Morning Note: Market news and updates from Barrick Gold and engineer Dowlais.
Market News
US equities were little changed last night – S&P 500 (flat); Nasdaq (+0.2%) – while the 10-year Treasury yield drifted down to 3.91%. Gold eased below $2,465 per ounce following strong gains on Monday, benefiting from safe-haven appeal amid elevated geopolitical tensions.
In Asia this morning Japan’s equities gained (Nikkei 225, +3.45%) after a holiday, as a weaker yen was seen providing support for exporters. Other Asian markets were mixed: Hang Seng (+0.1%); Shanghai Composite (-0.2%).
The FTSE 100 is currently trading 0.2% higher at 8,224, while Sterling buys $1.2802 and €1.1714
Brent Crude drifted back to $81.50 a barrel, ending a five-day winning streak, driven by renewed focus on demand concerns. The European gas price has risen on Russian supply concerns.
Source: Bloomberg
Company News
Yesterday lunchtime, Barrick Gold released Q2 results which were better than the market expected as the company benefitted from higher prices and robust production. In response, the shares were marked up by 9%. Despite a 20% rise in the gold price so far this year, the shares are little changed, highlighting the potential for catch-up.
Barrick Gold is the world’s second largest gold producer. The company was created following the 2018 merger of Barrick Gold and Randgold Resources. In addition, in 2019, the group improved its portfolio through the formation of the Nevada Gold Mines joint venture with Newmont, providing exposure to the single largest gold-mining complex in the world.
As a result, the group operates mines and projects in 18 countries in North and South America, Africa, Papua New Guinea, and Saudi Arabia. It now owns six of the industry’s Top 10 Tier One gold assets with the largest reserve base among its senior gold peers. At the end of 2023, attributable gold reserves were 77m ounces. The group’s ten-year mine plans are based on reserves and geologically understood resource extensions, with a $1,300 per ounce long-term gold price currently used to allocate capital.
Overall, Barrick provides an attractive way to gain exposure to the gold price, albeit with the operational and political risks that come with a production company. The company is also well positioned to capitalise on global decarbonisation trends driving the long-term fundamental strength of copper with two world-class projects set to deliver into a rising price and demand market.
In the second quarter of 2024, revenue grew by 12% to $3.16bn, versus consensus of $3.11bn, while adjusted net EPS rose by 68% to 32c, ahead of the market consensus of 28c.
Gold production was 6% lower, at 948k ounces, albeit above market expectations, leaving the company on track to deliver on its full-year production guidance.
The gold price has rallied this year on hopes of US interest rate cuts, uncertainty around elections, along with global geopolitical risks and central bank bullion buying. During the first half, Barrick realised a gold price of $2,344 per ounce, up 19% versus last year.
Barrick has the lowest total cash cost position among its senior gold peers. However, in the latest quarter, all-in sustaining costs were up 11% to $1,498/ounce.
Group copper production fell by 10% to 43k tonnes, with a realised price up 22% to $4.53/pound. All-in sustaining costs were up 17% to $3.67/pound.
The group generated free cash flow of $340m, up from $63m last year, and ended the quarter with net debt of only $688m. This leaves the group with the flexibility to manage its business and take advantage of new opportunities independent of the vagaries of the capital markets.
Capital investment was $694m in the quarter and full-year guidance of $2.5bn-$2.9bn. The company continued to progress major capital projects and results from disciplined brownfield exploration are on track to replace annual depletion and identify further upside opportunities around Barrick’s operations in North America, Latin America, and Africa & Middle East.
In addition to a quarterly base dividend, a performance dividend is paid based on the amount of cash, net of debt, on the balance sheet at the end of each quarter. Today, the group has declared a payout of 10c in respect of Q2 performance. Barrick also recommenced its share buyback program in order to capture embedded value in business and growth pipeline. During Q2, 2.95m shares were repurchased under the current $1bn program.
In the second half of the year, the group expects higher production and lower costs. For the full year, the company is guiding to: gold production of 3.9m-4.3m ounces; all-in sustaining costs of $1,320-$1,420 an ounce; copper production of 180ktm–210kt pounds; all-in sustaining costs of $3.10-$3.40 a pound. The group is assuming an average gold price of $1,900/oz – it is currently $2,440/oz – and discloses that a $100/oz move has a $550m impact on cash flow. The group is assuming an average copper price of $3.50/pound – it is currently $4.03/pound – and discloses that a 25c/pound move has a $110m impact on cash flow.
By the end of 2030, the group is still targetting more than 7.0m ounces of GEO, up 30% driven by the organic project pipeline and continued reserve replacement.
Source: Bloomberg
Dowlais has this morning released first-half results which were slightly below market expectations and has cut its guidance for the full year. The company is continuing to restructure its portfolio and has announced a strategic review of its Powder Metallurgy business and the disposal of its loss-making Hydrogen unit. The shares have been weak over the last year and are down a further 5% in early trading this morning.
Dowlais is a global leader in automotive equipment and powder metallurgy. It is well placed to benefit from several structural growth drivers, such as stricter environmental legislation and the electric vehicle transition. Following the demerger from Melrose in April 2023, the company has a dual strategy of profitable organic growth and targeted M&A in the automotive sector where management sees opportunities as a consolidator.
In H1 2024, adjusted revenue fell by 5.1% at constant currency to £2,571m, driven by weakness in the ePowertrain product line of the Automotive business. Driveline, China and Powder Metallurgy, totalling more than 75% of the Group's revenues, performing above their markets.
Operating profit fell by 9% to £151m, including £7m of operating losses from the Hydrogen operations, driven by lower volumes. The Hydrogen operations were sold in July for a nominal consideration – this will eliminate cash future losses associated with the business. The margin fell by 30 basis points to 5.9%, as the impact from lower volume was partially offset by proactive actions to manage the cost base and by pricing recoveries.
In Automotive, the group is the number one global drive system supplier, serving 90% of global OEMs, with content on 50% of vehicles. The long-term aim is to grow at a rate of more than double global light vehicle production. In the first half of 2024, revenue fell by 6.3% at constant currency to £2,044m.
The business generated an operating margin decline of 50 basis points to 6.0%, with operating profit down 13%. This decrease was primarily driven by lower revenues in the ePowertrain product line largely due to BEV production schedules. The division generated business wins of over £2.4bn of forecast lifetime revenue, well balanced across regions, customers and product groups.
In Powder Metallurgy, the group is a market leader in both metal powders and sintered components. In the first half, revenue in constant currency was up 0.2% to £527m, ahead of the market. The order book was up 10% and the business continues to transition its portfolio with 53% of new business wins being for EV or propulsion agnostic products. Adjusted operating profit grew by 6.0%, resulting in an adjusted margin up 50bps of 9.5%. Dowlais has commenced a strategic review of Powder Metallurgy, considering a range of options, including a potential sale of the business.
The group generated free cash flow of £10m, down 70%, mainly due to lower earnings, higher interest costs, and restructuring outflows. As a result, net debt ended the period up 8% at £915m with leverage up to 1.6x net debt to EBITDA, just above the target range of 1.0x to 1.5x.
The group is targeting a sustainable and progressive annual dividend of approximately 30% of adjusted underlying profit after tax and with today’s results has declared an interim payment of 1.4p. The group commenced a share buyback programme of up to £50m over a 12-month period from April 2024. By 30 June, £9m shares had been repurchased.
Looking forward, industry forecasts no longer expect the second half of the year to improve and now predict a 3.6% decline in the second half, leading to a 2% decline of light vehicle production in 2024, with the ongoing BEV volatility expected to continue to affect the group’s ePowertrain business in the second half. As a result, Dowlais expects a mid to high single-digit adjusted revenue decline for 2024, compared to the previous guidance to be ‘slightly below last year’. The adjusted operating margin is now expected to be between 6.0% and 7.0% at constant currency, given the benefits of commercial recoveries, restructuring savings, and performance initiatives. This compares to previous guidance of operating margin expansion versus last year’s 6.5%.
Source: Bloomberg