Since the start of the year Barrick Gold Corp (ABX) has underperformed Goldcorp (GG) and Newmont Mining (NEM) by 24% and 19%, respectively. Part of this is attributable to a major setback at Pascua-Lama where the Indigenous Indian community has filed an injunction against ABX to cease work until certain environmental issues have been resolved. Another part can be explained by ABX's greater b/s leverage (debt/equity of 50% and debt/EBITDA of 1.5x), which is a function of overpriced/ ill-timed acquisitions in recent years. In typically clairvoyant style Moody's placed ABX on watch for a potential ratings downgrade last Thursday.
Notwithstanding these issues we believe that the current valuation (FY13 P/E of 4.6x, EV/EBITDA of 3.95x, DIV Yield of 4.4% - Bloomberg estimates - we appreciate that estimates will likely be revised down in light of Gold's recent decline) assumes an extremely draconian outcome for the Gold price in the medium/long term and fails to capture the immense hidden value tucked beneath the bonnet of the ABX conglomerate structure. In this note we will focus on the latter by comparing Barrick Gold North America on a standalone basis with Goldcorp.
ABX North America
In this section I will compare the various production and profitability metrics for both ABX NA and Goldcorp in FY2012 and for the coming FY13.
ABX North America
In 2012 ABX NA produced 3.5m ounces at cash costs of $500 and we are assuming that all in sustaining cash costs ran similar to the $823 level reported in Q4. Cortez and Goldstrike alone produced 2.5m ounces in FY12.
2013 will see Pueblo Viego contribute 500-650k ounces at all in sustaining cash costs of $500-$600. With total system costs forecast to rise by c$105 at the midpoint for 2013, this implies that ABX NA will produce 4.05m ounces at all in sustaining cash costs of $894 for 2013.
In FY2012 GG produced 2.4m ounces at all in sustaining cash costs of $874m. For the coming year Goldcorp are forecasting 2.55-2.8m ounces at all in sustaining cash costs of $1000-$1100.
ABX North America
In FY2012 ABX NA generated EBITDA of $3862 based on 3.5m ounces. In their annual report ABX indicated that a $100 decline in the Gold price would reduce group EBITDA by $720m. Furthermore, a 25c decline in Copper per/lb would reduce group EBITDA by $65m. Hence, assuming an average gold price of $1469 for FY13 (a $200 drop yoy) and an average Copper price of $3.25 (a 32c drop yoy) would imply a $1.473bn reduction in group EBITDA for FY13. Given that ABX NA contributes roughly 50% of group EBITDA this would suggest a $738m hit to North America EBITDA before taking into account the contribution of Pueblo Viejo. In the case of the latter, we are assuming a FY13 EBITDA contribution of $500m. We are also assuming a further $150m hit to EBITDA to reflect a $105 increase in all in sustaining cash costs. This gives total EBITDA of $3.46bn for ABX NA in FY13.
For 2012 GG generated group-wide EBITDA of $2.93bn. For FY13, we have assumed a $262m increase in EBITDA to reflect the 9.4% guided increase in production. However, counterbalancing this is a $176 (midpoint) increase in AISCC's, which we are assuming will negate $150m of the production benefits. So before considering the drop in Gold and Copper prices we are assuming EBITDA growth of $122m for FY13 to $3.056bn. Now using the same gold and copper assumptions as above (we have left out the impact of Silver to simplify the analysis) would imply a $426m hit to FCF (page 28 of Q42012 GG presentation - $100 move in Gold equates to a $205m change in FCF & a 50c move in Copper equates to a $32m change in FCF). Assuming a similar impact on EBITDA would result in FY13 EBITDA of $2.633bn.
Moving to the valuation, if you apply GG's forward EV/EBITDA multiple of 8.7x to ABX NA you get an Enterprise value of $30bn (vs. $22.84bn for GG). Moreover, if you assume that ABX NA shoulders 50% of group debt/prefs ($7.25bn) you arrive at an equity valuation of $22.7bn or $22.71 per share. This would imply that the equity value of ABX NA on a standalone basis is equal to that of Goldcorp and 26% more than the entire ABX group as it is currently valued. Put another way the market is valuing ABX International (South America, Australia pacific, ABG) at -$4.7bn despite generating EBITDA of $3595 in 2012. Applying a 4x EV/EBITDA multiple to the rump of the business and subtracting the balance of the debt results in an equity value of $7.1bn for ABX International and a group equity value of $29.8bn or $29.83 per share. This represents a 66% premium to the current price.
Average Gold Price
All in Sustaining Cash Cost*
Number of Share Out
Price per Share
Discount to GG
Market Cap of ABX
ABX NA premium to ABX
Implied value of ABX International
EBITDA for ABX International
4x EV/EBITDA Multiple (FY12)
Equity Value of ABX International
Equity Value of ABX GROUP
Indicative Price per share
*For ABX North America we are assuming the same AISCC as Q4 2012
ABX has been underperforming GLD and its peer group for well over a year now and much of this can be explained by a series of value destroying projects/acquisitions and an inability to translate a rising gold price into higher FCF per share. This, however, can only go on for so long. The analysis above demonstrates the extraordinary value locked within the conglomerate structure of ABX. If management cannot unlock this value in the coming months it is likely to attract the barbarian hoards of activist investors (Icahn, Loeb, Ackman to name but a few) who will demand a full-scale breakup of the company. The clock is ticking.