Is There a Silver Lining for Barrick Gold Corporation?

Does Barrick Gold, a gold mining company that has been struggling in recent years, have a sliver lining?

Mar 12, 2014 at 3:28PM

Barrick Gold (NYSE:ABX), unlike peers such as Goldcorp (NYSE:GG) and Yamana Gold (NYSE:AUY), expects to cut its production in 2014. Moreover, the company slashed its capital expenditure in half. These decisions were made to avoid potential cash flow problems down the line. But now that gold is recovering, does this mean it's high time to reconsider investing in Barrick? Is there a silver lining for the company? Also, how does the company measure up to its peers? 

Lack of growth in 2014
Barrick's revenue is expected to decline in 2014 not only because of lower gold prices compared to previous years, but also because of the reduced production guidance. Due to the difficulties Barrick has been facing the past couple of years, it plans to slash its production to an average of 6.25 million ounces – a roughly 13% decline year over year. This is also in line with the company's decision to reduce its capital expenditure from $5 billion in 2013 to roughly $2.5 billion.

In comparison, Goldcorp and Yamana plan to further augment their production during 2014. Goldcorp expects to raise its production by 15% to over 3 million ounces of gold; Yamana plans to increase its production from 1.3 million of gold equivalent ounces to 1.4 million -- a nearly 7.7% gain. Despite Barrick's lack of growth, the company's profitability is one of its strong points, and likely to remain so. 

Higher profitability
Even though Barrick faced cash problems in 2013, the company's profitability, after controlling for its goodwill provisions, was relatively high and reached around 32.7%. In comparison, Yamana and Goldcorp recorded a profit margin of around 16% (after controlling goodwill charges). 

One of the reasons for the higher profitability is Barrick's low all-in sustaining costs. Back in 2013 the cost was around $915 per ounce of gold. In 2014, the company expects its all-in sustaining costs will rise to an average of $950 per ounce -- a 3.8% gain. Nonetheless, Barrick's production cost will still be lower than other gold producers' costs. For example, Goldcorp's all-in sustaining costs reached an average of $1,031 per ounce in 2013. This year its production costs are expected to reach an average of $975 per ounce -- 5.4% lower than last year. This means, even though Barrick's production costs are expected to rise and Goldcorp's to fall, Barrick's costs are still estimated to remain lower than Goldcorp. After considering the good and the bad, is it time to reconsider investing in Barrick? 

Is the company fool's gold? 
The main question investors may ask is whether Barrick's current valuation makes it an investment worth considering. In the past several quarters the losses it recorded were mainly due to the changes in the valuation of its assets. This includes the changes in its assumptions on gold, silver, and other metals prices. These changes weren't cash expenses. In terms of cash, the company was able to generate roughly $4.2 billion from its operations. Let's take into account several factors, including enterprise value-to-EBITDA, operating cash flow-to-sales, debt-to-equity, and forward P/E. These measurements should provide a rough estimate for the above-mentioned gold producers' leverage, financial risk, and valuation. 

Barrick Value

Source of data: Yahoo Finance

Based on the data above, it seems that Barrick Gold is the least valued of the three as it has the lowest EV-to-EBITDA and forward P/E ratios. 

The company's debt burden is the highest, however, with a debt-to-equity ratio over 81. The silver lining from this table is the operating cash flow-to-sales ratio, which measures the company's ability to generate consistent cash from its operations. Barrick is still capable of generating a good amount of cash from its operations, much like Yamana and even better than Goldcorp. 

Therefore, even though Barrick might be a cheaper stock than other leading gold producers and is able to generate a reasonable amount of cash from its operations, the company's financial risk remains high, and with lower growth Barrick doesn't seem to offer enough in return. 

Barrick Gold has made several changes in order to ease its financial burden, mainly by cutting down its capital expenditure and slowing down its production. Moreover, the company's current valuation seems lower than its peers. If the gold market continues to recover, all three gold producers will benefit from this rally. Therefore, Yamana and Goldcorp might be better options due to their potential growth in 2014 and lower risk compared to Barrick. 

A good stock in a tough market
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information