The market's getting even with this gold stock

The world's largest gold mining company, Barrick Gold, earned much less than expected in the first quarter. That largely reflected less-than-expected gold production and higher-than-expected all-in sustaining costs. The company cut its production guidance for 2017. We cut our earnings estimate.

Toronto-based Barrick Gold (TSX-ABX), one of our Key stocks, reported worse-than-expected results in the first quarter of 2017. The market punished the stock. It's hard to predict how long it will remain in the 'doghouse'. On the positive side, an accelerating global economy could revive inflation. Also, there's more geopolitical uncertainty under U.S. President Donald Trump. Both factors could drive up the price of gold and Barrick's earnings and share price.

In the first quarter of 2017, Barrick earned an adjusted $162 million, or 14 cents a share (all figures in U.S. dollars unless preceded by a C). This was up by more than 27 per cent from an adjusted $127 million, or 11 cents a share, a year earlier.

While Barrick's first-quarter earnings rose to 14 cents a share, this fell far short of the 24 cents a share the market expected it to earn. This largely reflected less-than-expected gold production at higher-than-expected all-in sustaining costs.

Dashed hopes for production and costs

In the first quarter, Barrick produced 1.31 million ounces of gold. This fell short of the market's production expectation of 1.44 million ounces. Worse, Barrick now expects to produce from 5.3 to 5.6 million ounces of gold in 2017. This is down from previous guidance of 5.6 to 5.9 million ounces. It attributes this to the sale of half of the Argentine Veladero mine to strategic partner Shandong Gold Group of China.

In the first quarter, Barrick's all-in sustaining costs were $772 an ounce. This was far above all-in sustaining costs of $706 an ounce, a year earlier. Still, the company writes: "We continue to expect full-year . . . all-in sustaining costs of $720-$770 per ounce."

Barrick was formerly expected to earn 95 cents a share in 2017. But due to the first-quarter shortfall, we must reduce this by at least 10 cents a share. That leaves the 2017 earnings estimate at 85 cents a share-or C$1.15 a share. We may need to reduce the earnings estimate further in the months ahead.

When the market experiences a 'nasty surprise', it takes it badly. That's why it knocked down Barrick's share price. It's very difficult to predict when sentiment towards the company will improve.

We expect the price of gold to do well. That's largely due to expectations of higher inflation and an uncertain geopolitical outlook.

Barrick Gold Corp. remains a buy, but only for patient investors who can wait for higher gold prices to eventually raise the company's earnings per share and share price.

This is an edited version of an article that was originally published for subscribers in the May 5, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846