Barrick Gold: A Good Quarter Doesn’t Make It A Buy (NYSE:GOLD)

Barrick Gold (NYSE:GOLD) just reported its second quarter earnings, and the stock skyrocketed by more than 9% on the day following the release.

Although the market was clearly caught off-guard by the better than expected results, the quarter was not a reason enough to turn bullish on the stock. Even after the near double-digit jump in the share price, the year-to-date performance gap between GOLD and the VanEck Gold Miners ETF (GDX) is still very wide and not in favor of the gold miner.

One good quarter does not set a trend and unfortunately, GOLD remains an inferior in comparison to other large cap gold mining stocks.

Prices of precious metals, on the other hand, would likely continue to be a major tailwind for Barrick but for the time being it is too early to tell whether or not the company is headed in the right direction.

A Good Quarter, But Not Enough

For the second quarter of 2024, Barrick’s management reported earnings per share (EPS) that exceeded analysts’ consensus estimate. Adjusted net earnings per share stood at $0.32 for the 3-month period, when the analysts were expecting $0.27.

As we could see from the graph below, the earnings surprise was noticeable and with that, it appears that sell-side analysts have underestimated Barrick’s ability to capitalize on the recent increases in the price of gold and copper.

Gold production, on the other hand, noted a decline on a year-on-year basis, which was more than offset by an increase in realized gold price from $1,972 in the second quarter of 2023 to $2,344 in Q2 of 2024.

The magnitude of the gold price increases in the second quarter of this year could be seen on the graph below and was a major tailwind not only for Barrick, but for other gold miners as well.

So far, the price of precious metal has continued to increase in the months of July and August and would most likely remain a major tailwind for Barrick’s EPS figures during the next quarter. The magnitude of the increase, however, is much smaller when compared to the increases observed earlier this year, which is a signal that gold production and costs will be far more important in the second half of 2024.

Moreover, Barrick’s stock now trades at a sales multiple that is in-line with the company’s net income margin for the past 12-month period. This is now becoming a limiting factor for GOLD’s returns for the rest of 2024, unless we see a notable improvement in margins.

As costs continued to increase during the last quarter, it seems that Barrick’s quarterly net income margin has already peaked during Q4 of last year. This development now puts the current sales multiple at risk, if all-in sustaining costs continue to increase at a higher rate than the price of gold for the rest of 2024.

Inferior Choice

The other major problem that Barrick Gold investors face is that even if you anticipate the gold price to continue increasing at the same rate it did in the first half of 2024, then you would likely be better-off with other large cap gold miners.

As a starting point, GOLD has the lowest expected revenue growth when compared against its major peers – Newmont (NEM) and Agnico Eagle Mines (AEM).

The reason why expected growth is so important in this case is because it is of crucial importance for miners to have the ability to expand production during times when margins are elevated.

This leads us to the second reason and namely – costs. Back in 2019, Barrick Gold was among the lowest-cost producers, but this has changed in recent years as Agnico made a number of transformative M&A deals. Newmont is now the highest cost producer from the three companies, but this could change soon.

In recent quarters, Barrick’s all-in sustaining costs (AISC) increased meaningfully to $1,498 during the last reported quarter. This represents an 11% increase year-on-year.

This is significantly higher than the current outlook for fiscal year 2024 of AISC expected to be within the range of $1,320 to $1,420. Therefore, unless costs fall materially during the second half of the year, we are likely to see a revision of Barrick’s outlook for the rest of 2024.

In comparison, Agnico Eagle Mines reported just a marginal increase in AISC during the second quarter of 2024 with costs increasing by only 2% from the same quarter a year ago.

Newmont remains the highest cost producer, albeit its AISC increased by only 6% in Q2 of 2024 which is almost half of the percentage increase at Barrick.

When comparing NEW to GOLD, however, the latter is still a lower gross margin producer which has significant implications for earnings growth during good times when gold prices are skyrocketing.

Another major disadvantage that Barrick has, is the significant share of non-controlling interests. For example, for the past 6-month period a total of $456m has been attributed to non-controlling interest which was roughly 40% of the total company’s net income figure. At Newmont the same amount for the first half of 2024 is negligible.

Conclusion

Based on everything said above, GOLD is likely to continue to underperform its peers as costs continue to increase. Even if gold prices remain on their current trajectory through the rest of 2024, investors would most likely be better-off by sticking to higher quality miners, such as Agnico Eagle Mines. On the other hand, if we see gold prices staying flat or falling through the rest of 2024, then Barrick’s margins would suffer and with that, any potential upside through the rest of the year would be limited.