Gold stocks have been the standout performers this year as almost the entire sector has witnessed double-digit gains. My personal favorite from the industry has been Barrick Gold (ABX, Financial). Although Barrick Gold is up about 100% year to date, I think the stock can sustain the rally moving forward.
Focus on cost efficiency
In 2015, Barrick Gold successfully managed to reduce its all-in sustaining costs by 4% to $831 per ounce. The company had all-in sustaining costs of $660 per ounce at the end of previous year excluding its non-core assets. The reason behind the decline was a drop in corporate overhead and operating costs.
Barrick’s execution was improved because of superior capital outlay efficiency, rapid decision making across the company and an enhancement in information flow, thus leading to reduced costs.
The company’s low costs have steered an surge in its margins. Barrick recorded a margin of $329 per ounce in 2015, with its core assets conveying an even healthier gross margin of $500 per ounce.
The company generated positive free cash flow at a time when gold prices plunged around 10% during 2015. As of now, gold prices have been increasing and the company should see its free cash flow moving higher.
The enhancement in the free cash flow will also be supported by the fact that Barrick is strategizing to further decrease its cost structure as its objective is to bind its all-in sustaining costs to less than $700 per ounce in the next few years.
Financial condition and debt
Given the debt to capital ratios, total debt to equity, long-term debt to equity, Barrick’s foremost rival Goldcorp appears to have a healthier debt condition than Newmont and Barrick Gold.
However, the company is more indebted than its peers but it appears to have fewer trouble than Goldcorp when it has to pay interest outlays on outstanding debt. Moving back to the 2014 interest reporting, it appears that Goldcorp was previously having more trouble than its peers when paying interest outlays on outstanding debt.
Conclusion
I expect Barrick Gold’s free cash flow to improve significantly in the next year. Moreover, the company’s plans to reduce debt and other expenses bode well for investors in the long term. Thus, I think the stock can sustain the rally going forward.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
