Barrick Gold (NYSE:ABX)
The recent rebound in the price of gold has caused the prices of gold mining companies to rise significantly. The table below shows the ten gold companies with a market cap greater than $1,000 million ranked according to their 26-weeks price change. The average 26-weeks price change of the group has been very high at 147%, and the average return in the last 52 weeks (including dividend) was also high at 73.7%.
I believe that the stocks of gold mining companies are still attractive, and I will focus in this article on one of the world's largest gold companies Barrick Gold.
Barrick Gold has operating mines or projects in Canada, the United States, the Dominican Republic, Peru, Chile, Argentina, Tanzania, Zambia, Australia, Papua New Guinea and Saudi Arabia. The company was founded in 1983 and is headquartered in Toronto, Canada.
Source: Bank of America-Merrill Lynch Global Metals, Mining & Steel Conference
ABX's stock has risen sharply this year following the price of gold. However, while the gold price has climbed 21.2% from its seven-year low of $1,055.4 per ounce on December 02, 2015 to $1,278.8 per ounce on June 13, ABX's stock has soared 173% in the same period. That is not surprising since ABX's earnings depend on the production margin (average realized gold price minus all-in sustaining costs) and not on the absolute price of gold.
ABX's all-in sustaining cost of $706 per ounce in the recent quarter was the lowest in the last nine quarters, and the total cash costs of $553 per ounce was $89 down year over year. As a result, the production margin in the first quarter of 2016 of $475 per ounce was the highest in the last nine quarters, as shown in the table and the chart below. Moreover, I believe that the production margin will increase considerably in the current quarter due to higher average realized gold price.
Source: company's reports
Source: company's reports
Since the beginning of the year, ABX's stock is already up 174% while the S&P 500 Index has increased 1.7%, and the Nasdaq Composite Index has lost 3.2%. However, since the beginning of 2012, ABX's has lost 55.3%. In this period, the S&P 500 Index has increased 65.3%, and the Nasdaq Composite Index has risen 86.1%.
ABX Daily Chart
ABX Weekly Chart
Charts: TradeStation Group, Inc.
After soaring 22.8% from its seven-year low of $1,055.4 per ounce on December 02, 2015 to $1295.8 on May 02, the price of gold has retreated slightly to $1,278.8 per ounce on June 13.
Gold fundamentals remain positive. Gold is benefiting from a rush to safe havens amid volatility on stock markets. Global central bank policy, continuous reduction in near-term U.S. and global economic growth projections, supportive investment and official sector demand, are all positive for gold. Also, improved investment demand through ETFs, China and Indian purchases and a 5% decline in mine supply by 2020 have been supportive drivers of the improved gold price witnessed since December 2015.
Gold August 2016 Leading Contract
Chart: TradeStation Group, Inc.
On April 26, Barrick Gold reported its first quarter operating and financial results, which beat adjusted earnings per share expectations by $0.01 (10%). Barrick Gold has shown earnings per share surprise in its three last quarters, as shown in the table below.
Data: Yahoo Finance
Source: First Quarter 2016 Results
Barrick Gold reported adjusted net earnings of $127 million ($0.11 per share) for the first quarter and a net loss of $83 million ($0.07 per share). According to the company, the net loss for the quarter primarily reflected the impact of one-time foreign currency losses. First quarter free cash flow was $181 million, and EBITDA was $696 million. Production in the first quarter was 1.28 million ounces of gold at all-in sustaining costs of $706 per ounce. Cash costs were $553 per ounce. The company said that it continued to expect full-year production of 5.0-5.5 million ounces of gold at lower all-in sustaining costs of $760-$810 per ounce.
ABX's last quarter average realized gold price of $1,181 per ounce was up 6.9% from its previous quarter but down 3.1% from the same quarter a year ago. Trying to figure out the average realized gold price for the current quarter, I have calculated the average daily gold price thus far in the current quarter and the first quarter of 2016, as shown in the table below.
According to my calculations, the average gold price thus far (June 13) in the current quarter is up 5.7% from the previous quarter. As such, I assume that ABX's average realized gold price in the current quarter will be at least 5% higher than in the prior quarter, and higher earnings can be expected in this quarter.
Source: company's reports
Barrick Gold has a strong balance sheet, and it is generating high free cash flow. The company generated $181 million in free cash flow in the first quarter, marking four consecutive quarters of positive free cash flow.
At the end of the first quarter of 2016, it had cash and equivalents of $2.32 billion, compared to $2.26 billion at the end of the first quarter of 2015. In my view, it is very encouraging the fact that the company was able to decrease its long-term debt by $3.5 billion from $12.33 billion at the close of the first quarter of 2015 to $8.83 billion at the end of the recent quarter.
According to the company, strengthening its balance sheet remains one of its top priorities. In 2016, it intends to reduce its total debt by at least $2 billion by drawing on its existing cash balance, delivering free cash flow from operations, selling additional non-core assets, and creating new joint ventures and partnerships. Barrick said that so far this year, it has reduced its total debt by $842 million, representing 42% of its debt reduction target for the year. This is expected to reduce its interest payments by approximately $180 million on an annualized basis.
In February 2015, the company cut its quarterly dividend to $0.02 from $0.05 per share to conserve capital and boost liquidity. The annual dividend yield is at 0.40%.
ABX's stock valuation is not bad. The forward P/E is at 27.70, the current ratio is at 2.70, and the price to free cash flow is at 17.61. The Enterprise Value/EBITDA ratio is very low at 8.21, and the PEG ratio is at 1.62.
Barrick Gold, one of the world's largest gold companies, delivered first quarter results that were better than analysts' expectations. The company has shown earnings per share surprise in its three last quarters. Barrick's production margin in the first quarter of 2016 of $475 per ounce was the highest in the last nine quarters. Moreover, I believe that the production margin will increase considerably in the current quarter due to higher average realized gold price. The price of gold has shown some recovery since the beginning of the year, and gold fundamentals remain positive.
According to my calculations, the average gold price thus far in the current quarter is up 5.7% from the previous quarter. As such, I assume that ABX's average realized gold price in the current quarter will be at least 5% higher than in the prior quarter, and higher earnings can be expected in this quarter. In my view, the fact that the company was able to decrease its long-term debt by $3.5 billion year over year is very encouraging. The company generated $181 million in free cash flow in the first quarter, marking four consecutive quarters of positive free cash flow. All these factors bring me to the conclusion that ABX's stock is a smart long-term investment.
Disclosure: I am/we are long IAG.
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.