Co. Scores Wins With Growth, Dividend, and Buyback

Source: Adrian Day   02/22/2022

A miner reports better earnings than expected and meets its guidance for the third year in a row, Adrian Day of Global Analyst reports.

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) 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. 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).

Production Stable in Dramatic Turnaround

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.

Net Cash Leads to New Dividend Policy and Large Buyback Program

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 that main competitor Newmont held.

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 Chief Executive Officer 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.

Exploration Rather Than Acquisitions

“I talk a lot about M&A but have done very little,” Bristow remarked. He said there was lots of competition, and many transactions were done to survive whereas “we want value.” He added, “I reflect on some of the recent transactions and I think of 2011-2012”, a period when the large companies overpaid for often marginal assets, leading to massive write downs. “We don’t have to do those deals.” Instead of acquisitions, Barrick has increased reserves through exploration.

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 a good value. On a price-to-book value, cash flow and free cash flow basis, as well as debt levels, it is less expensive than the other two in the “big three,” Newmont Corp. (NEM:NYSE) and Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE). Now Newmont loses its dividend advantage. Given the move we have seen recently, we may see a little pullback in the week or two ahead. So we are holding. But Barrick is a stock we want to own.

First Royalty Check For Orogen

Orogen Royalties Inc. (OGN:TSX.V) received its first royalty payment, from its 2% NSR on First Majestic’s Ermitaño deposit. The first quarter’s payment from its 2% NSR of $480,000 is higher than expected from First Majestic’s feasibility study. Drilling to the east of the main Ermitaño deposit has discovered a new deposit, called Luna. Look for weakness to add to positions.

Growth Ahead For Royal Gold After Solid Quarter

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) reported solid cash generation, with operating cash flow up 28% on the year ago quarter. This came even as full production at Khoemacau was delayed by a quarter to the end of this year; the operator drew additional funds from Royal, thus increasing the stream and improving projected returns. The mine, representing about 8% of Royal’s NAV, is running at about 40% of production capacity.

The operator of Mt. Milligan, which represents about 24% of Royal’s NAV and revenue, projects higher gold production this year, offset by lower copper. A revised life of mine report is anticipated for the second quarter. Another major Royal stream, at Barrick’s Pueblo Viejo, will see a boost in revenue when a planned plant expansion is complete in the fourth quarter. Royal has a solid balance sheet with $144 million in net cash and undrawn credit facility of $1.2 billion. Given the recent move, we are holding.

Bad News For Almadex

Almadex Minerals Ltd. (DEX:TSX.V) received bad news when affiliate Almaden’s mineral title was cancelled by the Mexican Supreme Court. Almaden was not the defendant in the case, but rather the company’s claims were the subject of a case against the Mexican government arguing that Mexican mining law was unconstitutional because of a lack of consultation with indigenous communities before granting mineral title. The Court’s decision, a ruling on the constitutionality of the mining law rather than on Almaden per se, would affect other mining licenses.

What Happens Next?

Presumably, the Mexican government could consult with the indigenous communities and reissue the mining claim, though anti-miner president Andrés Manuel López Obrador, known as “AMLO,” has imposed a moratorium on the issuance of new mining concessions. At best, it will be some time before the issue is resolved. The court first has to issue its final decision, expected within two months.

Almadex’s main royalty is on Almaden’s Ixtaca; Almadex also made a controversial gold loan to Almaden to be repaid from Ixtaca revenues. Almadex has other assets, but many of those are also in Mexico, including its other major asset, a royalty on Azucar Minerals Ltd.’s (AMZ:TSX.V; AXDDF:OTXQX) El Cobre property; Azucar was another spin-off from Almaden. The balance sheet is strong and there are exploration properties in Nevada and British Columbia as well. We are not giving up on the company, therefore, but there will be more stock weakness as the Almaden saga unfolds, so we would wait before thinking of buying.

Production Up and Costs Down For Yamana

Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) reported lower costs on the back of record production, boosting earnings, while one- and three-year guidance was modestly higher. Cash costs in the fourth quarter came in a very solid $642/ounce. Its reserves had been announced previously, replacing its reserves (see Bulletin 805). The stock has responded well to the higher gold price — it has tended to be more leveraged to the gold price than some peers — up from just under $4 this month. Hold.

BEST BUYS: In addition to companies discussed above, best buys now include Lara Exploration Ltd. (LRA:TSX.V). After the recent run in gold stocks, and overvaluations in the broad market, we are buying little right now. Next week may be different!

Originally published on Feb. 20, 2022.

Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

Disclosures:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Orogen Royalties, Royal Gold, and Lara Exploration. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management, which is unaffiliated with Adrian Day’s newsletter, hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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