Barrick Gold - One Of The Cheapest Gold Mining Stocks - Barrick ... - Seeking Alpha

This has been a tough year for Barrick Gold (ABX) investors, but 2018 will likely be better. Although Barrick Gold stock has underperformed in 2017, the company has actually delivered a decent operational performance. I believe the Toronto, Canada-based company will continue to do well in 2018, even if gold prices drop. On top of this, there are three catalysts at work that can push the company’s shares significantly higher.

This hasn’t been a great year for Barrick Gold stock which has fallen almost 9% on a year-to-date basis, thanks in large part to the operational issues in Tanzania and declining production. But the price of gold has held up well and could end up averaging $1,250 an ounce, or higher, in 2017 – same as last year – even though the yellow metal started the year on a low note, with the price hovering under $1,150 an ounce. Analysts at Goldman Sachs have said that gold could decline to $1,200 an ounce by mid-2018 as market concerns ease, particularly following the introduction of US tax reforms and a smooth transition to a new Federal Reserve chair. The price will then gradually climb to $1,375 on the back of strong demand from emerging markets by the end of the decade.

I believe Barrick Gold will do really well in a higher-than-$1,200 gold price environment. Remember, although Barrick Gold stock has fallen this year, the company has actually delivered a great performance, even though it did not get any support from gold prices or gold production. In fact, the spot price of gold averaged $1,251 an ounce in the first nine months of this year, down slightly from $1,260 in the same period last year. The company produced 3.984 million ounces of gold in this period, down from 4.001 million ounces a year earlier.

Barrick Gold posted a decent profit and strong levels of cash flows. For the first nine months of this year, the company turned an adjusted profit of $0.52 per share which was actually higher than a profit $0.48 per share a year earlier. Its operating cash flows fell 23% from last year to $1.48 billion, but this was enough to cover the capital expenditure of $1.05 billion and dividends of $94 million. As a result, Barrick Gold ended the first nine months of this year with $429 million of free cash flows (cash flows in excess of capex), or $335 million of cash flows in excess of capital expenditure and dividends, despite slightly lower production and weaker prices.

The results show that Barrick Gold will continue reporting strong levels of cash flows and a net profit in a ~$1,250 per ounce gold price environment, but it can also generate decent returns at $1,200 gold, or lower. That’s because firstly, Barrick Gold has done an incredible job of managing its cost structure. In the first nine months of this year, the company’s all-in sustaining costs for gold clocked in at $750 an ounce. That was up from $730 an ounce a year earlier but within the company’s $740 to $770 guidance range. The company remains one of the lowest-cost gold miners in the world. By comparison, a number of its peers, including Newmont Mining (NEM), Goldcorp (GG), and AngloGold Ashanti (AU), operate with an AISC of more than $800 an ounce.

Thanks to its low-cost structure, Barrick Gold has consistently reported quarterly profits. Even in Q4-2015, which was one of the toughest periods for gold miners as the commodity averaged just around $1,100 an ounce, Barrick Gold reported an adjusted net profit of $0.08 per share and free cash flows of $387 million. In addition to this, the company's free cash flow breakeven level was just $1,037 an ounce in Q3-2017, which means that as long as gold stays above this level, the company will continue reporting free cash flows. Therefore, I believe that moving forward, if gold prices tumble to $1,200 or lower, then Barrick Gold will continue reporting strong results. But if prices rise, then the company will make a windfall.

Barrick Gold’s biggest problem, however, has been a weak balance sheet. In fact, at one point, the company carried the highest levels of debt in the industry. But by consistently reporting free cash flows and selling assets, the company has managed to significantly reduce its debt. The company started 2017 with $7.93 billion of debt and targeted a reduction of $1.45 billion. Its actual performance turned out significantly better than expected as the company ended the third quarter with $6.45 billion which depicts a drop of $1.48 billion in the first nine months. The company now expects to further reduce the debt to $5 billion by the end of 2018. This could bring Barrick Gold’s net debt ratio down from 31.5% at the end of Q3-2017 to 23.6% at the end of next year, assuming flat levels of cash reserves and equity.

Barrick Gold has said that it will continue working towards debt reduction beyond 2018, with support from asset sales and free cash flows. In the coming years, I believe the company’s leverage ratio will come closer to its peers who have solid balance sheets, such as Newmont Mining whose net debt ratio is 16.8%.

Following successful debt reduction, Barrick Gold could finally start thinking about growth. As noted earlier, the company has been struggling with declining production. For years, Barrick Gold has remained the world’s top gold miner in terms of production, but its rival Newmont Mining has almost caught up with the company. Unlike Barrick Gold, Newmont Mining has grown its volumes by 8.6% to 3.86 million ounces of gold in the first nine months of this year (ABX produced 3.98 Mn oz). For the full year (2017), Barrick Gold expects to produce 5.3-5.5 million ounces. At the midpoint, the guidance shows a drop of 2.2% from 5.52 million ounces produced last year. Currently, the company doesn’t have any production growth plans. Its output may decline in 2018. In that case, if Newmont Mining continues to grow production, then it could dethrone Barrick Gold as the world’s largest gold miner.

However, Barrick Gold can start building a production growth story by accelerating exploration and production work or by making acquisitions. I believe that the company has ample firepower to do major acquisitions. The company has more than $2 billion of cash reserves and $4 billion available under the revolving credit facility. That’s $6 billion of liquidity which can be used for M&A purposes.

Meanwhile, Barrick Gold’s 64%-owned subsidiary Acacia Mining (OTCPK:ABGLF) (OTC:ABGLY), which is the largest gold producer in Tanzania, is still engaged in a dispute with the country’s government. Tanzanian authorities believe Acacia Mining has been understating its shipments and has slapped the company with a ridiculously high $190 billion tax bill. Barrick Gold, however, expects to resolve the dispute by mid-2018, and the recent departure of the top Acacia Mining executives could be a step in that direction. Still, it is worth remembering that production from Tanzania accounts for just 10% of Barrick Gold’s volumes.

Conclusion

Barrick Gold has been one of the worst performing gold mining stocks of 2017. The company’s shares are priced just 5.06x in terms of EV/EBITDA (2018e.) multiple, as per data from Thomson Reuters. This makes it one of the cheapest gold mining stocks among the large-cap miners. By comparison, its peers Newmont Mining, Goldcorp, Newcrest Mining (OTCPK:NCMGY), and Agnico Eagle Mines (AEM) are all priced more than 7x EV/EBITDA (2018e.) multiple.

I believe Barrick Gold will likely do well next year, even if gold prices fall. Successful debt reduction and an accretive acquisition should have a positive impact on this stock. These two factors can also lift the company’s valuation. Meanwhile, any news related to the resolution of the Acacia Mining dispute can act as a catalyst for upside in the short term. For these reasons, I believe Barrick Gold is a buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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