On Sep 26, we upgraded world's largest gold miner Barrick Gold ( ABX) to Neutral. While we take into account uncertainties surrounding its Pascua-Lama mine, we are encouraged by the recent improvement in the gold price environment.
Why the Upgrade?
Barrick slipped to a loss in second-quarter 2013, reported on Aug 1, hit by a sizable impairment charge and a double digit decline in gold price. However, both adjusted earnings and sales beat Zacks Consensus Estimates. Both gold and copper production increased year over year in the quarter.
Barrick maintained its gold production guidance for 2013. The company cut its budgeted capital spending and costs by around $2 billion for 2013 and also trimmed its cost guidance for the year.
Barrick, a Zacks Rank #3 (Hold) stock, should gain from the recent recovery in gold prices. The yellow metal got a fresh lease of life following the Fed’s decision to continue with its $85 billion a month bond buying program.
Gold recovery is picking up steam as reflected by the rebound of prices to a $1,300 plus territory after touching a three-year low of $1,180.71 in Jun 2013. The prevailing geopolitical and macroeconomic uncertainty may support gold demand as investors look to avoid risky investments, which augurs well for gold miners like Barrick. Improving physical demand, tensions in the Middle East and uncertainties surrounding U.S. budget and debt ceiling are expected to support gold prices.
Barrick also has a sound liquidity position and generates healthy cash flows, which positions it well to take advantage of attractive development, exploration and acquisition opportunities. The company continues to make high return investments in its businesses.
However, uncertainty surrounding the Pascua-Lama project is weighing on Barrick’s stock price. The company’s prospects hinge heavily on the Pascua-Lama mine which overlaps the border of Chile and Argentina.
Barrick, in April 2013, halted construction work at Pascua-Lama after a Chilean court issued a preliminary injunction citing environmental concerns. It was fined roughly $16 million by a Chilean regulator for environmental violations.
Barrick will have to complete the project's water management system according to its environmental permit to the satisfaction of Chile's environmental regulator. As such, construction at Pascua-Lama has been delayed and Barrick now expects first production from the mine by mid-2016 compared with the earlier expectation of second-half 2014.
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