All gold mining stocks have surged in 2016, and I am bullish on gold through 2016 and beyond. I recently discussed Newmont Mining (NEM, Financial) as an attractive long-term investment. In that article, I also discussed the factors to be bullish on gold for 2016. With a positive view on the precious metal, investors can consider exposure to one or more of the gold mining stocks. Barrick Gold (ABX, Financial) is another gold mining stock I am bullish on for the long term.
For YTD16, Barrick Gold has surged by 66%, but the rally is not over for the stock. It is important to note that Barrick Gold surged from oversold levels and even after the big rally, the stock is trading at TTM EV/EBITDA of 7.0. With gold trending higher, the company’s EBITDA margin expansion will come in the next few quarters, and this will take the stock higher.
From a company-specific perspective, the first factor to like Barrick Gold is the company’s financial flexibility expansion through 2015 via sale of noncore assets. In January, Barrick Gold completed the sale of 50% interest in the Round Mountain mine and 100% of the Bald Mountain mine to Kinross Gold Corporation for a consideration of $610 million. With the completion of this sale, Barrick Gold sold assets worth $3.2 billion for FY15, and this has translated into debt reduction of $3.0 billion. With noncore assets being the target for sale, the company’s financial flexibility has increased with core assets continuing to deliver the company’s production guidance.
From a liquidity perspective, Barrick Gold has $4.0 billion in undrawn credit facility and the company has been generating positive free cash flows. Therefore, the cash buffer for incremental investment in core assets is available as gold trends higher. Further, Barrick Gold has only $250 million in debt maturity before 2018, and this ensures no refinancing or liquidity pressure for debt repayment. Therefore, from a financial perspective, Barrick Gold is well positioned.
Another important aspect to consider for gold miners is the all-in-sustaining-cost as it would largely determine the company’s EBITDA margin. For Barrick Gold, the company expects FY15 AISC to be in the range of $830 to $870 per ounce. Therefore, the company’s AISC is attractive, and strong cash flows can be expected in 2016 if gold continues to trend higher (very likely).
For every $100 change in gold price, Barrick Gold expects impact of $168 million on EBITDA and $79 million on the free cash flow. If gold is assumed to have an average cost of $1,500 per ounce (bullish scenario) for 2016, the incremental impact on EBITDA can be in the range of $500 million to $600 million. This will ensure robust cash flows and potential increase in dividend sometime in 2016.
Considering these company specific factors, it is not surprising to see Barrick Gold surge with gold trending higher. As I mentioned earlier, the rally has come from oversold levels and therefore a 66% surge in YTD16 does not imply that the rally is overdone.
Another reason for discussing Barrick Gold now is that the company’s 4Q15 results will be declared on Feb. 17, and an initial guidance for 2016 can be expected along with the results. Considering the outlook for gold, the guidance is likely to be positive for the stock, and the next upside rally seems probable after 4Q15 results announcement.
Gold was depressed for more than 30 months and the rally in 2016 is the beginning of another bull market for the precious metal. Investors can consider exposure to physical gold and quality gold mining stocks liken Barrick Gold for stellar returns from the sector.
Disclosure: No positions in the stock.
