Barrick Gold (NYSE: ABX), unlike its peers such as Goldcorp (NYSE: GG) and Yamana Gold (NYSE: AUY), expects to cut its production in 2014. Moreover, the company slashed by half its capital expenditure. These decisions were made to avoid potential cash flow problems down the line. But now that gold is recovering does this mean it’s high time to reconsider investing in Barrick? Does the company have a silver lining? Also, how is the company measure up to its peers?
Lack of growth in 2014
Barrick’s revenue is expected to decline in 2014 not only because of the low price of gold environment compared to pervious years, but also because of the reduced production guidance. Due to the difficulties Barrick has been facing in the past couple of years, plans to slash its production to an average of 6,250 thousands of ounces – roughly 13% decline, year over year. This is also inline with the company’s decision to reduce its capital expenditure from $5 billion in 2013 to roughly $2.5 billion. In comparison, Goldcorp and Yamana plan to further augment their respective production during 2014. Goldcorp projects to raise its production by 15% to over 3 million ounces of gold. Yamana plans to increase its production from 1.3 million of gold equivalent ounces to 1.4 million — nearly 7.7% gain. Despite Barrick’s lack of growth, the company’s profitability is one of its strong points and likely to remain so.
Even though Barrick faced cash problems in 2013, the company’s profitability, after controlling for its goodwill provisions, was relatively high and reached around 32.7%. In comparison, Yamana and Goldcorp recorded a profit margin of around 16% (after controlling goodwill charges).
One of the reasons for the higher profitability is Barrick’s low all-in sustaining costs. Back in 2013 the cost was around $915 per ounce of gold. In 2014, the company expects its all-in sustaining costs will rise to an average of $950 per ounce — a 3.8% gain. Nonetheless, Barrick’s production cost will still be lower than other gold producers’ costs. E.g. Goldcorp’s all-in sustaining costs reached an average of $1,031 per ounce in 2013. This year its production costs are expected to reach an average of $975 per ounce — 5.4% lower than last year. This means, even though Barrick’s production costs are expected to rise and Goldcorp’s to fall, Barrick’s costs are still estimated to remain lower than Goldcorp. After considering the good and the bad, is it time to reconsider investing in Barrick?
Is the company fool’s gold?
The main question investors may ask is whether Barrick’s current valuation makes it an investment worth considering? In the past several quarters the losses it recorded were mainly due to the changes in the valuation of its assets. This includes the changes in its assumptions on gold, silver and other metals prices. These changes weren’t cash expenses. In terms of cash, the company was able to generate roughly $4.2 billion from its operations. Let’s take into account several factors including enterprise value to EBITDA, operating cash flow-to-sales ratio, and debt-to-equity ratio. These measurements could provide a rough estimate to the above-mentioned gold producers’ leverage, financial risk, and valuation.
Source: Yahoo Finance
The table above summarizes these measurements. Based on the above, it seems that Barrick Gold is the least valued of the three as it has the lowest EV-to-EBITDA ratio. Moreover, Barrick’s forward P/E is the lowest, which implies the company is the expected to be the least to grow in 2014.
The company’s debt burden is the highest as its debt-to-equity ratio is over 81. The silver lining from this table is the operating cash flow-to-sales ratio, which measures the company’s ability to generate consistent cash from its operations. Barrick is still capable to generate a good amount of cash from its operations much like Yamana and even better than Goldcorp.
Therefore, even though Barrick might be a cheaper stock than other leading gold producers and is capable to generate a reasonable amount of cash from its operations; the company’s financial risk remains high and with lower growth, Barrick doesn’t seem to offer enough in return.
Barrick Gold has made several changes in order to ease its financial burden mainly by cutting down its capital expenditure and slowing down its production. Moreover, the company’s current valuation seems lower than its peers. If the gold market continues to recover, all three gold producers will benefit from this rally. Therefore, Yamana and Goldcorp might be a better investment due to their potential growth in 2014 and lower risk compared to Barrick.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
- Will Gold Continue to Dwindle?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.