Barrick Gold Corp. has surged to become Canada’s best-performing stock as a two-month rally within the rare metal gives added lift to the company’s turnaround efforts.
Barrick’s shares are up 29 per cent this year in Toronto, which makes it the best-performing stock on the Standard & Poor’s/TSX Composite Index. It’s also overtaken its two biggest competitors, Goldcorp Inc. and Newmont Mining Corp., in market capitalization, allowing it to reclaim the title of the world’s best gold company.
“Guys like me, in the pub, we had given Goldcorp the crown within the senior sector,” Barry Allan, an analyst with Mackie Research Capital Corp., said by phone from Toronto. “And Barrick actually pulled some rabbits from a hat. Not enough to get these to nirvana however they were seriously making some hard moves plus some hard calls.”
In the last year, those hard calls have included a lot more than US$3-billion worth of asset sales and joint ventures as well as aggressive cost cuts. That helped the company achieve its target of cutting its US$13.1-billion debt by $3 billion in 2015. Longer term, the goal would be to pare operations back to roughly a half-dozen core mines in the Americas that may withstand reduced gold prices compared to those seen today.
Barrick Gold Corp shares are sinking this morning after warning of $3-billion writedownBarrick Gold Corp’s Q3 results beat estimates, as miner continues debt reduction
Allan says expectations were high for Goldcorp and low for Barrick when he took an extended look at Barrick’s stock in August. It had been trading at $8.67 and he realized “it had gotten stupidly cheap.” He put a buy rating on the stock his price target to $14 a share from $12.35. The shares were trading down 5 percent at $13.20 at 11:01 a.m. in Toronto. As of Wednesday’s close the organization were built with a market value of US$11.5 billion in the U.S., compared with a U.S. market price of US$9.2 billion for Goldcorp and US$10.3 billion for Newmont.
“It’s great to determine that our shareholders are starting to acknowledge the progress that we’ve made but, make no mistake, there’s lots of lifting we have to do in 2016,” Barrick President Kelvin Dushnisky said in a phone interview Wednesday. The focus this season will still be on cutting operating costs and improving productivity in order to further lessen the company’s debt, he explained by phone from Argentina, where he was meeting with some of the country’s new cabinet ministers.
Barrick’s stock is taking advantage of the increase in gold more than its competitors due to its high debt, which makes it a “levered play on gold,” according to Rick de Los Reyes, a Baltimore-based portfolio manager at T Rowe Price Associates Inc., which holds 5.9 million shares of Barrick. Gold has jumped 5.3 per cent in 2016 after 3 years of declines as turmoil on global stock markets boosted its appeal like a safe haven. Bullion fell 0.4 percent to US$1,116.30 an oz Wednesday in New York.
“I wouldn’t get too caught up,” De Los Reyes cautioned. “Pull up a lasting chart of Barrick and this thing has a long way to visit.” What Barrick really needs is to start generating enough cash to obtain debt down to under 2 times earnings before interest, taxes, depreciation and amortization, he explained. Currently it’s 3.66, well above Newmont and Goldcorp at 2.22 and a pair of.18 respectively, based on data compiled by Bloomberg.
The company won’t provide new debt-reduction targets before its fourth-quarter earnings on Feb. 17, Dushnisky said, but the US$3-billion credit card debt reduction last year “wasn’t the ultimate step, which was the initial step.”
As part of its oft-repeated goal to help make the company bullet proof in almost any price environment, this month Barrick lowered its gold-price assumption to US$1,000 an oz for 2016, saying this might lead to impairments of around US$3 billion on 2015 earnings.
Although Barrick clearly advantages of higher gold prices, “we’re really focused on making sure the company is sustainable at virtually any foreseeable gold price,” Dushnisky said.
While the company maintains that its strategy of selling non-core assets can help it weather future gold-price storms by lowering costs, those benefits take a while to become felt, De Los Reyes said. “The problem is that each time they sell something, they lower their debt level, they also lower their Ebitda, so that your leverage ratios don’t change as much as you might like right off the bat.”
De Los Reyes did say he was impressed using the prices Barrick received for asset sales last year. “Any expectation that they were likely to be a distressed seller of assets has shown not to be true.”
For Allan, as soon as to crack the champagne is going to be when the stock is trading confined to the peers and also the balance sheet is robust enough to support future acquisitions, when they make sense.
“I’m not advocating they should be a predator, however i need to see them able where they may be,” Allan said. “We’re not there yet, but we’re not the basket case that we were taking a look at 18 months ago.”