12.08.14 - 10:27 Uhr

African Barrick Gold (Price: 252p | Target: 260p | Rec: Hold)

While African Barrick delivered a good production performance in the latest 2Q and 1H14A results, the key takeaway for us was that operating cash flows exceeded investing cash flows – the first time this has occurred in 10 quarters. Repeated cash outflows have long been a major concern for us, but the trend is increasingly positive and we now expect continued cash generation at current gold price levels. We upgrade our recommendation to Hold (previously Sell).

* While one swallow doesnt make a summer, African Barrick is evidently delivering on its targeted improvements and we have made a number of changes accordingly. These include a reduction in Bulyanhulu’s all-in sustaining costs in the longer term and a lift in North Mara production, with the positive impact of this offset slightly by increased D&A assumptions.
* The net result is a 3% drop in FY14E EBITDA, but a 17% increase in FY15E-16E EBITDA, with the exaggerated response to relatively modest changes exemplifying the company’s leverage to margin improvements. Our FY15E-16E EPS forecasts have increased by c.20%.
* Our target price of 260p (up from 212p), based on an equal blend of NPV ($1,300/oz gold price and 8% discount rate) and forward earnings and cashflow multiples, has risen significantly due to the dual impact of a higher NPV, following a reduction in Bulyanhulu’s long-term cost base, and by the lift in forecast earnings. The key risk to our recommendation is the gold price. Other risks include increased government tax grabs and ongoing project delivery, noting that we already incorporate most of African Barrick’s growth projects, some of which are not yet approved.

To access the full note please click here<

Analyst: Hunter Hillcoat +44 (0)20 7597 5182

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