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  • Barrick Gold Corp: Is Barrick North America Worth More Than Goldcorp? Examining The Merits Of A Demerger 3 comments
    Apr 24, 2013 12:49 PM | about stocks: ABX, GG, NEM

    Since the start of the year Barrick Gold Corp (NYSE:ABX) has underperformed Goldcorp (NYSE:GG) and Newmont Mining (NYSE: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.

    PRODUCTION

    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.

    Goldcorp

    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.

    PROFITABILITY

    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.

    Goldcorp

    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.

    VALUATION

    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.

     

    GOLDCORP

    ABX NA

     

    2012

    2013

    2012

    2013

    EBITDA

    2934

    2633

    3862

    3459

    Ounces Produced

    2.4

    2.63

    3.5

    4.1

    Average Gold Price

    1669

    1469

    1669

    1469

    All in Sustaining Cash Cost*

    874

    1050

    823

    894

    Market Capitalization

    22759

    22759

     

    22737

    Net Debt

    -135

    -135

     

    5925

    Prefs

    213

    213

     

    1332

    Enterprise Value

    22837

    22837

     

    29994

    EV/EBITDA Multiple

    7.8

    8.7

     

    8.7

    Number of Share Out

     

    812

     

    1001

    Price per Share

     

    28.03

     

    22.71

    Discount to GG

         

    -0.1%

    Market Cap of ABX

         

    18030

    ABX NA premium to ABX

         

    26.1%

    Implied value of ABX International

         

    -4707

    EBITDA for ABX International

       

    3595

     

    4x EV/EBITDA Multiple (FY12)

         

    14380

    Residual Debt

         

    5925

    Prefs

         

    1332

    Equity Value of ABX International

         

    7124

    Equity Value of ABX GROUP

         

    29861

    Indicative Price per share

         

    29.83

    *For ABX North America we are assuming the same AISCC as Q4 2012

           

    CONCLUSION

    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

    Disclosure: I am long ABX.

    Stocks: ABX, GG, NEM
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Comments (3)
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  • Jordan Lopehandia
    , contributor
    Comments (31) | Send Message
     
    My family (Lopehandia) are the true owners of Pascua. Let Mr. Munk lie to the shareholders about why Pascua is shut down on the Chilean side... sure they can spend money on infrastructure, but if everything was done they still would not be able to put a single shovel in the ground.

     

    Why? Because the courts are about to award my family the Chilean portion of the project. At that time, you can kiss goodbye all the money that was spent developing this stolen project, and you can expect Barrick to pay my family damages worth way more than they could ever afford.

     

    Dig deeper and you will discover that Chilean criminal charges that will soon begin popping up for the Barrick Directors.

     

    Heads up.

     

    Jordan Lopehandia
    24 Apr 2013, 04:08 PM Reply Like
  • TREX32
    , contributor
    Comments (2) | Send Message
     
    Fantastic piece, Can't see this stock staying at these levels, too much value here to go unnoticed for long....
    24 Apr 2013, 07:30 PM Reply Like
  • TREX32
    , contributor
    Comments (2) | Send Message
     
    Can't see this share price here for much longer, too much value here to go unnoticed.
    24 Apr 2013, 07:30 PM Reply Like
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