Is Barrick Gold a Buy?

Aaron Regent, former President & CEO at Barrick Gold, evidently lost Chairman Peter Munk's ear prior to his replacement.

On June 6, 2012 Barrick Gold made the surprising announcement to replace Aaron Regent as CEO. At the time, although there was plenty of frustration over Barrick’s share price performance, many investors felt the company was moving in the right direction under Mr. Regent’s leadership.

Forbes noted, “Barrick’s stock price gained nearly 30% under Regent’s tenure, failing to keep up with the 49% raise in the price of bullion, despite performing in line with its peers.”

Regent, among other things, was credited for unwinding the company’s gold hedge book. Investors also reacted favourably when he increased dividends and spun out the African assets. As for the acquisition of copper miner Equinox Minerals, that still remains a point of contention.

Some feel the company greatly overpaid for Equinox – the deal was valued at $7.5 billion – perhaps overpaying by as much as 50% according to analyst George Topping of Stifel Nicolaus.

Ironically, in a letter to shareholders co-founder and chairman of Barrick (Stock Profile – TSX:ABX & NYSE:ABX) Peter Munk hinted that acquiring more base metal assets was one way Barrick could increase shareholder value. So what, exactly, is going on at Barrick and is the company’s stock a Buy?

One thing is certain, at 84 years of age, Peter Munk, is clearly still in charge. According to Munk, “We are fully committed to maximizing shareholder value, but have been disappointed with our share price performance.”

Upon Regent’s ousting, former Executive Vice President and Chief Financial Officer Jamie Sokalsky was appointed President and CEO. Since then, Barrick has focused on cost controls to generate cash flow. And, distributing cash flow to shareholders would certainly be one way to improve the stock’s performance.

In support of the new direction, BMO Capital Markets rated Barrick’s shares as Outperform in a research note with a $44.00 price target on the stock.

This week, Dundee analyst Ron Stewart said Barrick may be among the first gold stocks to regain momentum. Stewart notes that Barrick produced 1.9 million ounces of gold in the third quarter – up from 1.74 million in the second. Mr. Stewart thinks the company will consistently generate strong free cash flows starting next year, a key part of chief executive officer Jamie Sokalsky’s corporate strategy.

Stewart increased his discounted cash flow multiple on Barrick’s shares to 1.2 times from 1.0 times, which boosted his price target to $55 per share – up from $42.

Barrick Gold has a portfolio of 26 operating mines, and exploration and development projects located in North America, South America, Australia, and Africa. The company has a price earnings ratio of 9.6, equal to the average metals & mining industry, but well below the S&P 500 average price earnings ratio of 16.2.

Comparatively, Goldcorp (Stock Profile – TSX:G & NYSE:GG) has a whopping PE ratio of 27.3 while beleaguered gold miner Kinross Gold (Stock Profile – TSX:K & NYSE:KGC), which also replaced their CEO this summer, tops Barrick with a 13.4 price to earnings ratio.

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