Improved Business Prospects Aided by Higher realizations and acquisitions:  Barrick Gold Corporation (TSX: ABX) is a Canada based gold mining company which has many advanced exploration and development projects located across five continents. The group aims to be the world’s most valued gold mines by acquiring, developing and owning the best assets and delivering a consistent return to the stakeholders. ABX holds interests in fifteen producing gold mines, including six Tier One Gold Assets across Argentina, Canada, Côte d’Ivoire, the Democratic Republic of Congo, the Dominican Republic, Mali, Papua New Guinea, Tanzania and the United States. The group’s recent acquisition would result in portfolio synergy, cost savings, integrated operations

Investment Rationale:

• Veladero gold mine gets a life extension: The company recently announced the new future of its Veladero gold mine located in Argentina, the life of which is now extended to at least 10 years. Barrick’s President and Chief Executive Officer Mark Bristow stated that the company is aiming to extend Veladero’s life of mine beyond 2030 with the vision to scale it up to a Tier One asset.

• Disinvestment of Kalgoorlie gold mine: The company had a 50% interest in Kalgoorlie gold mine in Australia, which was characterized by a lower grade of gold production along with relatively higher cash cost. On November 2019, the company completed the sale of 50% interest in Kalgoorlie to Saracen Mineral Holdings Limited for a cash consideration of US$750 million. Going forward, we believe, the above disinvestment is likely to enhance the overall operating performance of the business by lowering its cash costs, thereby improvement in margins.

• Improved performance aided by higher demand: For FY19, the group reported gold production of 5.47 million oz and copper production of 432 million lb which stood at the upper band of its FY19 production guidance. FY19 gold production came in 21% higher than FY18, while realized gold price stood at an average of US$1,396 in FY19, improved from US$1,270 in FY18. Further, the group reported robust performances across the Latin American, Asia Pacific and Africa Middle East.

• Aims to resolve long-drawn dispute: ABX is likely to resolve its Tanzanian disputes by signing of a framework agreement, where the Acacia minorities’ buy-out would facilitate in settling its long-running dispute with the Tanzanian government and to integrate the assets into its operations.

• Improved liquidity likely to lead higher value generation: The group reported Debt net of cash at US$2.2 billion, down 47% on y-o-y basis. The significant reduction in net debt is likely to drive growth in its liquidity while we believe the business would be better equipped to manage its business and taking advantage of new.

• Enhancing Existing Reserves: Barrick’s deepened its emphasis on geocentric principles which empowers its geologists to enhance the existing reserves and motivates them to find the next major discovery. The company remains committed to the exploratory targets to extend the existing mine life further or to add newer projects to its Arsenal. Within Latin America, the business reported 3x increase in the number of drill targets in FY19. 

FY19 Financial Highlights for the Period ended 31^st December 2019: ABX declared its full-year results, wherein the group posted a revenue of US$ 9,717 million, witnessed a growth of 34% on y-o-y basis, aided by the cumulative impact of double-digit growth in gold sales and 10% improvement in the realization price. Adjusted EBITDA stood at US$ 4,833 million, grew 57% y-o-y. Adjusted EBITDA margin stood at 50%, improved from 43% in the previous financial year. Free cash flow improved from US$365 million in FY18 to US$1,132 million in FY19. The group reported higher capital expenditure of US$1,701 million, witnessed a growth of 22% from FY18. The increase was due to a higher mine site sustaining capital expenditure due to Merger and the consolidation impact of Nevada Gold Mines, which was partially offset by lower project capital expenditures at Cortez and Rangefront project.   Net earnings per share grew by 271% on y-o-y basis at US$2.26. Fair value gain, gain on sale of investments and additional contributions from actuations were the key drivers for earnings growth.

Key FY19 Financial Highlights (Source: Company Reports)

Key Operating Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 28.95% of the total shareholding. Van Eck Associates Corporation and Fidelity Management & Research Company hold the maximum interests in the company at 4.99% and 4.78%, respectively.

Top 10 Shareholders (Source: Thomson Reuters)

Guidance: The company expects its FY20 gold production to be within the range of 4.8 million ounces to 5.2 million ounces. Depletion of the high-grade Cortez Hills Open Pit deposit along with maintenance activity in Lagunas Norte, Morila and Golden Sunlight would drag the production in the first half of FY20. The group further expects its exploration and evaluation to expenditures to remain within the range between US$210 million to US$230 million. Total cash costs per ounce are expected to be in the range of US$650 to US$700, remained unchanged from the FY19. The company expects its Copper production the range of 440 million lb to 500 million lb. Going forward, we expect that the company is likely to streamline its operations by Leverage innovation and technology to drive higher operational efficiencies. The management is focusing on building trust-based partnerships with host governments, business partners, and local communities to drive investor’s long-term value. The group further intends to grow and invest in a portfolio of Tier One and Tier Two Gold Assets in order to enhance its organic growth.

In the recent past, gold has outperformed the equity market against other asset class, depicting a double-digit CAGR growth in the last decade. Going forward, we expect, the demand for gold is likely to grow driven by global uncertainties. The outbreak of COVID-19 has created jitters in the stock market and an account of the weakening global economy. Thus, investors would likely to bet on safer asset class to mitigate the risk factors. We also believe that central banks would continue its gold purchase and the demand for gold is likely to remain solid in the coming quarters.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA Based Relative Valuation

Price to Earnings Based Relative Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: At the 19 March 2020 closing price, shares of ABX have registered a reversal trend on the daily price chart and ended above its 200-day Simple Moving Average (SMA) price of CAD 22.93, which is a positive technical trend. Price/200-day SMA ratio stood at 1.01x, another positive trend. Typically, a price above the long-term support level of 200-day SMA considered to be a long-term favorable trend in the stock. Further, ABX’s shares have relatively outperformed the broader prevailing trend in market, as it outperformed its benchmark index by ~ 24% in a month-over period and by ~36% on a YTD basis. It reflects that amid bearish market sentiment led by novel COVID-19 spread, ABX’s stocks have relatively performed well against the market and managed to trade in a long-term bullish trend.

The stock made a 52-week low and high of CAD 15.73 and CAD 29.94 and is currently trading close to the upper band of its 52-week’s trading range. The group is continuously focusing on the acquisition and development of best assets across geographies. The management is also focusing to implement more sophisticated geological models in order to enhance its gold reserves and improve business prospects. Exit from lower grade mines and an expectation of higher realization price would drive the margins in the near to medium term. We have valued the stock using EV/EBITDA a. For this, we have considered peers like Agnico Eagle Mines Ltd (TSX: AEM), Kinross Gold Corp (TSX: K), Newmont Corporation (TSX: NEM), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 23.34, up 3.96% as on 19^th March 2020.

ABX Daily Technical Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.