Barrick Gold Hikes the Quarterly Dividend

Upside will follow the announcement

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Barrick Gold Corp. (ABX, Financial) closed at $13.65 per share on Monday, which was flat from the previous close.

But I am expecting some upside in the share price of the Canadian gold producer after it announced on Monday it has more than doubled the quarterly dividend to 7 cents per ordinary share from the previous distribution of 3 cents per share. The payment is for the final quarter of 2018 and will be distributed on Jan. 14 to holders of the ordinary stock as of Dec. 28.

Even though the increase is only temporary, as the miner will reduce the dividend for the first quarter of 2019 down to 4 cents per share after the completion of the merger with Randgold Resources Ltd. (GOLD, Financial), it is enough to trigger upside.

I have estimated the dividend hike will boost the amount of funds allocated to the payment of the dividend for the last three months of 2018 by $50 million. Most of the increase will be financed with the $1.7 billion, or $1.45 per share, it has in cash on hand and equivalents as of the third quarter.

Since the generation of cash flow is influenced by the uncertainty that usually reigns on the gold market and the company has still some debt reduction targets to accomplish before Dec. 31, a positive surprise from the fourth quarter financial report is likely to occur. Otherwise, the company would hardly have raised the distribution.

As a reminder, to maintain a robust balance sheet, Barrick Gold aims to reduce total debt to $5 billion from $5.7 billion as of the third quarter. This will also be enacted through the usage of some cash on hand.

So what can we expect from the next earnings announcement? Since gold is going to close the fourth quarter averaging $1,225 an ounce, just shy of a 1% jump from the average of the prior quarter, we can be optimistic about a production boost.

Instead of the 4.5 million ounces of gold produced, as guided by the company, Barrick Gold may close the year with gold production falling somewhere between 4.75 million and 5 million ounces at an all-in sustaining cost of $765 to $790 per ounce.

Barrick Gold also produces copper. Production for the year is expected to be between 345 million and 410 million ounces. Copper will be sold at an all-in sustaining cost of $2.55 to $2.85 per ounce.

Gold is 85% to 90% of Barrick Gold’s total revenues and copper contributes 10% to 15%.

For the final quarter of the year, consensus is for earnings of 12 cents per share on $1.95 billion in revenue.

The stock has declined 4% for the 52 weeks through Dec. 17, sending the share price above the 50-, 100- and 200-day simple moving average lines. The closing share price on Monday was 43.2% off the 52-week low of $9.53 and 13.7% below the 52-week high of $15.52.

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Barrick Gold has market capitalization of $15.96 billion, a price-book ratio of 1.85 versus an industry median of 1.74 and an EV-to-EBITDA ratio of 13.51 compared to an industry median of 9.3.

The recommendation rating for Barrick Gold is 2.8 out of 5, suggesting a hold. The average target price also reflects a slim appreciation of 3.3% to reach within the next 52 weeks. The margin is going to be squeezed further as the dividend hike announcement will positively impact the market value.

Therefore, I suggest holding Barrick Gold, waiting for a significant depreciation before adding to the position.

Disclosure: I have no positions in any securities mentioned in this article.

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