Headquartered in Toronto, Barrick is one of the world’s largest gold mining companies boasting operations in Canada, the U.S., Chile, Argentina, Zambia, Australia and Saudi Arabia. Jorge Beristain, a New York-based analyst at Deutsche Bank Securities, says Barrick management has made a good start at debt reduction, but more fat needs to come off.
Barrick Gold Corp. (TSX─ABX; NYSE─ABX) is tightening its belt.
Not only has it sold its Cowal gold mine in New South Wales, Australia, but it’s selling 50 per cent of its gold mine in Papua New Guinea to China’s Zijin Mining Group Ltd.
Although the downsizing has lowered Barrick’s debt, more needs to be done, says Mr. Beristain, who’s keeping the Toronto-based top gold producer as a ‘hold’ on his list of mining stocks to invest in.
He’s also cutting his 12-month price target to US$12 from $13 a share. He writes:
Because of the downsizing, we’re cutting our estimate of Barrick’s 2015 net earnings per share by five per cent, while slicing eight per cent from our 2016 number.
But EPS will actually fall 22 per cent for 2015-16, given a rise in Barrick’s tax rate to 43 from 35 per cent — mainly because of Barrick’s 60 per cent stake in Pueblo Viejo, a gold mine in the Dominican Republic.
This, though, will be partially offset by lower sales, general and administrative expenses, as well as by the company’s cost-cutting.
Copper mining operations on the block
In the meantime, Barrick has started to accept bids for either the full or partial sale of its Zaldivar copper producing operations in Chile. Zaldivar is located next to the world’s largest copper mine, BHP Billiton-owned Escondida.
The mine, which now produces 240 million pounds of copper a year, is a long-life operation, boasting reserves of 5.6 billion lbs.
Given recent reports that the mine could fetch US$2 billion, it could have EBITDA (earnings before interest, taxes, depreciation and amortization) of US$237 million, implying a ratio of enterprise value to EBITDA of 8.4.
More asset sales likely
We admit Barrick is cleaning up its portfolio. But we think the company might find it hard to slice US$3 billion from its debt using both asset sales and cash flow, given that indebtedness has so far fallen by only about US$900 million.
After all, Barrick itself is forecasting free cash flow of just US$202 million. So, it will need to sell more assets.
We’re now pegging the company’s 2015 output at 6.2 million ounces — 200,000 ounces below our previous forecast.
And, as a result of its divestitures, Barrick’s gold volume is expected to fall eight per cent in 2016 to 5.9 million ounces.
Meanwhile, by the end of 2015, the company’s net debt is set to fall nine per cent to US$9.4 billion.
As a result of this, Barrick’s ratio of net debt to EBITDA is now 2.6, rather than 2.9.
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •7/27/15 •