Barrick Gold Corporation (USA) (NYSE:ABX) has announced a massive impairment in its second quarter earnings report. This came as no surprise. The drop in gold prices has caused the company to write down $8.7 billion from its balance sheet. On the other hand, Barrick Gold reported adjusted earnings of $0.66 per share. The company made money from its operations in the quarter, despite the low gold price environment. Its stock has lost more than 50% this year. Is it time to take a closer look at Barrick?
Pascua-Lama problems
The worst that Barrick Gold Corporation (USA) (NYSE:ABX) could have said is that it decided to give up on it. Fortunately, this did not happen. Shareholders of Silver Wheaton Corp. (USA) (NYSE:SLW) and Fluor Corporation (NEW) (NYSE:FLR) must be satisfied with this decision. Silver Wheaton is a silver streaming company that has bought the right to buy silver from Pascua–Lama when it starts operating. As Pascua-Lama has significant silver reserves, it is a valuable asset for Silver Wheaton. The company would buy the contract amount of silver from other Barrick’s mines until Pascua-Lama starts production. Silver Wheaton has been under pressure this year, as gold and silver prices dropped–the stock has lost 38%.
The company’s business model does not involve mining operation. It is a distinctive advantage among silver miners and makes Silver Wheaton Corp. (USA) (NYSE:SLW) a unique way to play silver. The company’s dividend is tied to its fiscal performance, which brings flexibility and financial safety. The stock is trading at a forward P/E of 18, and its performance mostly depends on the price of silver.
Fluor Corporation (NEW) (NYSE:FLR) has been awarded a contract for construction at Pascua-Lama project. The company has been doing fairly well this year, and its stock is up 14%. The situation with Pascua-Lama is common in the mining industry, as projects are delayed for various reasons. Unfortunately, Fluor has recently reported its second-quarter results and missed analysts’ estimates. The steady growth in the oil and gas sector was offset by the weakness in the mining sector. However, the $37 billion backlog suggests a solid future for the company. Fluor trades at an attractive 14.41 forward P/E. Analysts’ mean target price suggests a 12% upside. This target is surely reachable.
Outlook
Barrick Gold Corporation (USA) (NYSE:ABX) continues to cut costs, and the company has slashed its dividend by 75%. This move would free up $600 million per year. If the low gold prices are here to stay, liquidity will be critical, especially for companies with high debt levels like Barrick.
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Barrick Gold Corporation (USA) (NYSE:ABX) has reported that its all-in sustaining costs were $919 per ounce in the second quarter. The company has changed its cost outlook for the year, and now expects the costs to be in the $900 — $975 range. The previous guidance was $1000 — $1100. This is a significant improvement.
The resequencing of construction schedule at Pascua-Lama frees more money for Barrick Gold Corporation (USA) (NYSE:ABX). The mine is expected to start production by mid-2016. In another move to save money, capital expenditure for this year was reduced by $1.5 billion.
With the improvements on the cost front, Barrick Gold Corporation (USA) (NYSE:ABX)’s position looks solid. The company has $2.4 billion of cash on hand and $4 billion of undrawn credit facility. The debt schedule is relatively easy, with $1.8 billion of debt due through 2015.
Bottom line
Barrick Gold Corporation (USA) (NYSE:ABX) trades at 6.69 forward P/E. When the price of gold improves, the company is fully positioned to profit from it. The improvements on the cost front would stay with Barrick regardless of the price environment. The impairment of the assets could be temporary. When the prices rise, the company would reevaluate its assets and adjust their value accordingly. In the short term, the stock would be volatile and sensitive to minor changes in the gold market. In the long term, the company is a solid, low-cost gold producer.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Fluor.
The article The Worst Is Behind for this Gold Miner originally appeared on Fool.com.
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