Only a year has gone by and we've done a complete 180 on our view of Barrick Gold (NYSE:ABX). Our original analysis (here and here), pointed to a company that was at significant risk and we foresaw both the dividend reduction as well as the equity offering seen last year. We were short the stock until mid-summer when we wrote (here) of our covering and our intention to play it from the long-side. So far so good, as the shares have rallied to over $20/shr although we admit we've been in and out. However, with the significant, and continuing, restructuring of their balance sheet, Barrick is worth a long-term buy. Asset sales, equity infusion, write-downs, mine-optimization, and a more cautious outlook on gold prices and leverage gives us much more confidence in management as stewards of our capital. We believe that ABX is just beginning on the road to recovery and look for 2014 to be a major inflection.
Between asset sales and new equity, ABX has raised nearly $4bn in liquidity. Coupled with a lower dividend payout of ~$235mn and reduced capital expenditures, ABX should generate about $1.2bn in free-free cash flow. From a high of over $12bn, this implies ABX's net-debt should decline to about $7bn in 2014. All this assuming conservative gold and copper prices of $1,350 and $3, respectively. EBITDA will be down 24% in 2014 to $4.5bn (2013 was down 20%) due to lower production and prices. Gold production itself is slated to be down 12%, even with Pueblo-Viejo ramping up further, as continued mine-optimization and asset sales take hold. Normally, declining revenue and EBITDA might be a concern, but this is a result of management's focus on high-return projects and the share price already reflects this fact.
Net income should be about $2.5/share this year. Street estimates of just north of $1 are way off base just as they were during the downturn last year. Look for upside surprises. One interesting note is that with about $20bn in write-downs and discontinued operation losses, over the last two years, ABX now owns a significant "tax-asset." In fact, we estimate that ABX has about $11bn in tax-loss carry-forwards into 2014 and they should last well into the latter part of this decade. With no significant taxes, today's investors will enjoy the benefit of further leverage should gold prices improve further. And with a forward PE ratio of about 8 and an EBITDA multiple just north of 5, the shares look cheap to us particularly with leverage (net-debt to EBITDA) at about 1.6. Most important, continued portfolio reshaping (ABX just announced a partial divestiture of ABG for $188mn), management is focused on not letting the balance sheet get overly leveraged going forward.
If anything, today, ABX has the opposite cash-flow problem. By late 2015, we estimate they will have nearly $5bn in cash and net debt will decline further to $6bn. And this assumes minimal production growth and modest 1-2% commodity price increases. Our models indicate that by 2015, ABX could embark on a share-repurchase program of 50mn shares/annum and a 15% annual dividend increase. All the while keeping leverage below 2. Now let us state that we do not expect that to happen. We believe that ABX will conservatively manage their balance sheet as they've gotten "religion" and respect the potential for gold prices to decline. Oddly, that respect from all gold miners is what will lead to further price increases. We do expect that ABX will begin to look to make acquisitions, later this year, taking advantage of weaker hands and, potentially, restart the now infamous Pascua-Lama project.
Barring another dramatic decline in gold prices, we see ABX as an excellent value play that has only just begun. We are impressed with management's quick execution of the balance sheet restructuring. In fact, we've told them just that. At a rebooted share price and balance sheet, we see potential for ABX to once again become a growth story. While we've traded the name, from the long side, over the last six months, we now are holding a core, long-term, position. While anything can happen, all signs point to a share price reaching $30 by the end of this year.
Disclosure: I am long ABX. 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.
Additional disclosure: We are also long gold/miners in other forms.