Barrick: Gold Miner Earns Upgrade

04/04/2016 8:00 am EST


Our latest featured recommendation is a leading gold miner with operations in the US, Canada, Australia, South America and Africa, notes Bill Selesky, editor of Argus Research.

We are raising our rating on Barrick Gold (ABX) to buy from hold and setting a price target of $18.

Our upgrade reflects improving gold industry fundamentals and prospects for at least a modest decline in the US dollar this year — as a weaker dollar typically signals higher gold prices.

For all of 2015, Barrick produced 6.12 million ounces of gold, in line with management’s revised outlook.

Barrick projects 2016 gold production of 5 to 5.5 million ounces with an all-in sustaining costs (AISC) of $775-$825 per ounce. Management’s goal is to bring AISC below $700 per ounce by 2019.

We are raising our 2016 EPS estimate to $0.42 from $0.40 to reflect our higher near-term price expectations and our lower cost assumptions for gold. The 2016 consensus forecast is $0.39 per share.

We are also initiating a 2017 EPS estimate of $0.50, implying growth of 19% next year. Our 2017 estimate assumes continued cost reductions, higher gold prices and stable production. The 2017 consensus is $0.49.

We believe that Barrick has significantly strengthened its financial position over the last several years and note that management plans to reduce debt by at least $2 billion in 2016.

ABX shares trade at 33.2-times our 2016 EPS estimate and 27.9-times our 2017 estimate, compared to a 21-year historical average range of $24-$49.

The shares are also trading at a trailing price/book multiple of 2.3; at a price/sales multiple of 1.9; and at a price/cash flow multiple of 6.0. The price/EBITDA multiple is 7.3.

Based on these relatively low valuation metrics and prospects for continued improvement in gold industry fundamentals, we believe that the shares are attractive at current levels.

Our price target of $18, combined with the dividend, implies a potential 12-month total return of 32%.

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By Bill Selesky, Editor of Argus Research

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