Barrick Gold (ABX, Financial) has been on my radar since the sentiments were very bearish for gold and the gold mining industry. I remained bullish on the stock and even after a 22% upside in YTD15, I am still positive on Barrick Gold. This article discusses the reasons to be bullish on the gold miner for the medium-term.
I will start with the outlook for gold before talking about company specific positives. In the recent past, there has been several economic data from the U.S. that points to weakening of the economy. The data includes weak retail sales, weak industrial production and declining consumer confidence. As a result of these data, the U.S. dollar has weakened as indicated by the dollar index.
The dollar index has declined from a high of 100.3 two months before to current levels of 93.1. I am talking about decline in the dollar at the onset because a weak dollar is positive for gold. It is therefore not surprising to see gold trend higher in the last one month and this has contributed to the recent rally in gold mining stocks.
I must add that weak economic data implies that interest rate hike will be delayed and this will keep the dollar trend weak in the medium-term. In other words, I expect gold to trend higher in the medium-term and this will translate into further upside for gold mining stocks. I already discussed Newmont Mining (NEM, Financial) in the recent past and Barrick Gold is my second stock pick in the gold mining sector.
Coming to company specific positives, the first reason to be bullish on Barrick Gold is strong financial flexibility. As of March 2015, the company had $2.3 billion in cash and $4.0 billion in undrawn credit facility. Total liquidity position of $6.3 billion implies that the company is fully funded for capital expenditure for the next 2-3 years. Further, if gold prices trend higher, Barrick Gold is well positioned to significantly increase its capital expenditure and production. From a financial flexibility perspective it is also important to mention that Barrick Gold has only $0.9 billion in debt repayment until 2017. Therefore, there is no significant debt refinancing pressure in the foreseeable future.
The second reason to be bullish on Barrick Gold is the fact that 60% of the company’s 2015 production comes at an all-in-sustaining-cost of $725 to $775/oz. A low AISC is a big positive and as gold price trends higher, a low AISC will ensure that the company’s EBITDA margin and free cash flow is robust.
I must also add here that the company aims to reduce debt in the coming years and this will reduce the interest payment cost and provide a boost to the net profit margin. Another important point to note from a shareholder return perspective is that the company’s dividend is directly linked to gold prices and I expect higher dividend payout in the coming quarters if the gold price uptrend sustains over the next 2-3 quarters.
Overall, considering the attractiveness of the mines in terms of the cost, considering the financial strength of the company and considering the industry outlook for the foreseeable future, I am bullish on Barrick Gold and I believe that the stock has further upside even after a 22% rally in YTD15. Investors can therefore consider exposure to the stock at current levels with a medium to long-term investment horizon.
