Bargain Rack Buy: Barrick Gold Corp. (NYSE: ABX)
Barrick Gold is the biggest name in the business, but right now it’s resting on the bargain rack.
The stock just about doubled to start the year as gold prices posted a tremendous rally. However, over the past three months, it’s lost about a fifth of its value.
It could fall further, too. Conventional wisdom has the Fed raising rates by the end of the year. Hence the retrenchment in gold and gold miners.
That’s just a short-term blip, though.
You may recall that a few weeks ago I made the point that once the Fed does eventually raise rates, it’s likely to allow for a considerable cooling period. That period is likely to yield a rebound similar to the one we saw in the first half of 2016.
Heck, even if it doesn’t, Barrick is poised to profit thanks to its low costs.
Indeed, what I like about Barrick is how much it’s achieved over the past year in terms of cutting its costs and reducing its debt. This has increased profit shored up on the company’s balance sheet.
Take a look at Wednesday’s earnings report, and you’ll see what I mean…
Barrick reported a $175 million profit, or 15 cents a share, compared with a year-earlier loss of $264 million, or 23 cents a share. Excluding impairments and other items, profit rose to 24 cents a share from 11 cents a share a year earlier.
The company upped its 2016 production forecast as well. Barrick now expects to produce 5.25 million ounces to 5.55 million ounces of gold, up from 5 million and 5.5 million ounces.
At the same time, the company has lowered its costs.
Barrick now estimates all-in sustaining costs (AISC) at $740 to $775 per ounce, down from a previous target of $750-$790. And it’s aiming for AISC of $700 per ounce or lower by 2019.
Barrick's AISC are now in the 40th percentile on the cost curve, compared to some of its largest peers. And the company's core mines sit at around the 15th percentile, with costs around $660 an ounce. Both of those positions stand to improve over the next few years.
Capital spending for 2016 is also forecast lower. It’s now $1.2 billion to $1.3 billion, down from $1.25-$1.4 billion in the second quarter.
Debt has been reduced by $1.4 billion year-to-date and the company said it is on track to meet its 2016 reduction target of $2 billion. Barrick ended the quarter with $2.65 billion in cash and $8.54 billion in debt. In three to five years, it wants to cut that burden to less than $5 billion.
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It isn’t all strawberries and cream, of course.
Barrick shed assets to reach this new level of efficiency. That’s led to a steep drop in production, which totaled more than 6 million ounces in 2015. Third-quarter production shrank 17% to 1.4 million ounces.
Revenue dipped to $2.3 billion from $2.32 billion, while free cash flow fell to $674 million from $866 million.
Barrick also cut its 2016 production forecast for its Veladero mine in Argentina to 530,000 to 580,000 ounces of gold, from 580,000 to 640,000 ounces, citing severe weather and a three-week suspension. (Veladero operations were suspended in September after falling ice damaged a pipe and some cyanide-laced ore spilled over a barrier.)
There is good news on that front, however. China's Zijin Mining Group and Shandong Gold Mining have reportedly held separate talks with Barrick to buy a 50% stake in Veladero. The talks come after Barrick and Zijin formed a strategic partnership to develop a Papua New Guinea project in 2015.
Veladero is one of Barrick's five core mines and there is no certainty that the talks will result in a transaction. But if the companies were to strike a deal, a 50% stake could fetch more than $1 billion from a potential suitor.
According to Reuters, Barrick would like the buyer of the Veladero stake to also make an investment in its Pascua-Lama project in South America. That gold and silver project was put on hold in 2013 due to environmental issues, political opposition, labor unrest, and development costs that ballooned to $8.5 billion.
All in all, Barrick is in a strong position. Its costs, debt, and output are all headed in the right direction. And the company is stable enough to withstand the kind of volatility we continue to see in gold prices.
Maybe that’s why George Soros recently dropped $264 million into Barrick.
On the other hand, if you want to take a larger stake in a smaller company there’s an opportunity to do that as well.
Our own Nick Hodge recently scored a deal with an up-and-coming gold company that has yet to list on an exchange. You can get in privately, before the public, right now if you’d like. The details on this limited time offer can be found here.
Jason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page.