Is Barrick in trouble? I don’t think so!

• As of September 30, ABX had $15.4 billion in debt, of which, $0.86 billion was current (to be paid in the next 12 months). Most of its debt, as shown in the chart below, is long-term (5+ years).

• Interest coverage is currently at about 8 times; although this figure is lower than the industry average, a coverage ratio of 8 times is nothing to worry about.
• Barrick has suspended operations at Pascua Lama, and has significantly cut its total CAPEX budget for 2013 and 2014. 2013 CAPEX is now estimated to be $4.5 – $5.0 billion, versus their initial estimate of $5.7 to $6.3 billion. I think this is a great decision, and allows them to focus more on streamlining their existing operations
• Barrick sold a few of its non-core assets this year, including its oil and gas business; these divestitures resulted in cash inflow of $522 million.
• Cut dividends to $0.05 per share per quarter (1% annual yield)
• Barrick has low operating costs compared to its peers. The all in sustaining cost is currently at $900 – $975 per oz versus the industry average of $1,200+ per oz.

Now, let us compare Barrick to its peers. The table below lists companies based on their market capitalizations. As shown, Barrick is clearly the largest producer with revenues and an enterprise value significantly higher than its peers. Most of them made significant write-downs in 2013, which explains the negative profit margins.

From the tables above, Goldcorp (NYSE: GG), Yamana (NYSE: AUY) and Eldorado (NYSE: EGO) have significant advantages over their peers due to their high gross margins, low debt levels, and high dividend yields. This explains why their valuation metrics (EV/Revenues and EV/EBITDA) are well above their peers and the industry averages.

Barrick’s gross margins are in line with the industry average (as mentioned earlier, their costs including sustaining CAPEX are lower than the industry average), but debt to capital of 49% is significantly higher than the peer average of 28%. Their interest coverage ratio and dividend yield are also much lower than the peer average. This is why their valuation metrics are much lower than the peer averages. For example, Barrick’s EV/EBITDA is 4.9x versus the peer average of 7.4x.

In summary, Barrick clearly is not the best run gold producer at this time, but they clearly are not in any major problems. I think the current share levels are reasonable for investors.

By Sid Rajeev, head of research at Fundamental Research Corp.

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