As reported by Bloomberg earlier this week, Barrick Gold Corp. (ABX, Financial) will cut its debt by another tranche this year to reach the goal of $1.45 billion in debt reduction by Dec. 31.
According to Kelvin Dushnisky, president of Barrick Gold, it has already cut its debt position by $1.23 billion since the beginning of fiscal 2017.
This move is part of the Canadian miner’s strategy to deleverage its balance sheet that had approximately $7.44 billion in total debt as of June 30 and achieve a target of $5 billion that Barrick Gold plans for the end of next fiscal year.
This strategy, said Dushnisky, will be accomplished by Barrick Gold using cash on hand and securities that as of the most recent quarter was approximately $2.93 billion, a cash flow that will be originated by the miner’s operations and through the divestiture of costly assets.
Speaking of the remainder of this fiscal and full fiscal 2018, the company aims to reduce the total debt by another $1.214 billion. This is the tranche that still needs to be reimbursed before the mining company can reach the goal of $5 billion in total debt by Dec. 31, 2018, and will play as a catalyst to the market value of Barrick Gold.
As a matter of fact if Barrick Gold was able to cut its total debt by another $1.23 billion year to date when the yellow metal averaged $1,250.47 per troy ounce on the London Bullion Market during the same period and without using cash on hand, with the bullion now trading over $1,290 per troy ounce, and considering that Barrick Gold can mine at profit already starting from $1,100 per troy ounce or even lower, the biggest gold producer in the world will be able to generate enough cash flow from operations to accomplish this without using its prompt liquidity. From the last quarter of fiscal 2016 to the second quarter of fiscal 2017, Barrick Gold has even increased its cash on hand by 22.5% to $2.926 billion.
In addition, the existence of certain macroeconomic factors worldwide, which are positive to gold, will help Barrick Gold achieve its debt reduction targets in 2017 and beyond, likely without recurring in either asset divestitures or more importantly using its liquidity.
The debt reduction will work not only in favor of Barrick Gold in the sense that it will improve its creditworthiness, but it will also play as a catalyst because Barrick Gold’s net debt-EBITDA ratio – a measure of the company’s balance sheet leverage – will further improve.
The improvement in the company’s net debt-EBITDA ratio – one of the most used measures of leverage for companies that operate in a capital-intensive industry – will lead analysts to rerate Barrick Gold upward, and it cannot but have a positive impact on the share price over the coming weeks.
As of fiscal 2016, the net debt-EBITDA ratio was at 1.448, and analysts estimate (see the "Balance Sheet Analysis" section on the linked website) that it will be lowered by Barrick Gold’s deleverage strategy to 1.08 times at the end of fiscal 2017 and to 0.72 times at the end of fiscal 2018.
How much is Barrick Gold worth today to think of either establishing or increasing a position in the miner?
Barrick Gold is trading at $19.39 per share – more or less in the middle of a 52-week low and 52-week high range of $13.81 to $20.78Â – with a market capitalization of $18.57 billion.
The Canadian gold stock gained 2.75% year to date.
The analysts have set a target price of $20.22 that they expect Barrick Gold will reach within 12 trading months, and it represents a 23.4% likelihood of upside in the market value of this gold stock. The value of $20.22 is an average of 21 estimates of analysts who were surveyed on Barrick Gold’s target price and that range between a low of $15 per share and a high of $24.76 per share.
The recommendation rating on Barrick Gold is set at 2.5 out of 5.
When the time comes to decide whether investing in the gold stock industry and which gold mining stocks to choose to expose the portfolio to the volatility of the bullion market, there is a metric that investors should consider – the EVO. The EVO is the enterprise value of the gold mining company divided by the total volume of mineral reserves held in ounces by the company.
In the case of Barrick Gold, the EVO is $306.64, which measures the Canadian miner’s enterprise value per ounce of proven and probable gold reserves.
On Dec. 30, 2016, Barrick Gold held proven and probable gold reserves of 85.9 million, and its enterprise value is according to the latest market valuation – $26.34 billion.
This metric should be used in a vertical analysis to determine whether Barrick Gold is more convenient compared to its peers.
Disclosure: I have no positions in Barrick Gold.
