With gold trending higher year to date, gold mining stocks have surged and Barrick Gold (ABX, Financial) has provided stellar returns of 156%. Even after the big rally from depressed levels, Barrick Gold has more upside in the coming months.
George Soros (Trades, Portfolio) bought 19,419,309 shares of Barrick Gold, according to the latest filings, and this is an indication of hedge fund managers' bullish view on gold.
The important point is that Barrick Gold has strong fundamentals, but the rally has been clearly driven by gold trending higher, and it is critical to discuss the factors to be bullish on gold in the coming quarters.
The single most important reason is the likelihood of an interest rate hike by the Federal Reserve System and its implications. Fed Chairwoman Janet Yellen, in her latest speech, has still not provided any specific timeline on rate hike. However, global economic indicators clearly suggest that economic activity is sluggish, and I see no rate hike through 2016. Once this is clear, gold will surge higher, and I will not be surprised if gold convincingly breaks $1,300 an ounce in the current rally.
The upside for gold in the coming quarters is also likely to be driven by continued purchase of gold by central banks and renewed interest in gold investing from retail investors (as indicated by the ETF trend).
Coming to reasons specific to Barrick Gold, I see the following factors as reasons for continued rally in the stock:
- For 2016, Barrick Gold has approximately 70% of production from core mines at an AISC of $660 to $730 per ounce. Further, the company’s overall asset AISC is likely to be $831 per ounce. As gold trends higher, meaningful EBITDA margin expansion supported by attractive AISC can be expected.
- For Barrick Gold, the average reserves grade of core mines is attractive as compared to peers, and I see the benefit here if gold upside sustains. With average mine life of 16-plus years, Barrick Gold has the flexibility to ramp up quality production if gold sustains at higher levels.
- Barrick Gold has plans to reduce debt by another $2.0 billion in fiscal year 2016, and this is a good strategy even when the trend seems bullish for gold. By doing away with noncore assets and increasing financial flexibility, Barrick Gold will be well positioned to make the desired level of investment in core assets in the next 24 to 36 months.
- For the first quarter, Barrick Gold reported free cash flow of $181 million, and the company’s FCF is likely to increase going forward. The reason to focus on the FCF is that Barrick Gold probably will increase dividends this year, and that is likely to trigger re-rating of the stock.
- From a balance sheet perspective, Barrick Gold has minimal debt maturity coming in 2016 and 2017. Further, the company has a $4 billion credit facility that is likely to support the company’s investment plans for the coming quarters. With Barrick Gold expecting positive cash flow even at $1,000 per ounce, the company’s credit health should improve in the coming quarters.
Considering these positives, Barrick Gold has more upside in the coming quarters and the bullish trend for gold will strongly support the company’s upside trajectory. In the coming quarters, an increase in dividend can further add to the positive momentum in the stock. Even after big upside, there is certainly more rally impending in the stock.
Disclosure: No positions in the stock.
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