Should You Buy or Sell Barrick Gold (ABX) Stock? 3 Pros, 3 Cons

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Barrick Gold (ABX) is one of the world’s largest and most-important gold and copper mining firms. It’s also got the eye of Wall Street, with ABX stock up about 150% in 2016 alone.

Denver-based Newmont Mining (NEM) may be more familiar to American readers; it’s the largest U.S.-based miner and the only sector player that is a constituent in the S&P 500. However, Toronto-based Barrick has, by market cap anyway, retaken its lead as the world’s most valuable gold mining firm.

barrick gold

Now valued at more than $20 billion following the recent tripling of ABX stock, Barrick has its swagger back after a long period of weakness.Shares of Barrick Gold have spiked from $6 to nearly $20 since this past September. The turnaround hasn’t just been driven by improving gold prices. Barrick’s management has aggressively slashed costs and reassured investors who’d been concerned about the balance sheet. Despite the large gains in recent months, is ABX stock still a buy?

ABX Stock: Pros

Low-cost Leader: Barrick has been on a mission to lower its operating costs, and it’s having increasing success. The company’s all-in sustaining cost “AISC” has plunged from $864 per ounce in 2014 to $706 per ounce in the first quarter of this year. For the full-year, the company should achieve a figure in the mid-$700s. A large factor in this is Barrick’s high-grade mines. On average, Barrick mines have reserves of 1.32 grams of gold per ton of rock, compared to just 0.82 grams per ton at competing gold miners.

With its costs this low, ABX can produce positive free cash flow even if gold were to fall to $1,000/oz in 2016. After hitting $1,050, gold has spiked, and now trades around $1,280. The company will produce lots of cash and be significantly in the positive on an earnings per share basis with gold prices at current levels.

Paying Off Debt: The main complaint with ABX stock had been that the company was too levered. Unlike other majors such as Newmont and Goldcorp (GG), Barrick had hugely levered up its balance sheet, betting heavily on higher gold prices. It spent freely, throwing billions at marginal prospects such as Pascua-Lama in Chile. That debt binge came with a hangover.

At the end of 2014, the company had more than $13 billion in debt. In 2015, it paid down more than $3 billion. This was primarily achieved by asset sales. In 2016, the company anticipates getting net debt to under $8 billion, eventually reaching the long-term target of $5 billion in debt or less. ABX stock was punished as investors feared the company might topple under its heavy debt burden. Management is taking aggressive steps to change that perception.

Gold Is Soaring: It’s excellent that the company has low cost mines and is aggressively reducing its debtload. However, the most important factor for ABX stock and other gold miners is the price of gold. All else dims in comparison.

On this front, things are looking good. Gold has been in a grinding bear market for years now, sliding from $1,900/oz to as low as $1,050. However, it appears that a bottom may be in. Over the past couple months, gold has rallied sharply. In recent days, gold hit $1,300/oz for the first time in more than a year.

ABX Stock: Cons

Barrick Is Shrinking: To achieve the balance sheet improvements and improved cost profile discussed above, something had to give. In this case, it was the company’s overall reach. Barrick has now entered a trend of clearly and substantially declining gold production. In 2014, the company produced 6.25 million ounces of gold. This fell slightly to 6.12 million ounces last year. The company projects between 5 and 5.5 million ounces for both 2016 and 2017. This would represent a 10%-20% decline from 2015 levels. And that’s not the end of it; 2018 production is slated to drop further to between 4.6 and 5.1 million ounces.

This shrinkage is understandable. Barrick had too much debt, and at sub-$1,100/oz gold, there was a real question as to whether the company could survive. By slashing its debtload and concentrating production in more profitable mines, it has greatly reduced concerns about the business’ solvency. On the downside, if this is the beginning of a big new bull market in gold, Barrick is now positioned less than ideally. In upcycles, more production ounces, even at slim margins, are richly rewarded by the market. You’ll hear plenty of griping from owners of ABX stock if the current gold move continues and Barrick’s output levels continue to sag.

Gold Rally Could Be Transitory: Gold’s move from the low at $1,050/oz up to $1,300/oz recently hasn’t had a strong fundamental underpinning to it. Most of the move has been, it appears, a sympathy rally with crude oil, along with benefiting from the fall in the U.S. dollar. If you look at the price of gold in other currencies, Canadian Dollars or Japanese Yen for example, gold’s rally hasn’t been nearly as strong. Much of the supposed gold strength is really just a reaction to fluctuations in currencies.

The main consumers of gold — India, China, and the Middle East — are all seeing fair to weak economic performance. Indian gold demand is estimated to be flat this year. China will likely be down; the country is in the grips of a credit event and slowing economy. The Middle East also faces more than its share of problems driven by lower oil prices. Look at the panicked reactions to lower oil prices in Saudi Arabia for example. These normal sources of gold demand will likely not be big buyers this year.

Big Impairments From The Bust: Barrick’s previous management was far too aggressive during the boom. They invested heavily in marginal or dud projects. Pascua Lama, a multi-billion dollar mine in Chile and Argentina, was the most obvious bust. It failed due to cost overruns and environmental infractions. Other investments such as the JV with Novagold (NG) at Donlin Creek also failed to bear fruit.

In all, Barrick poorly invested a great deal of shareholder funds. This left it with a large debtload and also an increased share count for ABX stock. Between 2009 and today, outstanding shares have soared from 903 million to 1.16 billion. When you look at a long-term chart of ABX stock, realize it will be harder to move back to old highs, given how many more shares of ABX stock there are outstanding today.

Barrick Gold Shares: Verdict

Barrick took great steps to remain a viable operation during the gold bust. These are starting to pay off for ABX stock; with a better balance sheet and strongly profitable low-cost mines, the company is ready to profit as gold rebounds. Despite that, the market is arguably getting ahead of itself. The stock was underpriced at $6, but in the high teens, it’s gotten rather pricey. I’d wait for a sizable dip to take a position in ABX stock.

At the time of this writing, Ian Bezek had no position in any of the stocks mentioned. You can reach him on Twitter at @irbezek.

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Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/barrick-gold-abx-stock-pros-cons/.

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