Barrick Gold Corp. (ABX, Financial) had a great run in 2016 as the stock surged more than 100%. Moreover, the stock has displayed strong signs of upward movement this year as it has gained 17% year to date.
As a matter of fact, the profit margin of gold mining companies is directly proportional to the gold price. Currently, gold trades at a price of $1,287 per ounce and is projected to hover around $1,350 per ounce this year, which is obviously positive news for gold miners.
Gold miners are increasingly trying to reduce costs in an effort to maximize profits. Among all the gold miners, however, Barrick Gold appears to be in a great position to continue growing since it has the lowest all-in sustaining costs (AISC) in the industry.
In fiscal 2016, Barrick generated $8.56 billion in total revenue compared to $9.05 billion in fiscal 2015. Despite this, the company managed to produce a record-breaking free cash flow of $1.51 billion in the prior year. Most significantly, the company also reduced its long-term debt by $2.04 billion, signifying approximately 20% of its overall debt.
Moreover, for the full year, the company’s gross margin was approximately 36%, up from 23% in the prior year. Despite generating lower revenues in 2016, the company successfully managed to increase its gross margin by a considerable amount.
A couple of weeks ago, the gold miner announced it is selling a 50% stake in its Veladero mine in Argentina to Shangdong Gold Group, a Chinese mining company, for $960 million. The company has made a smart move by signing the strategic cooperation agreement with Shangdong as it will limit its risk and permit it to gain additional benefits from these resources.
Moving ahead, the company plans to reduce its overall debt by approximately $3 billion this year. Consequently, the $960 million in cash from Shangdong Gold will certainly help it achieve its debt reduction goal. Furthermore, the company also announced it will use the cash to reinvest in its business so as to efficiently cultivate free cash flow in the coming quarters.
On the other hand, Barrick recently increased its quarterly dividend by 50% to three cents per share. This increase showcases the company's strong financial condition as it also significantly reduced its debt in fiscal 2016.
Summing up
Barrick Gold rewarded investors with massive returns in 2016 and will likely continue to do so. The price of gold is forecasted to further improve in the approaching quarters, which will certainly move the stock upward.
As a result, shareholders should continue holding the stock for more returns since its future looks bright.
Disclosure: No position in the stocks mentioned in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
