Barrick Gold Corp. has surged to become Canada’s best-performing stock like a two-month rally within the precious metal gives added lift towards the company’s turnaround efforts.
Barrick’s shares are up 29 per cent this year in Toronto, which makes it the best-performing stock around the Standard & Poor’s/TSX Composite Index. It’s also overtaken its two biggest competitors, Goldcorp Inc. and Newmont Mining Corp., in market capitalization, letting it reclaim the title from the world’s most valuable gold company.
“Guys like me, in the pub, we’d 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 from a hat. Insufficient to get them to nirvana however they were seriously making some hard moves plus some hard calls.”
In recent times, those hard calls have included more than US$3-billion worth of asset sales and joint ventures as well as aggressive cost cuts. That helped the organization achieve its target of cutting its US$13.1-billion debt by $3 billion in 2015. Longer term, the goal is to pare operations to roughly a half-dozen core mines within the Americas that can withstand reduced gold prices than those seen today.
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‘Stupidly Cheap’
Allan says expectations were high for Goldcorp and low for Barrick as he took a long look at Barrick’s stock in August. It was trading at $8.67 and he realized “it had gotten stupidly cheap.” He place a buy rating around the stock his price target to $14 a share from $12.35. The shares were trading down 5 percent at $13.20 at 11:01 a.m. in Toronto. As of Wednesday’s close the company were built with a market price of US$11.5 billion in the U.S., in contrast to a U.S. market price of US$9.2 billion for Goldcorp and US$10.3 billion for Newmont.
“It’s great to determine that our shareholders are beginning to acknowledge the progress that we’ve made but, make no mistake, there’s lots of lifting we have to do in 2016,” Barrick President Kelvin Dushnisky said in a phone interview Wednesday. The focus this season will continue to be on cutting operating costs and improving productivity in order to further lessen the company’s debt, he explained by telephone from Argentina, where he was ending up in a few of the country’s new cabinet ministers.
‘Long Way’
Barrick’s stock is taking advantage of the run up in gold a lot more than its competitors because of its high debt, that 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 per cent in 2016 after three years of declines as turmoil on global stock markets boosted its appeal like a safe haven. Bullion fell 0.4 percent to US$1,116.30 an ounce Wednesday in New York.
“I wouldn’t get too caught up,” De Los Reyes cautioned. “Pull-up a long term chart of Barrick which thing has a long distance 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 explained. Currently it’s 3.66, well above Newmont and Goldcorp at 2.22 and 2.18 respectively, based on data compiled by Bloomberg.
‘First Step’
The company won’t provide new debt-reduction targets before its fourth-quarter earnings on Feb. 17, Dushnisky said, but the US$3-billion debt reduction last year “wasn’t the final step, that was the first step.”
As part of its oft-repeated goal to help make the company bullet proof in any price environment, this month Barrick lowered its gold-price assumption to US$1,000 an oz for 2016, saying this might lead to impairments of as much as US$3 billion on 2015 earnings.
Although Barrick clearly advantages of higher gold prices, “we’re really focused on making sure the business is sustainable at virtually any foreseeable gold price,” Dushnisky said.
While the organization maintains that its strategy of selling non-core assets can help it weather future gold-price storms by lowering costs, those benefits require sometime to become felt, De Los Reyes said. “The problem 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 around you may like right from the start.”
Future Acquisitions
De Los Reyes did say he was impressed using the prices Barrick received for asset sales last year. “Any expectation that they are likely to be a distressed seller of assets has proven to not be true.”
For Allan, the moment to crack the champagne is going to be when the stock is trading confined to its peers and the balance sheet is robust enough to aid future acquisitions, when they make sense.
“I’m not advocating that they ought to be a predator, but I need to see them able where they could be,” Allan said. “We’re not there yet, but we’re not the basket case that people were looking at 18 months ago.”
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