Canadian Rate Cut Winners: Will Barrick Improve?

With the increasing global turmoil and geopolitical uncertainty, the price of gold continued to hit new highs in 2024. Investors have also begun to pay attention to investment categories related to gold, such as spot gold, gold ETFs, etc. For Canadian investors, there is another potential option, which is gold mining stocks.

Although the performance is excellent, the stock price of this gold mining company has been "up and down" this year. As of June 14, the stock price has fallen by 6.67% since the beginning of the year, and the current stock price of the company is CAD 22.06. As the representative of gold mining stocks, is this company an investment choice under the expectation of interest rate cuts? Below, I will analyze it from several aspects such as volume, price, EPS, and shareholder returns.

Barrick Gold Corporation (hereinafter referred to as "Barrick") is one of the world's leading gold producers, specializing in the extraction, production, and sale of gold and copper mines, as well as related activities such as exploration and mine development. It occupies an important position in the global gold industry in terms of production scale and gold reserves.

The company's main products are gold and copper. According to the latest annual report, the company produced 4.05 million ounces of gold and 420 million pounds of copper in 2023, and gold revenue accounted for 91% of the total revenue in 2023. In terms of regions, Barrick's business spans 18 countries around the world, with self-operated mining areas in Argentina, Canada, Chile, and other places. More than half of its revenue comes from the United States, and the rest comes from various parts of the world.

Our analysis of Barrick's production should be based on both existing data and future prospects, with a focus on key indicators such as production volume, All-in Sustaining Cost (AISC), and year-end reserves.

Figure: Barrick's Business Operations in the First Quarter of 2024

In the first quarter, Barrick's gold production decreased compared to the previous quarter and the same period last year, while copper production decreased compared to the previous quarter and remained flat compared to the same period last year. Barrick's management stated that the main reason for the production decline was the delayed capacity expansion of multiple mining areas, and with the completion of the "planned maintenance at Nevada Gold Mine", production will increase in the second half of the year. The company's production guidance for the year remains unchanged, with total gold production expected to be between 3.9 million and 4.3 million ounces, compared to 4.054 million ounces in 2023. Barrick expects production to increase in the second half of the year with the completion of planned maintenance at Nevada Gold Mine, and the second half of the year will have a higher weight in the total annual production (54%), which may mean "a strong ending to the year".

The gold reserves of a gold mining company refer to the amount of gold resources that the company has explored and technically and economically feasible, which can reflect the company's future production potential. In the latest report, Barrick stated that its annual gold reserves were approximately 77 million ounces, a year-on-year increase of 1.3%. Since the end of 2019, Barrick's reserves have steadily increased, and during this period, Barrick has not taken any merger and acquisition actions. Despite negative factors such as the depletion of reserves in the first phase of Long Canyon and the withdrawal of Massawa from Teranga, Barrick has still achieved a continuous increase in reserves, reflecting the company's strong management and operational capabilities.

In addition, Barrick's AISC for gold production in 2023 was $1,335 per ounce, which increased by 9% compared to $1,222 per ounce in 2022. AISC is a key indicator that measures the total cost required for a gold mining company to produce one ounce of gold, and its increase may be caused by multiple factors such as rising raw material costs, increased labor costs, and decreased production efficiency. For AISC in 2024, the company expects it to be between $1,320 and $1,420 per ounce, and it is expected that with the application of new projects and technologies, AISC will be better controlled.

Although stock price trends are not directly related to gold prices, it is undeniable that the financial performance of any mining company is heavily dependent on commodity prices. As mentioned earlier, 91% of Barrick's revenue comes from gold, so let's conduct a brief analysis of gold prices below.

If we look at the past few years, we can see that although gold prices have fluctuated occasionally, the overall trend has been upward. As an emergency safe haven tool, the price of gold is influenced by multiple factors. However, considering the recent global turmoil, geopolitical conflicts and other situations, the demand for gold is unlikely to decrease significantly in the short term, and unless unexpected events occur, gold prices are unlikely to fall significantly.

At the same time, under the expectation of interest rate cuts, according to traditional economic theory, when central banks implement loose monetary policies or lower interest rates, the opportunity cost of gold as a non-interest-bearing asset decreases, which may push up gold prices.

The adjusted earnings per share of Barrick in 2023 was $0.84, and analysts have given optimistic expectations of $1.21/$1.53 per share for 2024/2025. The main reason is that there are expectations for Barrick's expansion projects and new mining development to increase production, and it is expected that specific projects such as the expansion of Pueblo Viejo and the start of production at Reko Diq will significantly increase the company's production and revenue, thereby improving the company's profitability.

In terms of shareholder returns, the company's dividend remains in line with the performance dividend policy announced at the beginning of 2022, and the dividend payment is related to the company's free cash flow (FCF). Currently, the company's dividend yield is 2.46%, paid quarterly, with a dividend payment of $0.1 per share, and an expected annual dividend of $0.4, which is relatively low. The first quarter dividend for 2024 will be paid on June 17, 2024, which may temporarily boost the stock price.

As of June 13th, 2024, Barrick's P/E ratio is 19.87x, which is basically flat compared to 20.5x P/E in 2023. Regarding its future stock price trends, although the operating conditions and expectations are good, analysts remain cautiously optimistic due to the fact that the industry is directly affected by uncontrollable factors such as politics and inflation, and relevant risks cannot be ignored.