'Backing Away From The Cliff' At Barrick Gold: Time To Buy?

In a report published Friday, Barclays analyst Farooq Hamed upgraded the rating on Barrick Gold Corporation (USA) ABX, while lowering the price target from $11 to $10. The analyst believes that the company's ability to reduce debt removes an overhang on the stock.

According to Barclays, "In the past week ABX has raised ~$1.6B through profitable asset and stream sales bringing its YTD asset sales total to $2.45B or ~20% of its total debt outstanding. With its Q2 release, ABX highlighted another group of 6 non-core assets it intends to sell by yearend which, we think could generate proceeds of another $500-$700 mln."

The company had earlier indicated that the proceeds from its asset sales would be used to repay debt, and the analyst believes that Barrick Gold would be able to repay all its debts maturities till 2020, via cost savings and asset sales.

The decline in the risk profile, along with the meaningful decline in the share price, makes the stock valuation and risk reward profile compelling.

"While the debt/EBITDA ratio is still high relative to the other gold producers in our coverage, it marks significant improvement," Hamed said, while adding, "In addition to the asset sales, ABX also announced measures to preserve cash including a 60 percent dividend reduction and reduced capex guidance."

The dividend cut would lead to annual savings of about $140 million, while the capex for 015 had been reduced by $200 million. With the decline in gold prices, Barrick Gold is expected to find it difficult to generate positive FCF. Therefore, the analyst believes that the dividend and cost cuts announced by the company are both necessary and prudent.