Commodities & Metals

After Big Gains Already, One Analyst Sees Barrick Gold Rising Much Higher

Gold and the gold-mining segment have been on fire in the wake of plummeting interest rates and more economic uncertainty around the U.S.-China trade war. One analyst sees Barrick Gold Corp. (NYSE: GOLD) rising even further in the wake of the now-closed Randgold and Barrick merger.

Before getting into this call, note that some analyst calls come with some very unlucky timing. Gold and the gold miners have seen serious selling pressure on Tuesday after the U.S. Trade Representative said that the United States would delay certain new tariffs from September until mid-December to allow for further trade talks to continue in a few weeks.

Independent research firm Argus has raised Barrick Gold to Buy from Hold, and the new target price is $22. That is versus a $17.96 prior closing price, and the Refinitiv consensus analyst target price was last seen at $16.93. It is important to realize that this stock is now in a constant race with Newmont Goldcorp Corp. (NYSE: NEM) over which is the largest gold miner by market cap, as both currently screen at almost $31 billion.

As far as the Argus upgrade by David Coleman, the call reflects the expectations for higher gold prices in the coming quarters and management’s upwardly revised production guidance. Coleman also expects the combined gold giant to benefit from its recent Randgold acquisition, and the call also calls for higher earnings over time.

As far as a relative rating compared to other stocks in the sector, Argus currently rates the basic materials sector as Market Weight.

The Argus earnings estimates are $0.48 per share for 2019 and $0.55 per share for 2020. The call implied an upside total return of 16%, if you include Barrick’s the dividend. Most analyst calls with new Buy and Outperform ratings in S&P and Dow Jones industrial stocks tend to come with upside projections of 8% to 10% at this stage in the 10-year-old bull market.

Several factors are working their way into the mix for the upgrade: higher gold prices in the coming quarters, management’s upwardly revised production guidance, gains from its merger and higher revenues.

To show its strength after reporting results, note that Barrick Gold’s total gold production rose 27% to 1.08 million ounces and its copper production was up by 17% to 97 million pounds. The company’s all-in sustaining costs for gold also rose, to $869 per ounce from $856 per ounce a year ago. The company’s cost of sales for copper fell to $2.04 per pound from $2.45 a year earlier, and its all-in sustaining costs for copper fell to $2.28 from $3.04 per pound.

Barrick’s management also forecast 2019 gold production to be at the high end of its previous forecast range of 5.1 million to 5.6 million ounces, and its cost of sales estimate of $910 to $970 per ounce was unchanged, with an all-in sustainable costs estimate of $870 to $920 per ounce.

Before gold bugs and investors just jump into this call, they should consider that Barrick and its rival gold stocks already have made major runs higher in 2019. Barrick’s shares have risen about 45% in the past three months alone, and the shares were up over 70% from a year ago. Also worth noting is that the street-high sell-side analyst price target from Refinitiv is now $22.50.

Other developments have taken place since the Randgold deal. On July 19, Barrick agreed to acquire all the shares of Acacia that it did not already own. On July 1, Barrick closed on its joint venture agreement with Newmont Goldcorp. The combined Barrick-Randgold operation also is said to have five of the world’s 10 tier-one gold mining assets, which are mines producing over 500,000 ounces of gold per year.

Barrick is said to trade at 37.9 times the Argus 2019 EPS estimate and 33.1 times its 2020 EPS estimate. That compares to a peer average of 35.6 for 2019. It is also trading at 2.0 times its book value, well under the peer group’s average of 4.6 times book and under the midpoint of a five-year historical range of 0.7 to 3.7 times book.

The Argus report also talked up Barrick’s financial strength and its dividend:

We rate Barrick Gold’s financial strength as High, the top of our five-point scale. The company receives average scores on our main financial strength criteria of debt levels, fixed-cost coverage, cash flow generation, and profitability. The company’s debt is rated BBB/stable by Standard & Poor’s and Baa2/stable by Moody’s. The company has worked to pay down debt, which fell to $5.8 billion at the end of the second quarter of 2019 from $6.4 billion at the end of the second quarter of 2018. The company has repaid $10 billion of its debt over the past five years. Most GOLD debt does not mature until after 2023. At the end of 2Q19, Barrick had cash and equivalents of $2.15 billion, up 3% from the end of 2Q18. Debt, net of cash, was $3.65 billion at the end of the second quarter of 2019, down 15% from the prior year… In May 2019, the company raised its quarterly dividend from $0.03 to $0.04, or $0.16 annually. It also paid a special dividend of $0.07 per share in January 2019.

Barrick’s shares traded down 1.2% at $17.73 on Tuesday in late-morning trading, and it has a 52-week range of $9.53 to $18.66.

Tuesday’s top analyst upgrades and downgrades also included Advanced Micro Devices, Apple, Domino’s Pizza, Intel, McDonald’s, Occidental Petroleum and and many more.

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