- Despite Barrick Gold doubling their dividends earlier in 2022, their share price still endured a sell-off along with gold prices.
- This dynamic is nothing new, as their commodity prices fluctuate in the short term but importantly, their lower share price saw their dividend yield surge higher.
- It is now back around its highest point in 30 years but unlike the last time it reached this point in 2013, they are not burdened by debt.
- Despite the potential for short-term bumps, they appear capable of funding their dividends on average.
- Since this offers the most compelling income their shares have ever offered, I believe that upgrading my rating to a strong buy is now appropriate.
Barrick Gold (NYSE:GOLD) entered 2022 ready to mark a change for the better after years of sporadic shareholder returns and thankfully, they wasted no time with the first quarter already seeing their dividends doubled with the potential that more could follow, as my previous article discussed. Whilst their subsequent share price sell-off has not been ideal, it now sees investors able to grab a moderate dividend yield of 5.39% and thus as a result, this short-term bump in the road actually offers the best deal in over 30 years, as discussed within this follow-up analysis that also reviews their recently released results for the second quarter of 2022.
Executive Summary & Ratings
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
After seeing a disappointing start to 2022 with their gold production suffering a circa 10% year-on-year decrease during the first quarter, the second quarter remained soft, albeit with a different mix of variables. Whilst their operating cash flow for the first half is now $1.928b and thus effectively on par year-on-year with their previous result of $1.941b from the first half of 2021, the second quarter of 2022 only sees a result of $924m and thus down sequentially versus their first quarter result of $1.004b. Even if removing the impacts of temporary working capital movements, it only makes this more noticeable with the second quarter seeing a very similar underlying result of $958m, whilst the first quarter climbs to $1.135b.
This gap eventuated despite gold production increasing 5.35% back to 1.043m/oz during the second quarter of 2022 versus 0.99m/oz during the first quarter, whilst gold prices across these same two points in time were at $1,861 per oz and $1,876 per oz, respectively, as per their second quarter of 2022 results announcement. Even though this shaved $15 per oz from their top line, they lost a further $23 per oz as their cash costs increased to $855 per oz from $832 per oz, respectively, thereby seeing soft cash flow performance as they battled against higher fuel and electricity costs, as per the commentary from management included below.
“So we are dealing with costs. And on top of that, we've got the Eastern European crisis -- Europe crisis, which has brought a very stressed fuel market to bear. And that's both oil or diesel and gas.”
“And the gas markets are moving around, the amount of gas being exported out of the U.S., for instance, where we rely and are growing our capacity to take on more gas power generation.”
-Barrick Gold Q2 2022 Conference Call.
Whilst these results were not their best, the bigger cause of their share price sell-off during the past months resulted from gold prices dropping as the Federal Reserve moves to quickly tighten monetary policy and thus inadvertently strengthening the US dollar. At the end of the day, their share price ebbs and flows along with gold prices but to the chagrin of shareholders, those investors with capital on the sideline are now presented with the best deal in 30 years with their dividend yield surging higher, as the graph included below displays.
When looking back at their prevailing dividend yield from the last 30 years, there was only one time that it exceeded its current level, although as denoted on the graph included above, this merely stems from differences in how their dividends are now determined and declared. Back in 2013, they only provided a routine quarterly dividend, whereas now they provide a base quarterly dividend of $0.10 per share plus a variable performance dividend as determined by their net cash position, which most recently was also $0.10 per share, thereby making a total quarterly dividend of $0.20 per share. The way many quote pages and graphs are constructed, their variable performance dividends are excluded and thus it suppresses their current yield versus its historical comparison, as observed above. If any new readers are interested in further details regarding their performance dividends or shareholder returns policy, please refer to my previously linked article because these have not changed during the second quarter of 2022.
Upon reviewing their dividend history, it shows that during 2013 their quarterly dividend was $0.20 per share and thus equal to their current total quarterly dividends. This means that from the perspective of income investors, their shares currently offer the highest and thus arguably the most compelling source of income they have offered in three decades but as subsequently discussed, the combination of their financial position ultimately makes this the best deal in over 30 years.
Admittedly, this view hinges upon their ability to continue paying their level III performance dividends that give rise to their total quarterly dividends of $0.20 per share but despite short-term bumps, it seems reasonable. Whilst gold prices will always vary in both directions going forward, historically speaking they generate sufficient free cash flow to provide adequate coverage to these dividends and thus in theory, they should be sustainable on average. A combined quarterly dividend of $0.20 per share costs $354.2m given their latest outstanding share count of 1,771,000,000, which equates to $708.4m for half a year and thus below the $732m they generated during the first half of 2022, despite their production and cost headwinds. Or if annualized, it equals $1.417b per annum and thus once again slightly below their average free cash flow of $1.484b during 2019-2021, which encompasses a wide range of gold prices that ranged from as low as circa $1,200 per oz to over $2,000 per oz, thereby providing a suitable basis.
Despite their soft cash flow performance during the second quarter of 2022, their net cash position only slipped slightly lower to $636m versus its level of $743m when conducting the previous analysis following the first quarter, thereby representing a decrease of $107m. Thankfully if not for their share buybacks of $173m and minor $34m working capital build, this would have not been the case and their cash balance would have actually increased, as was expected when conducting the previous analysis. This once again means that they have zero leverage and thus obviously making it pointless to assess and also marks a world of difference versus back in 2013, as their capital structure was burdened by a heavy debt load that left their net debt ending the year at a sizeable $10.7b, which restricted their shareholder returns for years as they battled to deleverage.
Quite unsurprisingly, their already strong liquidity persisted during the second quarter of 2022, as both their respective current and cash ratios only slipped immaterially to 3.95 and 2.59 from their previous respective results of 4.01 and 2.62 when conducting the previous analysis following the first quarter. As long as they maintain a net cash position, they should obviously not have any issues with future debt maturities, plus as a dominant company in the gold mining industry, they should always retain easy access to debt markets if required, even if central banks further tighten monetary policy.
The last time investors could buy their shares with a dividend yield near its current level was back in 2013. Unlike in 2013, they are no longer crippled by a heavy debt load and thus in my eyes, this leaves their shares offering investors the best deal in over 30 years with the most compelling source of income their shares have ever offered. Even though the inherent volatility of the gold industry is not necessarily a gem in the eyes of every investor, I nevertheless believe that upgrading my rating to a strong buy is now appropriate given this very desirable opportunity.
Notes: Unless specified otherwise, all figures in this article were taken from Barrick Gold’s SEC filings, all calculated figures were performed by the author.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GOLD over 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.
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