Prudent Picks in Gold

02/27/2017 7:00 am EST


Jason Clark

Contributing Editor, The Prudent Speculator

Jason Clark is a leading value investor and contributing editor to The Prudent Speculator. Here, he looks at two gold stocks that recently reported earnings.

On the back of lower costs and stronger guidance for production, cost and capital expenditures, shares of Barrick Gold (ABX) rose after the mining giant reported its Q4 2016 results.

ABX posted adjusted EPS of $0.22, versus expectations of $0.20, and realized revenue of $2.32 billion, compared to projections of $2.22 billion.

In 2016, ABX said its mines generated operating cash flow of $2.64 billion and record free cash flow of $1.51 billion, while the company reduced its cost of sales applicable to gold to $798 per ounce, and its all-in sustaining costs by 12% to $730 per ounce. Additionally, ABX continued to strengthen its balance sheet, cutting total debt by $2.04 billion, or 20%.

In 2017, ABX expects to produce 5.60 million to 5.90 million ounces of gold at a cost of sales applicable to gold of $780 to $820 per ounce and all-in sustaining costs of $720 to $770 per ounce.

This represents an improvement over its previous 2017 guidance of 5.0 million to 5.5 million ounces of gold, at all-in sustaining costs of $740 to $790 per ounce.

Additionally for 2017, ABX is once again targeting a free cash flow breakeven gold price of $1,000 per ounce, which should ensure that the company can generate cash in periods of lower gold prices, while producing a windfall when gold prices rise.

For 2018, ABX expect to produce 4.80 million to 5.30 million ounces of gold, at an all-in sustaining cost of $710 to $770 per ounce, while in 2019, the company expects to produce 4.60 million to 5.10 million ounces of gold, at an all-in sustaining cost of $700 to$770 per ounce.

While the dividend yield is not material, ABX increased the quarterly payout by 50% (from $0.02 per quarter to $0.03). With all new information taken into consideration, our Target Price for ABX now resides at $26.

Shares of Yamana Gold (AUY) were hit hard following the Canadian miner’s Q4 earnings release as well as the announcement that the company doesn’t expect to begin development of any major projects for the next five years.

Additionally, all six of its current operating mines showed a decrease in reserves, though a seventh mine will be producing soon. For the quarter, AUY reported adjusted EPS of $0.01, in line with expectations, on revenue of $484.4 million (versus forecasts of $488.2 million).

Through reductions in administrative and exploration costs, the company continues to trim its all-in costs of mining. While debt levels are a bit elevated, we see management’s focus on efficiency, cost containment and free cash flow generation as extremely positive, and ultimately will lead to AUY having a much improved capital structure.

Though gold prices have bounced from the December 2016 lows, we are not banking on shattering the record spot price of $1,772.25 set in September 2012 anytime soon.

However, we continue to be comfortable with this gold miner as a hedge in a broadly diversified portfolio, and believe that AUY can build on its almost 25% share price rebound since late December. Our Target Price for AUY has been reduced to $5.87.

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