Barrick Back on Top As the World’s Most Valuable Gold Companyby
Company's pulled `some rabbits out of a hat,' analyst says
President says $3 billion debt reduction first, not final step
Barrick Gold Corp. has surged to become Canada’s best-performing stock as a two-month rally in the precious metal gives added lift to the company’s turnaround efforts.
Barrick’s shares are up 27 percent this year in Toronto, making it the best-performing stock on the Standard & Poor’s/TSX Composite Index. It’s also overtaken its two biggest competitors, Goldcorp Inc. and Newmont Mining Corp., in market capitalization, allowing it to reclaim the title of the world’s most valuable gold company.
“Guys like me, on the street, we had given Goldcorp the crown in the senior sector,” Barry Allan, an analyst with Mackie Research Capital Corp., said by phone from Toronto. “And Barrick actually pulled some rabbits out of a hat. Not enough to get them to nirvana but they were seriously making some hard moves and some hard calls.”
In the last year, those hard calls have included more than $3 billion worth of asset sales and joint ventures as well as aggressive cost cuts. That helped the company achieve its target of cutting its $13.1 billion debt by $3 billion in 2015. Longer term, the goal is to pare operations back to roughly a half-dozen core mines in the Americas that can withstand much lower gold prices than those seen today.
Allan says expectations were high for Goldcorp and low for Barrick when he took a long look at Barrick’s stock in August. It was trading at C$8.67 and he realized “it had gotten stupidly cheap.” He put a buy rating on the stock and raised his price target to C$14 ($9.98) a share from C$12.35. The shares fell 6 percent to C$13.05 at the close in Toronto, giving it a market value of $11.3 billion in the U.S., compared with a U.S. market value of $9.2 billion for Goldcorp and $10.3 billion for Newmont.
“It’s great to see that our shareholders are starting to recognize the progress that we’ve made but, make no mistake, there’s a lot of lifting we have to do in 2016,” Barrick President Kelvin Dushnisky said in a phone interview Wednesday. The focus this year will continue to be on cutting operating costs and improving productivity in order to further reduce the company’s debt, he said by phone from Argentina, where he was meeting with some of the country’s new cabinet ministers.
Barrick’s stock is benefiting from the run up in gold more than its competitors because of its high debt, which makes it a “levered play on gold,” according to Rick de Los Reyes, a Baltimore-based portfolio manager at T Rowe Price Associates Inc., which holds 5.9 million shares of Barrick. Gold has jumped 5.3 percent in 2016 after three years of declines as turmoil on global stock markets boosted its appeal as a safe haven. Bullion settled little changed in New York on Thursday at $1,116.10 an ounce.
While Barrick’s rally has made it more expensive relative to its own earnings prospects, it’s still cheaper than its biggest rivals. The stock trades at 26 times forecast earnings compared with an average ratio of 35 among members of the the BI Global Senior Gold Valuation Peer Group. Goldcorp and Newmont fetch 71 and 33 times expected profit, respectively, according to data compiled by Bloomberg.
“I wouldn’t get too carried away,” De Los Reyes cautioned. “Pull up a long term chart of Barrick and this thing has a long way to go.” What Barrick really needs is to start generating enough cash to get debt down to less than two times earnings before interest, taxes, depreciation and amortization, he said. Currently it’s 3.66, well above Newmont and Goldcorp at 2.22 and 2.18 respectively, according to data compiled by Bloomberg.
The company won’t provide new debt-reduction targets before its fourth-quarter earnings on Feb. 17, Dushnisky said, but the $3 billion debt reduction last year “wasn’t the final step, that was the first step.”
As part of its oft-repeated goal to make the company bullet proof in any price environment, this month Barrick lowered its gold-price assumption to $1,000 an ounce for 2016, saying this could result in impairments of as much as $3 billion on 2015 earnings.
Although Barrick clearly benefits from higher gold prices, “we’re really focused on making sure the business is sustainable at virtually any foreseeable gold price,” Dushnisky said.
While the company maintains that its strategy of selling non-core assets will help it weather future gold-price storms by lowering costs, those benefits take a while to be felt, De Los Reyes said. “The issue is that every time they sell something, they lower their debt level, but they also lower their Ebitda, so your leverage ratios don’t change as much as you might like right off the bat.”
De Los Reyes did say he was impressed with the prices Barrick received for asset sales last year. “Any expectation that they were going to be a distressed seller of assets has proven not to be true.”
For Allan, the moment to crack the champagne will be when the stock is trading at a premium to its peers and the balance sheet is strong enough to support future acquisitions, if they make sense.
“I’m not advocating that they should be a predator, but I want to see them in the position where they could be,” Allan said. “We’re not there yet, but we’re not the basket case that we were looking at 18 months ago.”