Is Barrick Gold Stock A Buy, Sell, Or Hold After Recent Earnings? We Like The 4% Dividend Yield

May 20, 2022 9:00 AM ETBarrick Gold Corporation (GOLD)GLD5 Comments15 Likes

Summary

  • Barrick Gold reported its Q1 earnings which beat expectations despite some mixed operating trends due to facilities maintenance and cost pressures.
  • The company initiated a new dividend policy tied to the balance sheet net debt level with the current forward yield at 3.9%.
  • We are bullish on Barrick Gold as a leading miner with a positive outlook on the precious metal price.
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Gold miner with nugget

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Barrick Gold Corp. (NYSE:GOLD) has managed a positive return year-to-date despite facing increasing levels of volatility in both the price of gold and the broader stock market. As one of the world's largest gold miners, there are many moving parts to the company's outlook this year between some mixed macro trends and softer earnings from the latest quarterly report. That being said, we are bullish on the stock with an expectation that the metal price of gold is set to rally higher in the current economic environment. Barrick is well-positioned to outperform, benefiting from overall solid fundamentals. The company recently initiated a new dividend policy with a forward yield of around 3.9% which also looks attractive.

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Data by YCharts

Barrick Earnings Recap

The company reported its Q1 earnings on May 2nd with non-GAAP EPS of $0.26 which was down from $0.29 per share in the period last year but did beat consensus by $0.02. Revenue of $2.9 billion fell 3.5% year-over-year while $100 million was above expectations.

This trend this quarter considers total gold production of 909koz down 10% y/y balanced by a 5% higher average realized price in the quarter. Management explains that the company depleted a particular stockpile of higher-grade ore and some planned maintenance impacted the results. As it relates to copper mining, which represents about 20% of total revenues, output was up 9% y/y.

In terms of the all-in sustaining cost, gold "AISC" at $1,164/oz was up 14% from Q1 2021, in part, following global trends of inflation as it relates to energy and logistics costs. Overall, the Q1 trends for production and cost were within previous management guidance. The key takeaway here is that despite lower production and earnings compared to last year, Barrick was still able to generate adjusted EBITDA of $1.6 billion and $393 million in free cash flow.

GOLD metrics

Company IR

From the company's agreement with the government of the Democratic Republic of Congo last year regarding the repatriation of revenue from the Kibali project, Barrick received repayment of $0.6 billion in shareholder loans this quarter. The impact helped the company's balance sheet cash position reach $5.9 billion in cash, up from $5.3 billion at the end of 2021. Net cash of $743 million also improved from $130 million last quarter.

The company has issued guidance forecasting total gold production in 2022 between 4.2 and 4.6 million ounces, approximately flat compared to 2021 at the midpoint. The forecast for copper production is between 420 and 470 million pounds compared to 415 million in 2021. In other words, gold earnings this year will largely be based on market pricing trends, with higher copper output balancing a trend in higher costs.

Barrick Gold New Dividend Policy

An important update from the earnings release was a new dividend policy that provides a supplementary payout in relation to its balance sheet position. Depending on the "threshold level" of net cash, Barrick is set to distribute a quarterly "performance dividend" which is inclusive to the base amount of $0.10 per share.

GOLD metrics

Company IR

The Q1 net cash of $743 million indicates a "level III" performance dividend equal to $0.10. By this measure, Barrick has announced the next dividend at a total of $0.20 to be paid on June 15, 2022 to shareholders of record at the close of business on May 27, 2022. In effect, the company is doubling the dividend for Q2.

While the net cash threshold may vary going forward, investors can expect performance dividends to continue for the next few quarters within the current copper and gold pricing environment as Barrick will continue to generate free cash flow. On an annualized basis, the implied forward dividend yield for GOLD with a new $0.20 per share amount is 3.9% at the current stock price. This is a compelling yield compared to a peer group of major gold miners and streaming companies. Separately, the company also maintains a $1 billion stock buyback program which further enhances shareholder returns.

GOLD yield

YCharts

Is GOLD Stock Overvalued?

When looking at Barrick Gold the attraction here really comes down to its high-quality profile and portfolio of tier-one gold assets. There may be other miners that are generating higher near-term production growth or have some optionality with concentrated exposure to an exploration phase project, but few companies can check off all the boxes as a leader in the sector.

GOLD metrics

Company IR

In terms of valuation metrics, Barrick and its larger peer Newmont Corp. (NEM) typically trade at a premium against smaller miners. There is an implicit value in scale with a global diversification offering key strategic advantages. The point we are getting at here is that the question of whether the Barrick is under, over overvalued should really only be made against Newmont, as a more direct comparison.

For context, NEM with a market value of $51 billion compares to GOLD's market cap at $35 billion. While Barrick produced around 1 million ounces of gold in the last quarter, Newmont did 1.3 million. On the other hand, while both companies posted nearly equal gold AISC in Q1, Barrick was able to generate a higher adjusted EBITDA and free cash compared to NEM. Barrick also has a stronger balance sheet with net cash while Newmont has over $1 billion in net debt. Putting it all together, there is a case to be made that Barrick is fundamentally stronger and is more attractive compared to NEM.

We highlight that Barrick trading at an 18x forward P/E multiple is at a discount to NEM at 20x. We believe Barrick's steps to enhance shareholder returns with the new dividend policy should help this spread narrow. Again, compared to smaller miners, Barrick may look expensive, but that premium is justified in our opinion.

GOLD metrics

YCharts

The dynamic is similar to other valuation metrics. Barrick is trading at an EV to forward EBITDA ratio of 6.7x compared to 8.3x from NEM. With a positive outlook on the direction of the gold pricing, we believe there is upside for the entire gold mining sector but Barrick has the incremental room to reprice higher through a multiples expansion. The stock should be relatively supported to the downside in a more bearish market environment.

GOLD metrics

YCharts

Barrick Gold Stock Price Forecast

We mentioned a bullish outlook for the price of gold (GLD). The metal price has been volatile this year, balancing several tailwinds against some other headwinds. On one hand, the macro environment between elevated inflation, global growth uncertainties, and the geopolitical climate is positive for gold. These factors likely helped the price of gold briefly approach a new all-time high in early March during the early stages of the Russia-Ukraine crisis before the recent correction to under $1,800/oz.

The combination of a stronger dollar with rising interest rates connected to the aggressive rate hiking cycle by the Fed explains some of the recent weaknesses. It's likely gold also got caught up in some form of financial contagion amid the extreme selloff in other segments of the market.

Still, we like the current setup with the price of gold bouncing from the $1,800/oz level which represents an important area of technical support. Recent data suggest weaker economic growth adding to the specter of a U.S. and global recession by next year has resulted in a pullback in bond yields as well as the Dollar from recent highs. Gold can benefit going forward as a store of value in a flight to safety trade particularly as macro conditions deteriorate.

GOLD chart

Finviz

We see $2,000/oz as the next upside target and view the recent selloff as a new buying opportunity. Based on $26.00 stock price for Barrick in mid-April when the price of gold last approached $2,000/oz, a rebound back there can generate +25% upside for Barrick stock compared to the 9% move in the metal. This ~3x gold price upside leverage in percentage terms is a good benchmark going forward. Keep in mind that investors are also getting the quarterly dividend adding to returns.

GOLD chart

Finviz

Longer-term, Barrick has issued guidance explaining every $100/oz increase to the price of gold is expected to add $1.5 billion to free cash flow through 2026. By our estimate, in a scenario where the gold price climbs back to $2000/oz, the company will be able to hit the "level IV performance dividend threshold" indicating another increase in the quarterly payout with a balance sheet net cash of above $1 billion by next year.

GOLD metrics

Company IR

Is GOLD Stock A Buy, Sell, Or Hold?

We rate GOLD as a buy with a bullish outlook on the gold metal price. We expect the stock to outperform the upside in percentage terms. There's a lot to like about Barrick Gold as an excellent way to capture exposure to themes in precious metals. The new dividend policy also makes the stock a compelling choice for income investors looking for diversification.

The key risk for Barrick Gold is going to be the price of gold. A leg lower under $1,750/oz would likely hit sentiment among gold miners with implications for the earnings outlook. A stronger dollar is also a risk that can end up pressuring the price of gold. Over the next few quarters, the net cash level on the balance sheet will be a key monitoring point with the relationship to the dividend payout.

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Disclosure: I/we have a beneficial long position in the shares of GOLD, GLD either through stock ownership, options, or other derivatives. 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.

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