Quality Assets, Cautious Expansion and Commodity Super-cycle To Deliver Steady Revenue Growth

Key Takeaways

• A strong presence in stable regions puts Barrick Gold in a good position to benefit from the next commodity super-cycle.
• Barrick's investment in human capital should ensure qualified personnel are available for developing markets.
• Geopolitical conflicts and environmental activism pose the main risks.
• The management has troves of experience to successfully expand into copper.

Catalysts

COMPANY CATALYSTS

Quality Assets In Safe Jurisdiction Can Provide Stability

Barrick Gold Corporation's robust portfolio, anchored by its significant foothold in the United States, positions it as a global leader in the mining industry. 

With Nevada Gold Mines (NGM) serving as the largest gold mining complex worldwide, Barrick has strong domestic assets, which is important in a de-globalizing environment. 

Through its 61.5% ownership and operation of NGM, Barrick controls three Tier One Gold assets – Carlin, Cortez, and Turquoise Ridge – contributing to its status as the largest gold producer in the US. The company’s share in these mines is 29.2 million ounces of proven and probable reserves, 45 million of measured and indicated ounces, and 14.4 million inferred ounces. 

A forecast of all-in sustaining costs is between $1,350-$1,450 / ounce for 2024. Barrick's focus on high-margin, long-life gold projects further enhances its portfolio's resilience and profitability.

Looking ahead, Barrick's deep project pipeline, which includes brownfield projects, greenfield exploration discoveries, and large undeveloped gold deposits, provides healthy growth potential. 

The company’s ability to replenish depleted resources has been exceptional, and balance sheet management has been impressive, with plenty of cash and little debt.

Controlled Diversification Can Help Take Advantage Of Industry's Opportunities.

Beyond its US operations, Barrick's extensive portfolio spans 18 countries, including key regions in the Americas, Africa, the Middle East, and Oceania. This diverse geographic presence underscores Barrick's commitment to tapping into the world's most prospective gold districts and maximizing value for its stakeholders.

The Reko Diq project in Pakistan, in which Barrick holds a 50% stake, represents a significant endeavor to tap into one of the largest undeveloped copper-gold projects worldwide. 

With construction expected in two phases and a projected lifespan of at least 40 years, Reko Diq promises to substantially expand Barrick's copper portfolio while delivering lasting economic and social benefits to Balochistan and Pakistan. 

Simultaneously, the management plans to expand its presence in the African copper belt, particularly in Zambia and the Democratic Republic of Congo (DRC). The company's investment in the Lumwana mine in Zambia shows ambition to take a position as a premier copper producer globally.

To support its ambitious growth plans, Barrick is investing in talent development through initiatives like the Barrick Academy at the former Buzwagi mine in Tanzania. 

By training thousands of personnel from Africa and the Middle East, Barrick not only ensures a steady supply of skilled workers but also contributes to local capacity-building and sustainable economic development.

It is worth noting that, despite a solid balance sheet, Barrick isn’t rushing in risky acquisitions, as evident from their reluctance to acquire the problematic Cobre Panama mine from First Quantum Minerals, despite the mine’s unquestionable potential.

INDUSTRY CATALYSTS

Commodity Super-cycle Provides A Strong Industry Tailwind

Marko Papic, the Chief Strategist of Clocktower Group, an alternative investment management firm, believes the market might be in the early stages of the next commodity super-cycle.

Papic's assertion hinges on a convergence of geopolitical factors and economic trends, particularly centered around Russia's role in the global commodity market. 

Papic argues that Russia's political instability, exacerbated by internal conflicts and a potential weakening of its leadership, will significantly impact commodity production, particularly critical commodities like oil and nickel. 

With Russia's historical significance as a major commodity exporter, any disruption in its production capabilities could have profound implications for global commodity markets.

Furthermore, the broader geopolitical landscape is suggesting that geopolitical tensions and economic uncertainties are driving increased demand for commodities, particularly from central banks and private investors seeking to hedge against these risks. 

Additionally, the green energy transition and efforts to de-risk supply chains away from China are further driving demand for commodities. 

Significant capex investments and government programs are pouring billions into new production capacity, which itself requires commodities as inputs before increasing supply.

Commodity super-cycles are generally rare, and the latest one occurred in the mid-2000s when the price of gold spiked 200% on the eve of the Great Recession. Without a significant rise in cost factors, such as labor, rallies in gold and prices at $3,000 like Citi’s analysts foresee in certain scenarios would boost net margins.

While I find it difficult to put an exact price on it, I do believe the probability of the gold price going higher as a result of these risks above playing out is more likely than not. 

Monetary Policy Impact Can Cause Demand Spike As A Hedge

While optimism stems from investors' expectations that inflation will continue to decrease (due to central bank commentary), underlying instability and uncertainty persists. 

The predictability of inflation is crucial for economic stability, yet various measures indicate lingering uncertainty. This uncertainty erodes consumer confidence, affecting spending habits and investment decisions.

With surging U.S. debt, the bond market is in a precarious position. Although a lack of domestic debt buying could send yields higher in the short term, I believe a higher interest rate is extremely unlikely in this cycle. On the other hand, interest rate cuts accompanied by lower yields would help the debt burden but also support commodity prices through a weakened US dollar.

Anything but an orderly inflation decrease would magnify the positive impact on commodity prices, as the loss of confidence could quickly reignite inflation fears, undermining efforts to achieve price stability. 

It seems like the odds of quantitative easing (lower interest rates, additional liquidity), are more likely than further quantitative tightening (higher interest rates, less liquidity), given the tricky situation many governments are in. 

Overall, I believe that the quantitative easing many investors are expecting is likely to occur, and will be supportive to the gold price, and thus, Barrick’s revenue streams. 

Assumptions

• Commodity Super-cycle: I will assume that Marko Papic is correct in saying that we’re on the verge of a new commodity super-cycle and I believe Barrick is well-positioned to take advantage of the escalating gold price growth driven by market uncertainty and the beginning of a new commodity cycle.
• Revenue Growth: I expect the company will grow its revenues by 4.5% per year, mainly owing to higher commodity prices and industry-leading organic growth. I believe that commodity prices will more than nullify the rising all-in-sustaining costs of extraction that might rise.
• Margins: As the price of gold climbs higher, I expect the net margin to recover to around 15% (up from 11% today), slightly above Wall Street's consensus expectations but still below the historical average of 18%.
• Increased Investor Interest: I anticipate that the company's strong footing in stable jurisdictions will be attractive  to institutions looking for a hedge against currency volatility, as even the ever-cautious Warren Buffett invested in Barrick when he decided to take a position in gold.
• Buybacks: I expect the company to continue with modest stock buybacks and reduce its share count by 22 million over the next 5 years, reducing the number of shares outstanding to 1.734B.
• Management Team: I believe that Barrick's seasoned management team is more than adequate to adjust to the ongoing global issues and continue with conservative growth and resource replenishment.

Risks

Geopolitical Conflicts Could Hurt Barrick's Growth Markets

Geopolitical risks are increasingly impacting gold miners like Barrick, reflecting the broader challenges facing the mining sector globally. 

With geopolitical tensions escalating due to conflicts such as the war in Ukraine and disruptions in trade routes, investors are turning to safe-haven assets like gold. This has led to a surge in demand for gold, particularly from central banks and private investors seeking to hedge against uncertainty.

However, geopolitical conflicts are a double-edged sword for commodity producers as many promising growth opportunities exist in historically unstable regions like Africa and the Middle East. 

The risk of conflict spillover in those regions is ever-present, particularly in West Africa. This important commodity region has seen multiple more or less successful coups in the last few years. Currently, African operations contribute to around 28% of the company’s net asset value, so there is a decent exposure to these risks.

Environmental Activism Threatens Mining Industry Growth

The recent closures of mining operations in Yukon and Panama (owned by First Quantum Minerals) underscore the growing pressure from environmentalists on the mining industry to adhere to stricter environmental standards. This trend is particularly notable in developed regions with strong environmental agency influence.

A notable example is the shutdown of the Minto copper mine in Yukon. The government's intervention to prevent environmental damage emphasizes the significance of prioritizing environmental concerns in mining operations. 

Similarly, in Panama, the closure of the Cobre Panamá copper mine reflects the power of grassroots environmental activism. The mass protests and blockade led by a diverse coalition of environmentalists, students, indigenous groups, and labor activists demonstrate the widespread opposition to environmentally destructive mining projects.

These developments pose challenges for mining companies like Barrick. Increasing scrutiny from environmentalists and regulatory bodies requires miners to invest in sustainable practices and mitigate environmental impacts. Failure to do so not only risks reputational damage but also could result in costly shutdowns and legal battles.