Why Barrick Gold Corp. Has Been a Top Performer in 2016

Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) has made some big improvements and has a high leverage to gold prices.

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After a tumultuous first month for the S&P/TSX 60, one stock has stood out from all the rest: Barrick Gold Corp. (TSX:ABX)(NYSE:ABX). The company’s shares gained a whopping 36% in January compared to -1.3% for the index. The Canadian-listed shares now trade at $14 after falling below $8 last September.

So what exactly has caused this surge, and is it too late to jump in?

Some big steps

Heading into the beginning of last year, Barrick had a monstrous US$13 billion debt load mainly due to the failed Pascua Lama project and the disastrous Equinox acquisition. Meanwhile, gold prices were well off their peak of nearly US$1,900 per ounce. So Barrick’s future was very much in doubt.

At the time, Executive Chairman John Thornton set what seemed like a very ambitious goal: reduce net debt by US$3 billion. Analysts were certainly skeptical, but Mr. Thornton managed to pull it off with US$3.2 billion of asset sales, joint ventures, and other partnerships. The company continued down this path with a US$610 million deal with Kinross Gold Corporation in January.

Fast forward to today, and Barrick looks like a more disciplined company than in years past. Of course, the bar was not high.

A resurgent gold price

So far this year, gold prices have risen by 6%. This is mainly due to concerns about China, low oil prices, and their effect on the world economy.

Of course, this has had a negative effect on most stocks, but it has been great news for Barrick. Despite the company’s efforts to reduce debt, its balance sheet remains very levered. Consequently, its shares are especially sensitive to the price of gold.

Still too risky

Perhaps there is light at the end of the tunnel for Barrick, but the stock remains incredibly risky.

The real breaking point could come in 2018, when Barrick has over US$1.5 billion in debt payments due. If gold prices are lower by then, these payments will be very difficult to make. There’s also a good chance that interest rates will be much higher, which limits refinancing options.

So for now, if you want to bet on gold prices you should go with an ETF instead of Barrick. And if you’re looking for a stable, long term investment, again, your best bet is to look elsewhere.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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