Barrick Gold Just Crushed My Earnings Estimates

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Data by YCharts

Senior gold miner Barrick Gold (GOLD) has reported its Q3 2020 earnings, and while I was expecting a great quarter due to higher gold prices (33% increase) and strong production, the miner surpassed my expectations as its all-in sustaining costs of $966/oz came in lower than expected.

While production was actually down a bit, the company remains on track to meet its full-year guidance between 4.6-5.0 million gold ounces.

In my earnings preview released on Oct. 28, I stated the following:

I think Barrick is likely to improve upon its adjusted net earnings by 30-35% given its higher margins in Q3. So I believe we’ll likely see adjusted net earnings come in at between $540 million and $570 million. Using its current share count of 1.77 billion shares, this results in EPS of between $.30 and $.32.

As for cash flow estimates, we should also expect a rise in operating cash flow and free cash flow by at least 30%. So I’m expecting operating cash flow of approximately $1.3 billion (up from $1 billion) and free cash flow of $670 million (up from $522 million), and potentially a drop in its net debt down to $1-1.1 billion (from $1.4 billion).

Analysts covering the stock had estimated for earnings per share to range between $.24 (low estimate) to $.37 (high estimate) with a mean of $.321.

Metric Author Estimate Actual
Operating cash flow $1.3 billion $1.9 billion
Free cash flow $670 million $1.3 billion
Adjusted net earnings $540 – $570 million $882 million
Earnings per share $.30 – $.32 $.41
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You’ll see above that cash flow and earnings figures absolutely blew away my estimates. I had estimated that Barrick would produce about $1.3 billion in cash flow, and I was off by $600 million. Part of that is due to underestimating its average realized gold price, as I had estimated a price of $1,909/oz, and Barrick reported $1,926/oz.

The strong cash flow allowed Barrick to reduce its net debt by 71% to $400 million and the miner now has $4.7 billion in cash, with no significant debt maturities until 2033, so it’s in the best financial shape it’s ever been in.

The strong cash flow and improved balance sheet also led to an increase in its quarterly dividend by 12.5% to $.09 per share, payable on Dec. 15 to stockholders as of Nov. 30. Its stock yields 1.22% based on the new payout.

Even better news for investors: gold prices rose sharply on Thursday and currently sit at $1,950 as of writing, or $24/oz higher than Barrick’s realized price in Q3.

Barrick Valuation Update: It’s Still Cheap

Barrick’s stock is still looking like a good buy here despite the run-up post-earnings. Its valuation is very compelling for value investors.

Currently, its shares trade at attractive valuation multiples: EV/EBITDA of 10.47X, P/E ratio of 10.89X. However, Barrick’s Q3 earnings report makes these multiples more compelling.

If Barrick is able to duplicate this quarter’s earnings, EBITDA, and cash flow over a full year, then the miner is deeply undervalued, as that would lead to a full year of $3.52 billion net earnings ($4.97 per share) and $8.8 billion in EBITDA.

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Based on its current stock price, this would result in a forward P/E ratio of 6.03 ($30 stock price divided by $4.97 per share), and an EV/EBITDA ratio of 6X ($53 billion enterprise value divided by $8.8 billion EBITDA.)

Stock P/E (FWD) EV/EBITDA (FWD)
GOLD 6.03 6.0
AEM 42.88 13.26
AUY 23.17 6.85
NEM 20.95 9.66
MEDIAN 21.83 9.06

(Barrick valuation compared to several top mining stocks, and the sector median. Source: Author estimates, Seeking Alpha)

You’ll see in the above chart that based on these forward metrics, Barrick’s stock is very cheap compared to peers, not to mention other sector averages, such as the utility sector, where the median forward P/E is 20.27 and forward EV/EBITDA is 11.06.

Of course, gold prices will have to at least hold the $1,926/oz mark for Barrick to report these full year figures, and Barrick will have to continue its strong operating performance, but I expect both to happen over the next year.

Bottom Line: Buffett Made the Right Call

Back in August, it was reported that Warren Buffett’s Berkshire Hathaway bought 20.9 million shares of Barrick Gold at $26.9 per share (worth $564 million) in Q2 2020. This came as a shock to many as Buffett has long been a critic of gold, but Buffett believes in owning shares of quality companies and he is a classic value investor.

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Data by YCharts

Buffett is now up more than 10% of his position with a dividend that just increased by 12%. I think owning Barrick Gold stock will likely be one of the best moves Berkshire will have made in 2020 as this undervalued gold miner has far more room to run, and far more room to increase its dividend. Barrick’s improving balance sheet and conservative payout ratio of 21% (forward EPS of $1.64 divided by annual payout of $.36) indicates the potential for huge dividend increases in 2021.

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What do you think of Barrick’s third quarter earnings?

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Disclosure: I am/we are long GOLD. 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.



Via SeekingAlpha.com