Barrick Disappoints Again; Looks for Strong Q4
Contributed Opinion

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Barrick Gold Corp., Altius Minerals Corp., Agnico Eagle Mines Ltd., Midland Exploration Inc., Orogen Royalties Inc., and Lara Exploration Ltd.
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Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) reported disappointing production numbers in its preliminary third-quarter report, particularly on gold, which, though in line with Q2, was significantly lower than expected.

More importantly, costs continue to move higher for both gold and copper, though the company said it still expects to meet its full-year guidance. The company has repeatedly emphasized that it expects its production to be weighted to the second half with a particularly strong fourth quarter.

Costs would be lower on higher volumes, other things being equal. However, the weak third quarter suggests that a particularly strong fourth quarter would be required to meet guidance. The hurdle for gold production is high, while the cost guidance is now unlikely to be met. Its full third quarter report comes out on November 7.

Despite these results, Barrick, with several high-potential projects, is trading at a low NAV multiple.

Hold.

Altius' Revenues Down, but as Expected

Altius Minerals Corp. (ALS:TSX.V) reported royalty revenue in line with estimates, though down on the previous and year-ago quarters. Potash revenues were soft, though renewables (now over 20% of total revenues) were strong, with base metals and iron ore broadly in line, demonstrating again the benefits of a broadly diversified asset base.

The key near-term driver will be the long-awaited decision on the Silicon royalty arbitration. Though trading above peers on revenue valuation metrics — its price-to-free cashflow multiple is twice what it was in the previous five years — on a NAV basis, it remains undervalued, with just two assets, the soon-to-be private renewables division, and the Greater Silicon Royalty, accounting for as much as 70% of the company's market cap., undervaluing the remainder of the portfolio.

We continue to buy on any pullbacks and hold them as a core position.

Wheaton Makes Investments in New Regions

Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) has made two investments in new areas. Most important is its $625 million stream purchase (plus a $75 million loan facility) to Montage for its Koné Gold Project in Côte d'Ivoire; payments will be at 20% of the spot price.

The investment will be made in four installment payments during construction. The investment has a strong 11% IRR based on reserves, reflecting the relatively high political risk.

Separately, Wheaton has invested $120 million in an additional stream on Rio2's Fenix Gold Project in Chile, adding to a previous $50 million stream. The new investment has an attractive (estimated) 15% IRR, but the project has a relatively short life. These two investments in new geographic regions, as well as several very small investments recently, indicate the difficulty of making large investments in top jurisdictions.

Hold.

Agnico Also Invests Outside Favored Regions

Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) has made a $40 million investment in ATEX Resources, which is exploring a copper-gold project in northern Chile, considered to have high geological potential.

While the investment is small for Agnico, it is also at odds with both Agnico's commodity and geographic focus. Over the past two years, Agnico has made major investments in nickel and copper-zinc, but in both cases, these were projects in Agnico's core geographic regions (Canada and Mexico). The company has frequently emphasized its focus on a small number of regions, though indicated a greater openness to commodities other than gold. Agnico is widely expected to report earnings in excess of its 2Q results, though the poor results from leading gold miner Newmont, with significantly higher costs, have led to caution.

We think Newmont's higher costs were peculiar to that company, and we fully expect Agnico to please the market with both production and costs when it reports at the end of the month. (See reader question on Newmont below.)

Hold.

Midland Continues With Lithium Exploration

Midland Exploration Inc. (MD:TSX.V) announced preliminary results from an initial drilling campaign in its partnership with Rio Tinto exploring lithium in the James Bay region of northern Quebec. The first 13 holes of 28 were released. The objective of the campaign is to test lithium showings and identify new targets.

Midland is extremely undervalued, given its strong balance sheet, experienced management, multiple partnerships, and drill programs. However, we suspect the stock could be subject to taxloss selling, given it is trading close to its 52-week lows.

We could continue to accumulate on weakness and expect to become more aggressive toward year end once tax-loss selling is over.

Lara Moves Higher on Project Study as Chairman Buys

Lara Exploration Ltd. (LRA:TSX.V) stock has responded well to its initial resource estimate on its Planalto copper-gold project, with higher volumes as the stock price moves up. The company filed its independent technical report on the resource estimate.

Separately, Chairman Miles Thompson exercised $1 warrants for an additional 230,770 shares, bringing his ownership in the company to over 10%; he also owns an additional 700,000 options under the company's stock employee option plan. If the stock remains above $1.20 for a few more days — highly likely — the company can force the exercise of the rest of the $1 options from a 2022 placement.

We expect the share price to continue to move higher as the company markets the project to interested parties.

Continue to buy.

TOP BUYS this week, in addition to above include Nestlé SA (NESN:VX; NSRGY:OTC), Kingsmen Creatives Ltd. (KMEN:SI), and Orogen Royalties Inc. (OGN:TSX.V).

Questions From Readers

Q. What happened to Newmont Corp.'s (NEM:NYSE) stock in the last couple of days? Newmont is the world's largest gold mining company and with gold at record highs, I was not expecting such a vicious drop. Does this spell trouble for other gold miners when they report? Should I double down on Newmont? — S.P., Conn.

A. In truth, for the last few years, Newmont has been my least favorite of the big-cap gold miners for several reasons. On Thursday, they released earnings with sharply higher costs: AISC of $1,611 was around 10% higher than analysts were expecting and well above the company's own guidance. G&A costs also increased by about 13% from the last quarter (and 60% from the year-ago quarter). They also reduced production guidance for next year by about 10%, which was a surprise.

Why were costs up so much?

AISC costs were up for most mines across their portfolio. The explanation given was that contract labor costs were up. Newmont uses contractors, about 50% of its workforce. This simple explanation left more questions than answers. If 50% of the labor costs are largely responsible for a 10% increase in total costs, then the cost of contract mining must have gone up significantly more, and that would be out-of-line with general labor cost increases in the economy as a whole.

And why is Newmont using so much contract labor anyway?

This might be part of CEO Tom Palmer's obsession with DEI and ESG, though I am unsure of the connection. Now, with these latest results, Palmer announced the launch of a new "traceable mine-to-market gold bar…demonstrating Newmont's commitment to transparent sourcing." At Newmont, all of these fashionable programs seem to come before actually making money for shareholders.

The stock gave back 12 weeks' gains

The stock's response does seem overdone, however. This may be because generalist investors have just started to come back to the sector, and Newmont, as the largest gold miner, is a destination for such investors. The results might have led an investor who has been disappointed before with gold stocks to think, "Here we go again," and exit. I do not think the higher costs at Newmont should be indicative of other companies' experiences. After all, the oil price, mines' largest cost input, was meaningfully lower in the third quarter than the second, while other general cost pressures have moderated. We shall know more when Agnico Eagle, the third-largest gold miner, reports on Hallowe'en.

No doubt, Newmont stock will experience a bounce in the coming days and weeks. The sell-off — 16% in the last two days — was overdone. The company has in place a massive buyback program (which it has been using, to the tune of $500 million during the third quarter, with another $2 billion to go). Once the quiet period has passed, we expect Newmont to be actively buying back its stock.

Buy for a trade but not for an investment

However, Newmont remains overvalued on most metrics relative to the other large gold miners: it trades (even after the stock collapse) at 58 times free cash flow, compared with around 30 times for both Agnico and Barrick; its debt is meaningfully higher than the other two's (33% debt-to-equity compared with just 10% for Agnico and 20% for Barrick).

It is also not cheap compared with its own history: other than an anomalous 2023 (which included costs associated with the Newcrest merger), today's price-to-free cash flow is two to three times what it has been for most of the past decade. In sum, though the stock may have a bounce from here, I would not choose Newmont as a long-term gold holding,