Barrick Gold Corporation: JPMorgan Increases TP to $21 Despite Consensus Estimate Miss

Barrick Gold: JPMorgan Increases TP to $21 Despite Consensus Estimate Miss
JPMorgan has increased its target price from $18 to $21 due to Barrick Gold’s cost control efforts and higher gold prices

JPMorgan released its report on Barrick Gold Corporation (USA) (NYSE:ABX) today, stating that it had reassessed the firm in accordance with its second quarter results, which the company announced last week. Taking into consideration the premium that the market is placing on the company amid its operations in relatively safer locations, as well as other factors, the firm increased its price target from $18 to $21.

On the other hand, it reiterated a Neutral stance for the company’s stock, stating that over time, the company’s cash flows had become more difficult to forecast. While the Pueblo Viejo project has been successfully commissioned, fiscal problems in the Dominican Republic would channel half of the early cash flow away from Barrick and its partner Goldcorp Inc. (USA) (NYSE:GG). The company is likely to take a dramatic approach toward its Profit and Loss account development only when market conditions improve. Furthermore, it is also optimizing its portfolio to help bring down its debt load after it offloaded its stakes in several assets.

Performance Review

On July 27, 2016, Barrick Gold announced its 2QFY16 result, missing consensus estimates in both revenue and earnings. Its $2.012 billion revenue was lower than the Street’s $2.073 billion projection, while its $140.145 million net income (EPS $0.12) missed the market’s $166.8 million (EPS $0.144) expectations.

Barrick Gold is considered the industry's largest gold reserves and resources company. During the quarter, it produced 1.34 million ounces of gold. Its applicable cost of sales was $1.23 billion, whereas an all-in sustaining cost was $782 per ounce. The company also announced that it was on track to reduce its debt by $2 billion by the year-end, and had already repaid $968 million year-to-date (YTD).

Even though the company missed consensus expectations, it did manage to perform better in net earnings as compared to the prior year. The earnings growth was attributable to a decline in operating costs, favorable foreign exchange movement, and reduced royalty expenses. Furthermore, lower costs of labor, contractors and consumables also contributed towards this growth.

Debt Reduction Process

While making the earnings call, the company disclosed that it had less than $150 million of debt now, which is due before FY18, whereas its $5 billion debt would mature after FY32. Over the medium term, the management has aimed to reduce its total debt to below $5 billion.

Meanwhile, the management reaffirmed its intention to reduce the debt, for which it announced the strategic sale of its non-core assets. In this regard, it announced a 50% stake sale in KCGM mining company’s operations in Kalgoorlie - Western Australia, worth $1 billion. Market pundits believe that the mine’s joint venture partner, Newmont Mining Corp (NYSE:NEM), might take over this stake, as it had previously shown interest towards a complete ownership of KCGM's mines. Furthermore, as per their partnership agreement, Newmont has a right of first refusal. This means Barrick has to offer its stake first to Newmont before putting it in front of any other interested party.

Full-Year Guidance

Barrick Gold’s management foresees gold production to be in the range of 5.0-5.5 million ounces by the year-end. Against this production, the cost of sales is likely to float in the $5.2-5.5 billion range, whereas the all-in sustaining cost is now projected to float at $750-790 per ounce. In 1QFY16, this range was projected as $760-810 per ounce, while the original guidance was $775-825 per ounce.

Furthermore, the company has also increased its copper production guidance from 370-410 million pounds to 380-430 million pounds. This increment was projected on the back of the Saudi Arabia-based Jabal Sayid copper mine production commencement.

Mine Site Guidance Updates

On the basis of better performance, the company increased its production guidance for Cortez and Turquoise Ridge mines. At Cortez gold mine, it projected 980,000-1,050,000 ounces of production (previously 900,000-1,000,000 ounces), with $520-550 per ounce all-in sustaining cost (previously $580-640 per ounce). On the other hand, at Turquoise Ridge gold mine, it now anticipates 240,000-260,000 ounces production (previously 200,000-220,000 ounces), with $640-700 per ounce all-in sustaining cost (previously $770-$850 per ounce).

On the contrary, at the Argentina-based Veladero gold mine, the company now presumes 580,000-640,000 ounces production (previously 630,000-690,000 ounces), with $790-860 per ounce all-in sustaining cost. The guidance was lowered amid severe winter weather conditions in the vicinity during the first half of CY16.

Research Firms’ Stance

As per Bloomberg statistics, 27 research firms covered Barrick Gold. Out of these, 13 suggested a Buy, 11 suggested a Hold, while 3 firms advised a Sell for the company's stock. The 12-month average target price turned out to be $23.41.

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