Is There a Silver Lining for Barrick Gold Corporation?

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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. 

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. 

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  • Report this Comment On March 13, 2014, at 12:08 PM, techy46 wrote:

    ABX cut production by 1.2 million ounces or about 14% but they also will see production costs go under $900 per ounce since it was high cost ore, greater then $1100 costs, that they cut from production. Bottom line ABX will make about $2 EPS in 2014 and that puts stock price in the $22-24 PS range. If and when they decide to bring PL project back to the forefront their production costs could go down another 10% and volume back up to about 7 million ounces. All the write downs also give ABX a huge tax advantage for the next 3-5 years or more.

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Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

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Related Tickers

8/28/2015 4:00 PM
ABX $7.13 Up +0.29 +4.24%
Barrick Gold Corp. CAPS Rating: ***
AUY $1.96 Up +0.07 +3.70%
Yamana Gold, Inc.… CAPS Rating: ***
GG $13.96 Up +0.28 +2.05%
Goldcorp, Inc. (US… CAPS Rating: ***