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What’s Driving Higher Margin Projections for Barrick Gold?

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Sep. 14 2016, Updated 5:04 p.m. ET

Factors impacting Barrick’s estimates

Analyst and investor sentiments for Barrick Gold (ABX) have mainly been driven by its excessive debt for the last few years. However, in the last one to two years, it has started deleveraging significantly. This, along with its lean cost structure, is turning investors to the stock once again.

Barrick’s strategy is to go for growth through optimization and exploration. It’s focusing on its existing mines for improvement to deliver high returns rather than focusing on quantity at any cost. A fall in production in the medium term could be a concern for some investors.

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Analysts’ revenue estimates

Wall Street analysts estimate Barrick Gold’s 2016 revenue to be $8.4 billion in 2016, 6.3% lower than the $9.0 billion ABX earned in 2015. This is mostly due to the lower production guided by the company after it disposed of some assets in 2015. The company’s revenue is, however, expected to take off in 2017, when analysts project year-over-year growth of 4.4% to $8.8 billion. As the company’s brownfield projects start generating volumes, production will pick up.

Barrick Gold’s peers (GDX) (GDXJ) are also trying to increase their production levels. While Agnico Eagle Mines (AEM), Goldcorp (GG), and Eldorado Gold (EGO) have stable production profiles, Kinross Gold (KGC) could have problems replacing its reserves in the long term.

There are various ways to invest in gold, including physically purchasing gold, investing directly in gold miners, and investing in gold ETFs. Those looking for exposure to gold can invest in the SPDR Gold Shares ETF (GLD).

Earnings estimates

Barrick is targeting all-in sustaining costs of below $700 per ounce by 2019. This will be below the 25th percentile of the industry cost curve. Barrick’s lower costs are one of the factors driving its above average EBITDA (earnings before interest, tax, depreciation, and amortization) margins.

Analysts are forecasting an EBITDA margin of 46.4% for Barrick in 2016 with an EBITDA of $3.9 billion. The margin for 2017 is still better at 50%, most likely due to Barrick’s focus on unit cost reduction.

Investors should, however, remember that these estimates keep changing depending on analysts’ expectations about the company’s production growth, gold price assumptions, cost expectations, and other such factors.

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