Barrick Gold: New Shareholder-Focused Paradigm To Drive Stock Returns

| About: Barrick Gold (ABX)

Barrick Gold's (NYSE:ABX) shares haven't been this low since the financial crisis in the 2008-2009 time period but prospects for the company are beginning to change as the company is undergoing a major change in its strategy. That change has left the market with a big question market about the valuation of the stock and has sent shares down to very low levels. Although the market is pessimistic on the shares, analysts and fund managers are both bullish and the stock's cheap valuation on an earnings basis makes the stock very interesting here.

Barrick Gold's strategy shift began 9 months ago with a change at the top. On June 6, 2012, Barrick announced that it appointed Executive Vice President and Chief Financial Officer Jamie Sokalsky as President and Chief Executive Officer, replacing Aaron Regent. The message was clear and the language in the press release quickly changed to focus on shareholders. At the time, the Chairman of the company said "We are fully committed to maximizing shareholder value, but have been disappointed with our share price performance." Sokalsky followed that up by saying "My focus will be on maximizing shareholder value…"

Compare that language to the last quarterly earnings release of Regent's era and the difference is night and day. Commenting on the financial results, Regents said "We had good operating performance... We also progressed our exploration program… improved our liquidity and returned more capital back to shareholders with a further increase in our dividend." The focus on shareholders' returns was clearly on the back burner. Comparing that to the language in Barrick's 1Q13 results makes the difference even more clear, Sokalsky said "Barrick's strategy prioritizes shareholder value creation by focusing on maximizing risk-adjusted rates of return and free cash flow through a disciplined approach to capital allocation."

Barrick has been executing on its plans and has already made some notable moves. Barrick Gold cut or deferred approximately $4 billion in previously budgeted capital spending and has no plans to build any new mines. The company is pursuing and actively engaged in realizing opportunities to rationalize its portfolio, including the sale of Barrick Energy and other non-core assets with short mine lives and high operating costs. ABX has launched a company-wide overhead review. As an initial step, the company has reduced 2013 company-wide overhead costs by over $100 million and expects further reductions through the review process. Lastly, the company outlined its strategy for mining in one simple sentence: returns will drive production; production will not drive returns.

In its new shareholder-friendly paradigm, Barrick Gold has embarked on a multitude plan to increase shareholder returns. As mentioned above, one of those areas that the company is looking at is asset sales to optimize its portfolio and raise cash. In an interview with Canada Real Time, ABX's CEO said he has embarked on a "targeted" but "top to bottom" review of potential assets sales. Barrick is already moving forward with its plans and has already put on the block its stake in African Barrick Gold (OTCPK:ABGLF), its energy division and a nickel joint venture. Barrick Gold has a 73.9% stake in ABGLF which would bring in a nice return if the company is able to sell it at a reasonable price. The stock current trades in London with a market cap of close to 1 billion pounds which translates into about $1.5 billion. Selling its 73.9% stake at close to market price would bring in close to $1.1 billion in proceeds. Another figure to look at on estimating how much African Barrick Gold is worth was provided late last year. In October, when Barrick Gold was in talks with China National Gold about selling its stake in African Barrick Gold, the price discussed was in the $3 billion to $4 billion range.

A transaction should be expected as the company has a history of engaging in asset sales. In 2009, the company entered into an agreement with Silver Wheaton (SLW) to sell 25% of the life-of-mine silver production from the Pascua-Lama project and 100% of silver production from the Lagunas Norte, Pierina and Veladero mines until project completion at Pascua-Lama. The total considerations were $625 million over three years as well as ongoing payments for each ounce of silver delivered under the agreement. In 2010, announced the IPO of African Barrick Gold in which the company sold approximately 101 million ordinary shares in the offering, or about 25% of its equity for proceeds about $835 million to Barrick Gold.

The analyst community is bullish on the stock with the average price target for ABX at $46 a share or close to 60% above Tuesday's closing price. Taking a more detailed look at the analyst targets reveals that the lowest price target on the shares is $37. Even if it fails to reach the mean price target and just reach the lowest price target on the Street, a 27% return would be in store for shareholders. Athough a 60% is a much better return, a 27% return would be solid and something most investing professionals would gladly accept.

Buying ABX's shares would put a buyer into some notable company. Prominent hedge fund manager John Paulson owns a significant stake in the company as well as a Canadian fund manager. The company is at an "inflection point," says Robert Gill, a portfolio manager with Aston Hill Financial, and a recent buyer of its shares. He said that Barrick's shares are very inexpensive now, trading at around seven times earnings. "We think the stock should be worth north of $40 (Canadian) a share. We'd like to see that within a year, but it is going to take a couple of quarters for investors to basically trust management...I think it [Barrick] is really ripe for a turnaround." For comparison purposes, Newmont Mining (NYSE:NEM) is trading at 10 times earnings while Yamana Gold (NYSE:AUY) is trading at a 13 times earnings.

With Barrick Gold one of the biggest miners out there, a pickup in the company's share price should carry over to other gold stocks such as Uranium Hunter (OTCPK:URHN) and NovaGold (NYSEMKT:NG).

Uranium Hunter's focus is on properties in Africa and South American. The company just announced that it is optimistic about its gold concessions in Guyana, and is buoyed about industry reports from that country. Guyana's gold industry continues to take in significant revenue for the country, increasing another 22% last year. It was the second consecutive year that gold declarations passed 300,000 ounces. Uranium Hunter was discussed last week in an article on Seeking Alpha. The author described the opportunity in the stock a "real opportunity" with the $20 million credit line and a joint venture with St. Watson Mining being the reasons.

Uranium Hunter also has its eye on Uranium opportunities, hence the company's name. It has acquired properties in both Guyana and West Africa focusing on what it sees as tremendous growth opportunities in the demand and supply of uranium for future world demand of electricity.

The second stock to watch is NovaGold. The company is a well-financed precious metals company engaged in the exploration and development of mineral properties in North America. Its flagship asset is the 50%-owned Donlin Gold project in Alaska, one of the safest jurisdictions in the world. With approximately 39 million ounces of gold in the Measured and Indicated resource categories (541 million tons at an average grade of approximately 2.2 grams per ton), Donlin Gold is regarded to be one of the largest, and most prospective known gold deposits in the world. According to the updated Feasibility Study, once in production, Donlin Gold should average approximately 1.5 million ounces of gold per year for the first five years, followed by decades of more than one million ounces per year.

NovaGold bears watching as it has been able to attract senior industry leaders from the top tie majors to help run the Donlin Gold project. Executives have been hires from companies such as Goldcorp (NYSE:GG), Newmont, and Barrick Gold, showing the potential of the Donlin Gold project. The company is planning to sell its 50% interest in the Galore Creek copper-gold-silver project to position itself as a pure play on Donlin Gold. As mentioned above, the company is well financed, driven by its completion one of the year's largest offerings which allowed the company to build a cash position of $253 million at November 30, 2012. Like Barrick Gold, NovaGold is also owned by John Paulson.

Disclosure: I 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.

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