In a July 3 research note, analyst Andrew Kaip reported that BMO Capital Markets upgraded Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) to an Outperform rating on the potential of its and Newmont Goldcorp's Nevada assets, recently consolidated through a joint venture agreement between the two companies.
Additionally, BMO is resuming coverage on Barrick, now that the restriction period related to the transaction is over, with the higher rating and a US$20 per share target price. The current share price is about US$16.51.
The analyst reviewed the deal and its potential benefits for Barrick. He highlighted that the resulting synergies from the combined Nevada assets "unlock value" and though integration risks exist, the near-term benefits outweigh those.
According to the terms of the deal, which closed on July 1, Barrick's ownership of the Nevada assets is 61.5% and it will be their operator. Newmont Goldcorp's stake is 38.5%. "The intention of the joint venture," Kaip explained, "was to unlock upward of $5 billion in pretax net present value (NPV) over the next 20 years, including an estimate of $500 million of pretax synergies over the first five years."
As for expected synergies, BMO's analysis determined they could amount to about $1.1 billion in NPV5% for Barrick simply from a drop in all-in sustaining costs to about $685 per ounce from $775, Kaip pointed out. When BMO factored into its company model the synergies' effect it calculated on Barrick, the gold miner's NPV5% rose by about 8% to $8.96 and equated to more than $250 million in free cash flow per year going forward.
"Given the positive momentum from the formation of the Nevada joint venture and ongoing cost optimization stemming from the Randgold merger," Kaip noted that BMO expects Barrick's stock price to outperform its peers over the next 12 months. "The real value driver, in our view, is Nevada."
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Disclosures from BMO Capital Markets, Barrick Gold, July 3, 2019
IMPORTANT DISCLOSURES
Analyst's Certification
We, Andrew Kaip, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to Newmont Goldcorp within the past 12 months.
Disclosure 2: BMO Capital Markets has provided investment banking services with respect to Newmont Goldcorp within the past 12 months.
Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to Newmont Goldcorp within the past 12 months.
Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from Newmont Goldcorp within the past 12 months.
Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Barrick Gold and Newmont Goldcorp.
Disclosure 6A: Newmont Goldcorp is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: A) Investment Banking Services
Disclosure 6C: Barrick Gold and Newmont Goldcorp are clients (or were clients) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.
Disclosure 9B: BMO Capital Markets makes a market in Barrick Gold and Newmont Goldcorp in United States.
Disclosure 16: A research analyst has extensively viewed the material operations of Newmont Goldcorp.
Disclosure 17: Newmont Goldcorp has paid or reimbursed some or all of the research analyst's travel expenses.
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