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3 Things to Look For When Barrick Gold Reports Q3 Earnings

By Scott Levine – Oct 24, 2016 at 8:47AM

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Shares are up 113% year to date, but will management be able to deliver?

Image source: Getty Images.

Barrick Gold (GOLD -0.11%)  is set to release its third-quarter earnings on Oct. 26. With earnings season upon us, are you finding yourself interested but equally worried about drowning in a flood of facts and figures? It's not uncommon during this time of year. Let's prepare by keying in on three things we can expect management to address in its report.

Rumor has it

Undoubtedly, management will pay considerable attention to one of the company's priorities for 2016: improving its balance sheet. Through the first half of 2016, Barrick has paid down $968 million of its debt -- nearly half of its fiscal 2016 debt reduction goal of $2 billion. So keep an eye on further progress made in the recent quarter toward achieving that target. But the amount of debt may not be the only point of interest.

Also look for management to address the mining industry's speculation that Barrick is seeking to sell its 64% equity stake in Acacia -- valued at approximately $1.9 billion -- to help finance its debt reduction strategy. Management has made it clear that it's willing to sell its non-core assets to help pay down its debt, but it hasn't revealed any specific deals.

Forecasting improved performance in 2016, management expects to profit from Acacia even if it remains in the company's portfolio. In Barrick's 40-F from 2015, management forecast 2016 gold production to fall between 480,000 ounces and 500,000 ounces -- a year-over-year improvement from the 468,000 ounces of production in 2015. In addition, the company expects to further benefit from a reduction in costs. Whereas all-in sustaining costs totaled $1,112 per gold ounce in 2015 at the Acacia mine, management expects this figure to fall between $950 and $980 per gold ounce in 2016.

Lucky number six

Besides reducing its debt, one of Barrick's priorities for 2016 is to improve its free cash flow. In fact, it has set the ambitious target of generating free cash flow per share even if the price of gold were to fall to $1,000 per ounce. 

Through the first half of the year -- during which the average spot price of gold was $1,221 per ounce -- the company has performed well, reporting $455 million in free cash flow.

Image source: Getty Images.

In fact, the second quarter of 2016 marked the fifth consecutive quarter in which Barrick has reported free cash flow. And with the price of gold hovering around $1,300 per ounce in the third quarter, expect Barrick to improve its streak to six consecutive quarters.

Management attributes its free cash flow growth, in large part, to its ability to consistently lower capital expenditures; however, on the Q2 conference call, it indicated that capex spending will rise in the second half of the year. And this won't be the only factor compromising free cash flow growth. Barrick's CFO, Catherine Raw, stated on the call that the third quarter is expected to be the highest in terms of all-in sustaining costs for the year.

Elaboration on digitization

Lastly, investors should expect management to address Barrick's recent partnership with Cisco (CSCO 0.06%) to -- as stated in the press release -- "drive Barrick's digital reinvention." Working together at the Cortez mine in Nevada, the two companies will deploy sensing technology throughout the mine to produce real-time operational data.

The digitization of the Cortez mine is expected to improve not only environmental and safety performance but also the management of energy, water, and emissions. Consistent with management's long-term vision for the company, the digital reinvention of Barrick is meant "to help Barrick deliver on its vision of growing free cash flow per share over the long term."

During the Q2 earnings presentation, management provided improved full-year guidance for Cortez, estimating the mine's AISC to fall between $520 and $550 per ounce. It will be interesting to see if management further improves upon the guidance in light of the partnership with Cisco and when it expects to deploy this technology at any of its other mines.

The takeaway

With its eyes on reducing debt and growing free cash flow, Barrick's management is clearly working to secure the company's long-term success, and I'd be surprised if the company's third-quarter earnings don't reflect the fruits of this labor. Though there may be a slowdown in the rate at which the company is growing free cash flow, I expect the company to remain on track to achieve its goal of reducing debt by $2 billion for 2016.

One additional thing I'll be looking for is an update on the temporary closure of the company's Veladero mine. Though it had initially suggested that the closure wouldn't have a material impact on the company's earnings, management has not recently reaffirmed this position, so it'll be interesting to see if management provides further commentary. 

Scott Levine has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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