In a report published Friday, BMO Capital Markets downgraded its rating on Barrick Gold Corporation (ABX). Instead of doing better than the markets, BMO believes it will perform at market levels and even lowered its price target by almost 10% from $50 to $46. Its reasoning:
"BMO Research has downgraded Barrick to Market Perform as the company has struggled to meet guidance recently, with persistent cost escalation for Pascua-Lama. Few positive catalysts are expected over the next six months or so."
The Problem - lower guidance on gold production and higher cash cost forecasts.
Costs Rise at Pascua-Lama
The giant Pascua-Lama project on the Chile-Argentina border is at the bulk of over cost problems for Barrick. Investors were floored when the company announced production costs ballooning to as much as $8 billion. Considering prior projections were at ($4.7-$5 billion) this is shocking. If that wasn't bad enough, just after that announcement the company came back and Barrick nudged that guidance even higher saying that recent work puts the price tag at between US$8-billion and US$8.5-billion. First production, which has already been delayed, is expected in the second half of 2014.
The Struggle to Meet Guidance
The company has placed itself at the bottom of the business ladder this quarter with a double miss. Most companies are struggling by "inching" out earnings at or just above estimates and falling short on revenue projections. Barrick missed both. It reported an adjusted profit of US$850-million, or US$0.85 a share, below the average analyst estimate of US$0.98. This is way lower than last year when it recorded $1.38 per share. Revenue results offered no good news either as it reported sales of $3.44 billion in Q3, down 13.5% from a year ago and below the $3.67 estimate. And the bad news kept coming at it saw copper production slide to 112 million pounds, from 140 a year ago.
What are my observations on investing at this time?
Other competitors like Newmont Mining Corp (NEM) and Goldcorp (GG) profited from an earlier rally as gold prices recently jumped by 7%. But two thirds of Barrick's gains evaporated with the recent news. Newmont recently lost 50% of its gains but Goldcorp stayed steady holding on to what it acquired. Knowing how volatile gold is, I understand that fortunes in this industry can change in an instant. But since I am no predictor of the future, I will have to rely upon my present observations. Taking into account the bearish news from the company, I also see no bullish catalysts right now. I am also of the opinion that gold may trickle up until our government hashes out the "fiscal cliff" problem. But when it is complete, I believe the markets may rejoice and trend up early in 2013. This won't do anything for gold in the short term and Barrick's woes will remain. So if one is interested in investing long term in Barrick Gold, I would suggest watching the stock and waiting until the end of the first quarter of 2013. Take a look at it again and how it is handling Pascua-Lama and what its margins are like.
Barrick is presently in a bearish pattern and has been for 6 weeks now. Recently I watched as the stock dipped below the bearish support line and now is moving back up into the channel. Both the RSI indicator and the MACD mirror the movement of the stock and have nothing special to reveal. Watching support lines crisscross soon will reveal more as to the movement of the stock. Presently it is following the lower Bollinger Band as support and this is very bearish. I would like to say the recent bottom is the beginning of a reversal but it is too early to tell and none of the indicators are saying anything like that. The stock may move up, but I do not think a reversal pattern is in order until I see it break through resistance.
The Options play
The stock is presently trading at 35.81. With the lower guidance and higher costs, I would gravitate toward a bearish short income strategy. Things could change quickly for the company if gold prices spike, but not knowing that, I am going to stick with my gut instinct.
- Buy the April 2013 pit with a strike of '36' (price at $3.35)
- Sell the April 2-13 put with a strike of '35' (priced at $2.79)
- Net Debit to Start: $0.56
- Maximum Profit: $0.44
- Maximum Risk: net debit
- Maximum Length of Play: 5 months
Reasoning behind the Trade
- With higher production costs, earnings could shrink and investors do not like that.
- Lowering guidance is never bullish.
- Missing both earnings and revenue guidance is a double whammy. Hello bears!