Barrick Gold (GOLD) reported better earnings than expected, even though costs were at the higher end of guidance (but still good at $725 per ounce), and capital spending increased, explains Adrian Day, resources sector expert and editor of Global Analyst.
The Nevada and copper mines in particular helped. The company has met guidance for the third year now since the merger with Randgold.
The company expects production this year to be stable for gold and higher for copper, but with higher cash costs. Production for both gold and copper is expected to be softer in the first quarter, with third and fourth quarters to be strong.
Porgera, in Papua New Guinea, is scheduled to restart in July but is excluded from guidance, so production could be higher. At Pueblo Viejo, which recorded another production record, Barrick expects the expansion to be completed by year end. After that. it will produce 800,000 ounces per year until 2040 (with two years over 1 million ounces).
The company also gave five- and 10-year plans, with expectations for stable production volume and free cash-flow throughout the period. This is significant, since one of the biggest strikes against Barrick has been the significant decline in production over the years.
From an outlier record output of 8.6 million ounces in 2006, output has declined to 4.4 million ounces last year, falling each year since, except 2009 and again 2019 when it acquired Randgold.
Some of the decline is attributable to the sale of smaller mines to reduce debt. But now, if Barrick can achieve stable production for the next 10 years without acquisitions, that is a very significant development.
Barrick ended the year net cash positive, even after $1.4 billion in dividends last year (its highest ever). At the time of the merger, three years ago, net debt stood at over $4 billion; some $2.5 billion has been returned to shareholders over the past three years.
Given the strong balance sheet, the company introduced ambitious plans to return money to shareholders. First, a new flexible dividend policy based on the company’s net cash at the end of each quarter, was introduced. The payment will range from 10 cents per quarter to 25 cents.
At the 10 cent rate declared (up 11% from the previous quarter), the dividend represents a 1.9% yield at the time of the announcement, but at the upper end, which is possible by year-end, the yield run rate would be 4.8%.
Formalizing a dividend policy will help; it received no credit whatsoever for last year’s $750 million one-off return-of-capital distribution. It also eliminates, in my mind, the only advantage held by main competitor Newmont (NEM).
In addition to the higher dividend, the company announced a $1 billion share buyback plan. Barrick had eschewed buying back shares but said it was doing it now because its shares were undervalued. “It’s all about our view on the value of our stock,” said CEO Dr. Mark Bristow.
That’s not the whole story of course. The company has talked a lot about making an acquisition in Canada, but the share buyback could be seen as an indication that the company does not see anything on the horizon right now.
Barrick stock responded very well to the results, jumping 12% in three days, over 25% since January. However, the stock traded as high as $30 in 2020, and is an improved company today. It remains good value. Given the move we have seen recently, we may see a little pullback ahead. Nevertheless, Barrick is a stock we want to own.