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Barrick Gold Is a Value Investment

As gold witnessed renewed decline in the last few months, gold mining stocks have also suffered. Barrick Gold (ABX) has also steeply declined from May levels of $13.5 per share to current levels of $6.4. While sentiments remain bearish for the precious metal, I am of the opinion that investors can consider some exposure to Barrick Gold at current levels. Bearish sentiments also result in correction being overdone, and that's the case with Barrick Gold.


I will start my discussion with the likely trend for gold price since the company's results and stock performance solely depend on gold price movement. Gold touched a low of $1,080 per ounce in the recent past and has climbed back to $1,121 per ounce. The immediate trigger for gold price is the fed meet on Sept. 17, and I believe that the fed will not increase rates. That can result in some relief rally for gold. In the long-term, factors such as increasing geo-political tensions, central bank currency diversification, continued expansionary monetary policies to support growth and increasing government debt globally are factors that will help gold trend higher. Therefore, investors with a 3-5 year investment horizon can consider some exposure to quality gold mining stocks, and Barrick Gold is one of the best options.

The first reason to consider Barrick Gold as a good investment option among miners is the point that the company expects all-in-sustaining-cost of $840 to $880 per ounce in 2015. The company has made continued cost improvements and a low AISC implies decent cash generation even when gold is around $1,200 per ounce. Further, if gold witnesses rally in the next 12-24 months, the EBITDA and cash flow scenario can completely change with Barrick Gold expecting $330 million in incremental EBITDA per $100 an ounce increase in gold price. As compared to Barrick Gold, Newmont Mining (NEM) has a relatively higher all-in-sustaining-cost. However, I also like Newmont Mining among gold mining stocks. Investors bullish on the gold mining sector can also consider small exposure to both the stocks.

Coming back to my focus stock for this article, Barrick Gold has been making efforts to dispose non-core assets and reduce debt. I see this as a positive strategy and Barrick Gold is on track to reduce $3.0 billion in debt by 2016. While disposing non-core assets also implies impact on the company's cash flow, I believe that the company's core assets have strong cash flow generating potential once gold prices recover. Therefore, the near-term adjustments will translate into long-term positive. Reduction in debt will increase the company's flexibility for investment in core assets when gold price surges higher.

The company's financial flexibility is also supported by $4.0 billion in undrawn credit facility as of 2Q15. While I don't see Barrick Gold utilizing this facility in the foreseeable future, the liquidity will help make robust investments if gold price trend turns bullish and sustains.

From a valuation perspective, Barrick Gold is trading at price to sales valuation of 0.79, price-to-book valuation of 0.74 and EV/EBITDA valuation of 5.2. These are certainly attractive levels for investment, but I would still consider small exposure to the gold mining sector at this point of time. Since I discussed Newmont Mining above, I would like to mention that the stock is currently trading at an EV/EBITDA of 3.6 and is also attractive.

In conclusion, Barrick Gold is moving forward with a right strategy of disposing all or part of non-core assets. This will help the company improve its balance sheet and I expect capital expenditure to be largely in line with operating cash flows as long as gold prices remain subdued. I see further divestment of non-core assets in the coming quarters and that will aid investment plans for 2016.

This article first appeared on GuruFocus.