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Barrick Gold’s Valuation Multiple: Upside in 2019?

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Feb. 28 2019, Published 12:05 p.m. ET

Valuation

Among senior miners (GDX), Barrick Gold (GOLD) has the highest EV-to-EBITDA multiple of 8.4x—a premium of 29% to its historical multiple. The company’s multiple has expanded significantly since the announcement of its merger with Randgold Resources to form an industry-leading gold company (SGDM). The combination will have the greatest concentration of Tier 1 gold (GLD) assets.

Newmont Mining (NEM), Goldcorp (GG), and Kinross Gold (KGC) are trading at EBITDA multiples of 8.3x, 7.0x, and 5.2x, respectively.

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Catalysts

As we discussed in this series, Barrick Gold’s costs are expected to fall. The company’s production profile is expected to improve due to low-cost and high-quality assets after the merger. The combination will own five of the top ten Tier 1 assets in the world, which will help reduce the unit costs. However, the new position will also add to Barrick Gold’s geopolitical risk.

Barrick Gold has also launched a bid to acquire Newmont Mining. While the fate of the bid hasn’t been decided, it could be another major catalyst for Barrick Gold’s stock price and valuation multiple.

Problems

Regarding the Randgold merger, there are some issues to overcome for Barrick Gold’s multiple to re-rate more. Most of Randgold’s operations are in Africa. Recently, there were a series of issues related to rising resource nationalism in African countries. The company is also trying to secure bigger shares in mining activities. Many mining companies are struggling to operate in these jurisdictions. Political problems in these countries could add to Barrick Gold’s operational risks.

To achieve more upside, the company will need to show more execution on its projects and resolve its disputes. On February 20, Barrick Gold outlined a proposed framework to resolve the outstanding dispute between subsidiary Acacia Mining and the government of Tanzania. The resolution should remove a major overhang from Barrick Gold stock.

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