Barrick Gold Corporation (USA): 3 Pros, 3 Cons of ABX Stock

Gold has regained its luster this year — and so have gold stocks.

Barrick Gold Corporation (USA): 3 Pros, 3 Cons of ABX Stock

Just look at Barrick Gold Corporation (USA) (NYSE:ABX). For 2017, the company has logged a return of 141%. Hey, by comparison, Facebook Inc (NASDAQ:FB) was only able to muster a 21% gain.

No doubt, the key driver has been the price of gold, which is up about 25% for the year. Keep in mind that a $50 change can result in a few hundred million dollars in additional Ebitda for ABX. No doubt, gold stocks can provide a tremendous amount of leverage when it comes to betting on commodities.

OK then, what can investors expect going forward with ABX stock? Is it still a good play here? Well, to see, let’s consider three pros and cons:

ABX Stock Pros

Global Platform: Barrick Gold is the world’s largest gold producer, with 26 mines in Argentina, Australia, Canada, Chile, Dominican Republic, Papua New Guinea, Peru, Saudi Arabia, the United States, and Zambia.

ABX also has a disciplined approach to exploration, balancing high-quality brownfield projects, greenfield opportunities and emerging explorations. All in all, the results have proven quite successful. During the last couple decades, the company has found the two largest gold deposits (Lagunas Norte in Peru and Goldrush in Nevada).

In all, the ABX portfolio has a massive 91.9 million ounces of probable gold reserves.

Financials: A few years ago, they looked pretty bad for ABX. Keep in mind that the company had to deal with the consequences of some ill-advised acquisitions, which were struck at the peak of the market.

But ABX has taken actions to get the balance sheet back on track. And there are already encouraging signs of progress. During the past five quarters, ABX has generated free cash flows. This has certainly made it easier to reduce the debt load, which is expected to fall by $2 billion this year.

Although, ABX appears to be determined to greatly reduce its break-even point as well, with the goal of getting to a cost-per-ounce of gold to under $700 by 2019. If so, the company will be in a good position to deal with the inevitable volatility in its business.

Valuation: Even with the run-up, ABX stock is still fetching a reasonable valuation. Consider that the forward price-to-earnings multiple is roughly 18. This compares to the following:

Company Multiple
Newmont Mining Corp (NYSE:NEM) 19X
Goldcorp Inc. (USA)(NYSE:GG) 23X
Kinross Gold Corporation (USA)(NYSE:KGC) 19X

Besides, it was only back in 2011 that ABX stock was trading at over $50 a share. So if the price of gold continues its rise, there could be much more room for upside with the shares.

ABX Stock Cons

Political Risk: They are significant. Because commodities like gold and copper are often mined in developing nations, there is always the real threat of nationalization.

Granted, this is certainly a worst-case scenario. But even lesser actions can still have a major impact. For examples, governments are often tempted to boost revenues with added taxes and permit fees. Oh, and yes, there may be tough negotiations on royalty rates. Consider that this has been an ongoing issue for ABX with its operations in Zambia.

Costs: To find new deposits, companies like ABX need to explore in harsh regions. Unfortunately, this means that the costs can escalate, such as with the building of new infrastructure and logistics systems, hiring qualified people and creating systems to allow for heavy equipment. What’s more, there are always ongoing threats to such assets, including sabotage or local wars.

In some cases, the costs can spiral out of control, such as when there is an environmental disaster. A stark case of this is the disaster at the Samarco mine in Brazil, which involved design flaws that resulted in the collapse of a dam. The companies involved — BHP Billiton Limited (ADR) (NYSE:BHP) and Vale SA (ADR) (NYSE:VALE) – could potentially be on the hook for tens of billions of dollars.

Gold and Copper Prices: In the case of copper, the main driver is supply-and-demand. And yes, this is often heavily impacted by the overall activity in China. No doubt, the overall slowing in the economy is likely to continue to weigh on the price of copper.

Next, as for gold, there is definitely some impact from supply-and-demand (gold has industrial uses and of course, is also a big part of the jewelry market). Yet, the main factors that drive the price include complex areas like monetary policy, inflation rates and geopolitics.

Something else to keep in mind: Gold has shown to go through long periods of little price activity. In fact, this was the case during the 1980s and the 1990s.

Bottom Line on ABX Stock

Again, the key to Barrick Gold stock is the price of gold. And for the most part, there are key factors that are likely to keep up the bullishness. First of all, the overall sluggishness in the global economy is likely to provide a boost since interest rates should remain muted — if not in negative territory in some countries.

This should put pressure on the U.S. dollar (keep in mind that gold is denominated in dollars). But the upcoming presidential election could also cause uncertainty, which should bolster demand for gold.

Yet, Barrick Gold is also getting more streamlined, which is likely to lead to better margins and profitability.

OK then, should you buy ABX stock? Yes, the company is likely to remain a good way to play an upward move in the price of gold — which should be leveraged by the improved financials.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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