After getting off to an up and down start to 2014, the time to buy Gold and Silver might be near according to Goldman Sachs. Analyst, Andrew Quail sees four key reasons for the sector call, "After underperforming the SPX by 21% since September 2013, gold and silver equities now appear more fairly valued, offering an average 7% total upside. We raise our coverage view to Neutral as we believe (1) more responsible capital allocation, (2) successful cost cutting initiatives, (3) a refocus on maximizing free cash flow, and (4) sound strategic portfolio optimization should improve the positioning of our companies offsetting our below-consensus outlook for commodity prices (we forecast $1,200/oz for gold from 2015 onwards)."
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While Quail thinks of the group as Neutral, he points to Barrick Gold Corporation (USA) (NYSE:ABX) as a "Buy," up from "Neutral" saying, "[Barrick] has actively shrunk to profitability over the past twelve months, focusing on its key FCF generating operations and divesting non-core strategic assets. Following the equity raise in 2013, we believe the company's financial flexibility has significantly improved."
That improvement should drive ABX to a price-target of $21 – upside potential to target of 19.38% as of this keystroke.
Barrick Gold is engaged in the production and sale of gold, as well as related activities, such as exploration and mine development. Its producing gold mines are concentrated in three regional business units (RBU): North America, South America, and Australia Pacific. Its Copper business unit contains producing copper mines located in Chile and Zambia.
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If gold is going to price at $1,200/oz as Goldman projects, then ABX could have its work cut out trying to find the way to $21. As you can see on the chart below, Barrick Gold's share price has essentially mirrored the price of gold – no surprise there. Considering atomic #79 is trading around $1,280, the metal's price would drop at least 6.5% to get to $1,200. Based on the gold/ABX correlation witness on the chart, the ABX would have to decouple from Au to go up as gold falters, which is something that hasn't happened to a large degree in the last 15 years.
ABX does appear to offer some value on a price-to-book (P/B) and price-to-sales (P/S) basis relative to the company's recent history and industry average for P/S.
At the moment, Barrick trades at 1.49 times its book value of $11.62 per share. In the last five-years, the typical P/B ratio was 1.98. At the half-decade average, ABX would price out at $23; a few bucks ahead of Quail's target.
Meanwhile, Wall Street has been willing to pay an average of 3.3 times the gold producer's sales since 2009. Today, the street is paying 1.43 times revenue while the industry average is 3.19.
Analysts think ABX will generate sales of $10.38 billion in 2014, and $10.86 billion next year. Using the average P/S ratio for the last five-years and current sales estimates for '14 and '15, we arrive at potential price targets of $29.53 and $30.89, respectively.
At the current 1.49 times sales, the stock would be stuck under $14 for both 2014 and 2015's consensus revenue estimates.
Overall: It could be difficult for Barrick Gold Corporation (USA) (NYSE:ABX) to rise to $21 if gold drops to $1,200 based on their intertwined relationship; although, to hit Goldman's $21 would not break the bank on a P/S or P/B basis. In all likelihood, ABX and gold's fate will rest on the Federal Reserve's monetary policy or a sudden geopolitical scare and subsequent flight to perceived safety.
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