With commodities rallying over the most recent weeks due to a weakening U.S. dollar, investors considering precious metals as a portfolio holding are likely to assess which mining companies best suit their portfolio’s needs. After all, the precious metals sector is one ripe with opportunity, abounding in the range of metals to consider as well as the underlying business and the unique types of investment vehicles offered on the market.
From precious metals exchange-traded funds (ETFs) to royalty or streaming companies, junior mining companies (exploration and development) or mature precious metals mining firms, the range of options to consider can be daunting, with a deep dive requiring time-consuming analysis across dozens of companies and different asset classes.
In this article, I’m going to dive into detail on one gold mining company I think outperforms the bunch, looking specifically at the company’s most recent earnings report and what this report indicates for investors considering sprinkling a little gold into a portfolio in need of a little sparkle.
Barrick Gold Corp. (NYSE:ABX) is one of the world’s largest gold producers, and has been on a very bumpy ride of late. Since breaching the $50 level in the most recent commodities rally following a sluggish U.S. dollar post-recession, ABX stock has dipped dramatically, falling below $10 in 2015 and rebounding to the $17 level of late.
While the current stock price is approximately 25% below its 52-week high, indications are that this is a company likely to outperform should the mining company continue to churn out excellent earnings results amid an improving macroeconomic environment, one which is expected to be much more friendly to the yellow metal.
Earnings Report Indicates Improving Fundamentals
Looking at the company’s most recent earnings report, ABX (already the world’s largest gold miner by volume) reported increased gold production of 1.432 million ounces at some of the lowest production costs in the industry.
The company posted all-in sustaining costs of $710 per ounce, substantially below its major competitors, reflecting the company’s drive toward profitability and long-term free cash flow generation.
These impressive production numbers have perhaps been overshadowed by the company’s massive debt overhang, which sat at $7.9 billion at the beginning of 2017. To improve the company’s debt ratios, ABX management has engaged in a sustained deleveraging program, in which the company is aiming to reduce its overall debt load from the aforementioned $7.9 billion level to $5 billion by the end of 2018 (two short years).
In this last quarter, ABX has been able to reduce its overall debt load by $309 million, bringing the miner closer to achieving its $1.45 billion debt reduction target by the end of 2017 (first half debt repayments have totaled $487 million).
With the proceeds of the company’s Veladero sale ($960 million) expected to be used exclusively to pay down debt, ABX stock is within striking range of hitting its 2017 target in Q3, making its 2018 debt reduction goal of having only $5 billion of debt appear very attainable.
Free cash flow generation is another area investors have wanted to see improvement with, and investors expecting improvement on this front may now have something to cheer about.
This most recent quarter has turned out to be a very profitable one for ABX stock, leading the company toward its goal of being free cash flow positive for 2017. In Q2, ABX reported operating cash flow of $448 million and free cash flow of $43 million.
Bottom Line on ABX Stock
Having a portion (even a small slice) of a portfolio invested in precious metals is widely considered to be a prudent play, given the defensive nature of the precious metals sector.
An investor not interested in purchasing portfolio insurance via index puts or other options trades (long-only investors) have the ability to hedge out a portion of their portfolio risk by buying a small amount of equity in an established, proven mining company such as ABX stock.
As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.