Barrick Gold Corporation (NYSE: ABX) released its second quarter 2016 results on July 27, which reported net earnings of $138 million (12 cents per share) and adjusted net earnings of $158 million, 14 cents per share, missing recent analysts' expectations by 0.01 cents.
A summary of financial results of the gold stock:
Source: Google Finance
In my previous article on Barrick, I wrote that the miner is, operationally and financially speaking, well positioned to both meet analysts’ expectations on EPS and increase the free cash flow as the gold price trades higher.
As a matter of fact, even though Barrick missed analysts’ expectations on EPS by only a fraction of a cent, it was capable of generating $274 million in free cash flow in the second quarter, marking five consecutive quarters of positive free cash flow.
This was possible thanks to the Best-in-Class philosophy of Barrick, of which “leveraging innovation and new technology” constitutes a core pillar that continuously upgrades the long-term value of its portfolio. Therefore, with an asset base that cannot be replicated by any other gold producer in terms of average grade and life of mine, Barrick has the flexibility to manage the production in order to keep operating costs under control, which are the lowest in the gold mining industry.
Barrick has the possibility to lower costs even further and improve the company’s risk profile with the sale of its 64% stake in the African unit Acacia Mining and the sale of its 50% stake in the KCGM operation in Western Australia.
The sale of non-core assets (in 2015 Barrick already sold Bald Mountain and 50% of Round Mountain generating $610 million in cash) together with the drawing on its existing cash balance ($2.4 billion in cash and equivalents, plus $4 billion undrawn credit) and the maximization of free cash flow from operations as the gold price trends higher, will enable Barrick to reduce its total debt by at least $2 billion and strengthen the balance sheet which remains a top priority. For 2016, Barrick has already reached the debt reduction target of approximately 50%.
However, as of the second quarter of 2016, the total long-term debt amounted to $8.8 billion, of which less than $150 million is due before 2018 and $5 billion of its outstanding debt of $9 billion does not mature before 2033. Over the term, Barrick aims to reduce its total debt to below $5 billion.
Goldman Sachs has reiterated Barrick to its Conviction Buy List with a $27 price target saying that “the cost cutting cycle is not over for the company” giving to the miner "the ability to realize industry-high cash margins" and “harvest FCF over the next few years, generating a yield of above 4 percent consistently on spot prices”.
In Goldman Sachs’ view, “ABX has done a good job of repairing its balance sheet over the past 24 months,” therefore the brokerage firm forecasts “net debt/EBITDA to be under 2.0x by the end of 2016" (analyst Andrew Quail).
Disclosure: I have no positions in Barrick Gold Corporation.
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