). However, it's important to note that Barrick divested one of its highest grade assets, Massawa, to Teranga Gold (OTCQX:TGCDF), which was responsible for half of the decline in reserves, with Barrick shedding 2.2 million ounces at an average grade of 3.94 grams per tonne gold. So, on an adjusted basis, reserves actually held up incredibly well after 4.8~ million ounces of gold depletion from production. Let's take a closer look at the results below:

(Source: Annual Report)

As shown in the chart above, Barrick Gold ended the year with 68 million ounces of gold reserves, one of the largest reserve bases in the sector. This is just behind Newmont (NEM) whose sitting on just over 94 million ounces of gold, well ahead of other senior gold producers. Barrick converted 4.1 million ounces of gold after depletion despite a year where we saw much lower exploration expenditures due to COVID-19 related headwinds, with notable reserve growth at Loulo-Gounkoto [LG] and Pueblo Viejo [PV], which added a combined 800,000 ounces year-over-year, despite production of 542,000 ounces at PV and 544,000 ounces at LG on an attributable basis last year.

(Source: Company Filings, Author's Chart)

If we look at the reserves at each of the company's mines compared to FY2019, we can see that several assets saw a decline in reserves. Still, the decline was very minimal, suggesting strong reserve replenishment. Of Barrick's mines, the only mine which is staring down a relatively short mine life is the Long Canyon JV in Nevada, which is permit-related, and Tongon, which is down to just 570,000 ounces at 1.92 grams per tonne gold. Besides, as noted earlier, Barrick has one of the most conservative metals price assumptions among its peers, so it has lots of room to add reserves if it decides to move its gold price assumption to calculate reserves from $1,200/oz to $1,275 or $1,300/oz in FY2022 or FY2023. Conversely, we've got some miners who have short mine lives using $1,500/oz to $1,700/oz gold prices like First Majestic (AG) and McEwen Mining (MUX), which is the furthest thing from conservative, and a bit of a red flag.

(Source: Company Filings, Author's Chart)

However, Tongon makes up a very small portion of Barrick's total attributable gold production with just over ~250,000 ounces produced in FY2020 (~5% of production), and Long Canyon is also a small contributor at ~160,000 ounces or less than 2% of annual production. Importantly, Barrick's largest assets continue to have significant reserve bases, with Carlin, Cortez, Kibali, LG, PV, and Turquoise Ridge all having 5-million plus ounce reserve bases. Besides, Tongon has 1 million ounces of gold resources at higher grades than its reserve base (~2.40 grams per tonne gold vs. 1.92 grams per tonne gold), so there is an opportunity to convert a portion of the ~430,000-ounce resource base that's separate from reserves into reserves at a later date.

(Source: Company News Release)

Outside of strictly reserves, we got some excellent news from Barrick's bonanza-grade Fourmile discovery, with significant resource growth and the first announcement of indicated resources at the asset. As highlighted above, Fourmile's total resource base increased from 1.9 million ounces at 10.9 grams per tonne gold to 2.77 million ounces at 10.78 grams per tonne gold. While this 46% growth in resources might not seem like much, it is quite a big deal when considering that Barrick added 470,000 ounces in the indicated column from zero previously and maintained its nearly half-ounce per tonne grades. While Barrick's Nevada assets are predominantly shared with Newmont in the Nevada Gold Mines JV with a 61.5% / 38.5% split, Fourmile is 100% owned by Barrick and could be a strong driver of production growth from a Tier-1 jurisdiction. Let's see how Barrick's reserves stack up relative to other million-ounce gold producers:

(Source: Company Filings, Author's Chart)

As shown in the chart above, Barrick Gold holds the #2 spot for total reserves in the ground next to Newmont and well ahead of smaller producers like Agnico Eagle (AEM) and Gold Fields (GFI). However, Barrick's major distinction among most million-ounce producers is its grades. This is because Barrick has one of the highest grade reserve bases among its peers at 1.66 grams per tonne gold. This dwarfs grades of miners like Yamana (AUY) at ~0.70 grams per tonne gold, Harmony (HMY) at ~0.70 grams per tonne gold, and B2Gold (BTG) at 1.3 grams per tonne gold. The below chart shows a closer look at strictly grades among million-ounce producers, corroborating the view that Barrick stacks up extremely well against its peers.

(Source: Company Filings, Author's Chart)

So, how's the valuation look?

(Source: Company Filings, Author's Chart)

If we look at the chart above, we can see that Barrick has seen a massive improvement in its quarterly and trailing-twelve-month free cash flow, with free cash flow soaring by nearly 200% to a record of ~$3.36 billion last year. Based on Barrick's market cap of ~$36 billion, this translates to a more than 9% free cash flow yield, despite a year of operational challenges related to COVID-19 and Porgera being placed on care & maintenance. Meanwhile, Barrick is also paying a $0.36 annual dividend which translates to a 1.80% yield, and has proposed returning $750 million in capital to shareholders this year. This translates to a competitive 4% yield in FY2021 and a high likelihood of a ~2.10% plus forward yield in FY2022 (ex-one-time capital returns), with a good chance that Barrick will raise its quarterly dividend to $0.11 as it continues to pay down debt.

(Source: TC2000.com)

While there are more attractive valuations in the sector, it's hard to find these valuations among multi-million-ounce producers with dividend yields this high. At the same time, Barrick is coming into a strong support level on its quarterly level, with its long-term moving average sitting near the $18.00 level as of April. If Barrick were to see further weakness and pull back to this level, it would be trading at a more than ~4% yield for FY2021 and closer to an 11% free cash flow yield. I believe this would present a low-risk buying opportunity.

(Source: Company News Release)

At the current valuation, Barrick offers solid value, but I am waiting for a dip closer to $18.65 and a re-test of the lows before starting a position. Obviously, there's no guarantee that the stock re-tests or undercuts its recent lows, but I believe if we do see a re-test, this would present a low-risk area to start a position in the stock. For now, I continue to see Barrick as a top-12 name in the sector given its large reserve base, conservative management team, and reasonable valuation. So, if Barrick does pull back over the coming weeks, I would be keeping a close eye on the stock, with the main upside catalysts for FY2021 being a potential deal at Porgera with the Papua New Guinea government and a potential slight increase to its quarterly dividend in Q4.

Analyst’s Disclosure: I am/we are long GLD, NEM. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Comments

[Robert van der Westhuizen]

I am concerned that Barrick has put 20Moz from Donlin on their reserve statement. Resistance to mining the Donlin deposit are huge and as far as I know they have not been able to get a mining license yet.

[Taylor Dart]

Hi Robert,

I don’t see Donlin anywhere in their reserve base, and to my knowledge it’s never been included there. It has nothing to do with the 68 million ounce reserve base which supports 12+ years of mining even without reserve replacement.

[Robert van der Westhuizen]

@Taylor Dart In your table, North America reserves, there is a line item Donlin Surface, one line above Fourmile Surface (50%) that shows 20Moz. I have assumed it came out of their reserve statement but may have been mistaken.

[Robert van der Westhuizen]

@Robert van der Westhuizen Fourmile Underground

[BEAST MODE]

That’s a lot of Yadda-Yadda for being Neutral on GOLD. You will be in for a surprise tomorrow. I see the trend for a breakout in GOLD. Although, 2019 was a better year, 2020 has some solid figures under the belt! I expect these figures to spill over into Q1. Although preliminary reports have been soft, Q1 results will surprise you. In 2020, Gross Margin is the best ever at 41.11% even though the Operating Margin has lagged. We are still at a reasonable Net Profit Margin at over 28%. Return on Assets, Return on Equity and Return on Investments have been respectable. Even though gold prices have been off in 2020, the above figures make me want to scream from excitement. Buy some May 21st $22.00 calls. Nice 200%-300% killing!!! Take profits within a week.

[lklein]

Good article for the bull case, but a few comments. Their valuation is highly based on the reserves, yet GOLD production dropped this past quarter and has been on a 2-year downtrend. I would expect the opposite. They also still include Pascua Lama in their reserves 6.1M oz (at 60%). This is 10% of the reserves, and where the risk is. Strategically, I suspect had the mine been in full production they would have had production growth (add PL to their production the past two years). Has this risk been priced in - hard to tell. Aside from this risk - production matters and with all these "reserves" they can't seem to get the gold out of the ground.

[BeaBaggage]

PNG 'deal' out..not great..some gold better than none, surprised Zijin went along- as they are basically PRC owned and PRC controls the debt in PNG..
www.reuters.com/...

hopefully Newcrest and Harmony decide that such an arrangement does not warrant the huge (US$3bil) cost to develop Wafi-Golpu in PNG and focus elsewhere. I am all for these poor 3rd world countries getting a fair shake on money to be made from resources but then they should also foot the bill for development to derisk said projects. Bea

[Carson7]

Remember, the special dividend is a return of your capital, and the cost basis for each share will be reduced by the amount of the dividend. So, you will pay capital gains taxes on that dividend. That is fair.

[InvestRite#1]

@Carson7 Do you have a date on the special dividend?

[Carson7]

@InvestRite#1 They did not state when the special dividend will be distributed on the call...

[Miners to the Moon]

@InvestRite#1, I read that it is to be distributed over the course of 2021.

[BobinSea]

Want a far better stock to consider?

Of all the Gold Stocks out there, there is at least ONE that is "ridiculously undervalued". That is the stock price of a small but consistently profitable company with a P/E of 4.38.

That is NOT a typo!

Wanna Guess?

It's Galiano Gold, (GAU) priced at $1.18

TipRanks best analysts have an AVERAGE 12 month price target of $2.05, which represents a 73% upside

From Etrade.com
"In the last 3 months, 4 ranked analysts set 12-month price targets for GAU. The average price target among the analysts is $2.05."

[Carson7]

@BobinSea GAE is junk on all metrics

[Kraken11]

I just wish they had a better dividend, like they used to many years ago. I am focused on dividend growth, and don't buy a stock with the expectation to sell anymore. I am working on income replacement, and GOLD's paltry dividend is not up there yet.

[deckofcards]

@Kraken11 You're probably not considering the proposed $0.42 special dividend (return of capital). That puts the total dividend yield closer to 4%. Not bad.

seekingalpha.com/...

[Flightmode]

@Kraken11 you’ll never get consistent dividend growth in gold stocks, way too cyclical. If you’re holding GOLD stock forever then you’re definitely going to see dividends cut sometime in the future. I still recommend owning it, but I don’t own any gold stocks I expect to hold forever or see consistent dividend growth with. Ride the wave, then bail.

[InvestRite#1]

@deckofcards When is that special dividend being paid?

[lorddarley]

Why are dealer margins so high on bullion coins like the Maple Leaf? Is this a problem with mints, or a shortage of bullion? I don't understand having to pay $110/$120 over spot for Maple Leafs.

[ggolflq1]

@lorddarley It's called obscene profit

[lorddarley]

@ggolflq1 Agreed. These are brokers I've dealt with in the past, and it drives home the point how inefficient it is to own physical. For those who say you should never sell, and pass on to children, I guess the costs to buy and sell don't matter.
The broker costs has kept me from buying more physical. That cost, plus the inefficiency of shipping and appraisal (even with new coins) if you want to sell has moved me out of the gold camp. Bitcoin may be 'just air" as my wife says, but it is so convenient and cheap to trade, and the capital gain rate is 8 percentage points less.

[Miners to the Moon]

@lorddarley, have you tried the senior miners? Bountiful profits
for company and shareholder alike in a Gold Bull, which may be reawakening in April. This morning, did some light selling into strength to realize some gains.

[GKIC]

Thanks as always, Taylor,

To me gold price assumptions by Barrick, $1,200/oz, and by the industry, $1,300/oz seem pretty low ... is there any reason?

[Taylor Dart]

Hi GKIC,

They use low reserve prices to bake in a large margin of safety between their mine plans and the spot price so that investors can see visibility into future production at conservative gold price levels, and not visibility based on current spot price levels. The lower the price they use, the better and more comfortable investors should be. When companies are raising their assumptions to current prices, that's where I would be nervous, like First Majestic just did with its $1,700/oz gold price assumption. It's also to make sure they aren't disappointed and losing money in a period of gold price volatility. If gold were to drop $300/oz this year for some reason to $1,400/oz, Barrick will be safe and not mining marginal ore that's going to hurt their bottom-line. Meanwhile, names like McEwen Mining using $1,500/oz prices would be in trouble, since their cut-off grade is based on a $1,500/oz gold price, and they'll run into some trouble and pile up losses.

[GKIC]

@Taylor Dart Thank you!!

[deckofcards]

The font size on your charts is so small that they’re illegible.

[Taylor Dart]

If you click on the image it should relatively easy to read. I'm using a font size of 11-13 in most cases.

[deckofcards]

@Taylor Dart On SA app on iPad if you tap on an image and zoom-in, then it will not let you un-zoom to close out of the image. You have to close the app and restart it. So your suggestion only works on PC. If reading on an iPad, your suggestion is not possible (maybe it's just me).

[Taylor Dart]

Thanks & sorry to hear the issue. I would recommend just using Safari in that case on Ipad (web browser) to see if that works. I do everything from laptop and don't really use IPad so not exactly sure for a work-around.

[smokenmirrors]

Taylor, always appreciate your time and effort! GOLD or KL if choosing between the two?

[Taylor Dart]

Hi SNM,

Thank you. I prefer KL, more reasonable valuation, better margins, more hated, better jurisdictional profile, and potential takeover target.

[William Frey]

@smokenmirrors With 20.118M ounces of reserves, KL's enterprise value is 405x the reserve ounces; GOLD's enterprise value is at about 514x, so KL looks like a better value on that metric.

[Leroyboy66]

@Taylor Dart
Thank You TD
KL under $33.00👍🏻

[7422981]

You are obviously looking for that weekly price gap to get filled at some point(entry price target). I focus on gaps as well, but at this point it looks to be a low probability in the near to medium term. Gaps(daily/weekly) such as this are still present in GOLD at much lower levels, and have not been filled. Gold(metal) has broken its 2021 downtrend, while I expect a pullback to retest the breakout downtrend line, I don't expect a relapse. Unless this is a failed breakout in the metal, implications for GOLD are that it will visit the upper downtrend channel over the coming weeks.

There is always the danger of a market wide event changing the outlook, the stock market looks extremely vulnerable at this stage, so I wouldn't totally discount your target entry price.... However, I think it becomes more of a possibility after the coming rally. The quarter end positioning led to a selloff of Gold/Miners, I think we are going to see some accumlation now to fuel a rally in April/May.

Very short term, a pulback in the metal and miners looks likely, but it should offer a buying opportunity in GOLD and the miners. GOLD(relative to the group, basis Friday's close) is my favorite based solely on technical factors, however SSRM looks great as well on a small pullback.

[Taylor Dart]

I'm not obviously looking at anything, I'm pointing out where valuation would be slightly more compelling to justify putting money to work. I still think there are more compelling ideas out there than Barrick on a country-risk adjusted basis, while also factoring in the small potential for M&A, which would very likely lead to a pullback to $18.00 if it occurs.

[7422981]

@Taylor Dart What drives these stocks is money flow, and the metal trend(up/down), not the valuation metrics.....at least in the current market.
Putting money to work in this sector has been a losing proposition since the 2nd quarter of last year, regardless of metrics you cite. I doubt $18 is coming in the next couple of months, but if Gold fails to reassert the uptrend, a lower price for GOLD is likely, acquisition or not.

The South African based miners have a number of issues which should have made them poor relative performers using fundamental metrics, yet they have been standouts of late compared to the rest of the sector. So, there are other drivers affecting performance in the miners.

[Taylor Dart]

Well aware of how markets work - thanks. Gold/miners don’t always correlate, so that point is moot. Gold spent several months making new highs in 2011 while the sector went sideways and many names made new lows. Money flows out are great, that creates buying opportunities for those willing to be patient. Good luck.

[Nick007]

I like the comment about looking at the strike point for reserve calculation as a deep indicator -- I'm curious if it is basically the same for low-grade open-pit mines and high-grade underground mines both? In my experience, a lot of underground mines seem to understand their local geology and have the ability to maintain a 3-5 year mine life pretty much indefinitely, while open pit miners, with easier access, are more constrained.

[Taylor Dart]

Hi Nick,

Thank you. Yes, generally underground reserves are lower on a reserve life relative to an annual production basis, partially due to the fact that it's expensive to drill it out ahead, but this becomes easier with increased development.

[Strike]

Excellent article. I expect huge upside to the metal price, based on stubbornly negative real interest rates and gradually rising inflation. Remember, the metal rose 450 % while the S&P actually sank 8 % from 2000 - 2011. History doesn't always repeat, but it is well worth considering the macroeconomic similarities between now and then.

Discl.: Very long GOLD, KL, NEM, GDXJ, ZSIL.SW and ZPAL.SW.

[Taylor Dart]

@Strike Thank you & thanks for reading.

[Miners to the Moon]

@Strike, agree with everything you say except that “inflation is
“gradually rising.” Both Shadow Statistics & Chapwood Index
came independently to the same conclusion: inflation now 9%.

[Miners to the Moon]

@Strike, I share some of your picks: NEM & GDXJ (my #1 and #4 holdings. Own less GOLD.

[Jacob 2]

Would love to buy some miners as they've had a hefty correction since there run ups last spring and summer. Was lucky and bought the close line down in late March of last year and sold in the fall due to seasonal concerns. Have reluctantly come to the conclusion that it would be unwise to re-buy the gold miners because of the continued strong dollar, rising employment and strong stock market, not tail winds for the gold trade. Gold looks washed out but dead money while oil looks ready to go again. Buying oil watching gold.

[Taylor Dart]

With 12% - 18% forward free cash flow yields across much of sector, I would argue that some names have already priced in a strong Dollar, rising employment, and recent weakness in gold.

[Jacob 2]

@Taylor Dart Thanks for the response and article. FYI: Also been recent insider buys in GOLD and CELTF>

[ghrcap]

Should $1200/oz. come to pass as GOLD presumes, think of the further supply constriction which would result.

[Taylor Dart]

@ghrcap I don’t understand comment. Barrick and others use $1,200/oz to be conservative and not chase after more marginal ore, their metals price assumption does not imply their predictions for future gold prices, it’s to build in margin of safety.

[User 9072361]

Great article Taylor. I bought some last week in $19s

[Taylor Dart]

@ilndboy7 Thank you & thanks for reading.

[yeahgold]

Thanks Taylor, another well written article on the gold space.

Let me ask some, what are your 5 top picks in the gold space?.

Thanks in advance

[Taylor Dart]

Hi YG,

Thank you for the kind words. I only share my top ideas and top takeover targets at www.tfsignals.com in my private newsletter. One name that I regularly write on here that remains a top idea is KL, but I save the rest for subscribers.

[yeahgold]

Great, Thank you.

[alemono]

Thank you Taylor for another excellent analysis. I have a problem with the comparative charts: it is almost impossible to read the names of the competitors. Can you solve this?

[Taylor Dart]

Hi Alemono,

Flattered it was of value - thank you. I don't share them outside of my private newsletter at www.tfsignals.com to be fair to subscribers, so I purposely minimize the text.

[InvestorMan Sr.]

The all time high for Barrick is in the $50's. I believe it will set a new one at some point and that's when I'll sell.

[Taylor Dart]

Hi IMS,

Not sure the all-time high is relevant for comparative purposes. The company had ~1 billion shares outstanding in 2011 and now has ~1.78 billion shares outstanding. $32.00 is the old $56.00.

[Carson7]

@Taylor Dart Exactly! This won’t be a Roman holiday, just a nice return..