Barrick Gold Outshines Gold At The Start Of 2016

| About: Barrick Gold (ABX)

Summary

Barrick Gold rose by more than 60% since the start of the year.

The company has outperformed its peers and gold this year so far.

The company's upcoming Q4 earnings report will provide more guidance about its performance in 2015 and what to expect in 2016 in terms of cutting costs and debt.

Shares of Barrick Gold (NYSE:ABX) kicked off the year with an impressive gain of over 60%, up to date. While the price of gold is partly responsible for this recovery - gold added over 17% since the beginning of the year - ABX has still outperformed its peers including Goldcorp (NYSE:GG). So what is keeping this stock up?

Even after ABX's stock rose by double the gain shares of Goldcorp recorded since the start of 2016, the former's valuation, at least in terms of EV/EBITDA, remain lower, as indicated in the following table.

Source: Yahoo Finance

While shares of Newmont Mining (NYSE:NEM) have added 40% this year, the company's valuation is still trailing behind the above-mentioned companies. So what's going on?

Reaching its annual goals

Barrick will release its quarterly earnings report next week, but the gold miner already published preliminary data for Q4 and last year. Based on this report, the company reached its annual production goals: Gold output was 6.12 million ounces - in line with its 6-6.15 million ounces annual goals; copper production reached 511 million pounds, which is between the guidance of 480 and 520 million pounds. Meeting these goals may have helped convey some assurance in management.

Moreover, the company completed its plan to cut $3 billion from its debt in 2015, which should have slightly alleviated its debt burden. The most recent deal was made back last month, when Barrick sold its 50% interest in the Round Mountain project and its entire stake in Bald Mountain mine to Kinross Gold Corporation for $610 million in cash.

But ABX pointed out in its recent statement it's in the process of write-off a $1.8 billion goodwill impairment provision and $1 to $1.2 billion asset impairment provision with respect to its Pascua-Lama and Pueblo Viejo projects. These provisions won't impact its cash flow but will reduce its equity - which in turn will raise back again its debt burden.

Besides reaching its production goals we still don't know whether the company was able to keep down its all-in sustaining costs. It should be pointed out that ABX's 2015 AISC guidance was among the lowest for the industry at $850. In comparison, Goldcorp's AISC guidance for last year was at $875. If Barrick were to come close to this target and even aim towards a lower target for 2016, this could also provide another boost for its profit margins.

The gold connection

But the main issue behind Barrick's recovery is the rally of gold price. It also seems that the impact of the changes in the price of gold on ABX isn't linear, case in point: Back in 2015, gold fell by 10% while ABX by close to 31%; and in 2014, gold edged down by only 1% - ABX crashed by 39%. So now that gold is rising again, ABX is recovering at a faster pace as more gold enthusiasts are getting back to this gold producer.

It's worth mentioning the state of copper. And while gold prices rose this year, the same can't be said of copper. The price is still down for 2016 at around $2. But since copper accounts for a small portion of Barrick's total revenue, it shouldn't have a substantial adverse impact on the stock.

Bottom line

The recovery of Barrick is likely to continue as long as gold prices are rising. Once the rally halts or changes course, shares of ABX will be prone to fall. But recovery was also related to the company's ability to meet its goals in terms of production and debt load. And the aim towards low production costs also helped offset the drop in gold prices last year. Next week, investors will get some answers regarding what the company plans to do this year in terms of production and debt and cost reductions. Despite the optimism ABX investors have in this stock, which has suffered a lot in recent years - more than some of its peers - the company's elevated debt load still places Barrick at a higher risk than other big gold producers.

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.