Melting gold price leaves African Barrick exposed

The price of gold slipped to a five-month low this week following upbeat US employment data - that revealed another stronger than expected monthly rise in employment. Positive economic data is widely anticipated to bring forward a tightening of monetary policy by the US Federal Reserve - known as 'tapering'. But that will lessen the attraction of holding precious metals and, consequently, the yellow metal has retreated from $1,400 (£865) an ounce in August to $1,230 an ounce in December. That's near the key $1,200 an ounce support level last reached in 2010.

This is bad news for gold miners, especially ones with high production costs such as African Barrick Gold (ABG). The company is expected to produce more than 600,000 ounces of gold this year, but it remains cash-flow negative after spending on maintenance and expansion projects are considered. It is arguably one of the most levered plays on the gold price and, as such, its shareholders stand to either gain or lose the most from future gold price movements.

A much improved operating performance in the third quarter saw African Barrick's all-in sustaining costs of production fall nearly a quarter year on year, but at $1,275 an ounce - that's still above the spot gold price. If prices stay low, the company could soon find itself in financial difficulties - as at the end of September, it had net cash of about $179m; down from $401m at the start of the year.

Investec Securities says...

Sell. We have adjusted our full-year 2013 production and cost estimates to reflect the improving operating performance but continue to view African Barrick's shares as being overvalued - based on an equal blend of our net present value estimate and three-year forward earnings multiples. Our target price of 137p a share incorporates a flat $1,400 gold price, too, and so already accounts for the possibility of a modest recovery in the gold price. In fact, at a spot gold price of $1,200 an ounce, our target price would fall to just 33p a share. Expect adjusted EPS of 14.5p for the end of 2013

RBC Capital says...

Outperform. The shares currently trade at a wide discount to our calculation of net asset value (NAV), which uses a $1,430 gold price in 2013 and $1,400 thereafter. Indeed, at 0.47 times NAV, the shares trade on one of the lowest multiples in its peer group. We believe this is too harsh given the company's significant cash pile and its high-grade gold reserves. The presence of Barrick Gold (TSX: ABX) as the majority shareholder also gives the group back-up access to significant low-cost capital. Our 270p price target is based on an equal blend of NAV and cash-flow multiples.