Barrick Gold (NYSE:ABX) has been facing a lot of issues in the recent past. It just lost its title as the world's largest gold mining corporation by market capitalization to its Canadian rival Goldcorp (NYSE:GG). The share price of Barrick has been plummeting down and reached an all-time low of $22.62 on April 12. What is actually happening to this stock?
Barrick's past performance
Barrick is the gold industry leader in production and reserves. With an annual production of 7.4 million ounces in 2012 and a market capitalization of $22.65 billion, the company operates mines, exploration and development projects throughout the world. Capital allocation is a key strategic priority for Barrick Gold, which drives every investment decisions based on its ability to generate free cash flows and attractive returns. Barrick also produced 468 million pounds of copper in 2012 and has a gold reserve of 140 million ounces. It reported a hefty loss in Q4 2012 of $3 billion compared to a profit of $959 million last year. The loss was due to a significant impairment charge of its copper business unit. However, the adjusted net earnings for the quarter was $1.11 billion, topping estimates. 2012 fiscal year loss stood at $665 million or 66 cents per share, and the company expects to increase production in 2013.
Gold prices falling in the last 3 months
The gold industry generally has been performing badly so far in 2013. In fact, it is the second-worst performer after the silver industry. This has a reason of course, because risk appetite is on the rise and people have been investing more on equities rather than gold. Gold is considered to be a safe haven for investors, but this year Dow Jones and S&P 500 has been performing at their peak. The tremendous growth has kept investors away from investing in gold. Another reason for the drop in gold prices is the improvement of macro-economic conditions and outlook. The Fed has lowered the interest rates, and this spurs people on to make more real estate investments instead of gold. Monetary policies like quantitative easing has also helped in a way which injects liquidity into the system.
The total yearly return to date of gold was negative at -22%, and prices have been dropping since the last three months. This can be understood from the chart given below.
Can gold prices rise again?
After the decline in gold prices for the first 3 months in 2013, it is expected that prices will rise again. Many analysts updated their forecasts for the gold price. Management at another gold miner, Newmont Mining Corp (NYSE:NEM), estimates the price may rise to $2550 per ounce of gold. Other analysts are estimating a price range between $2000 - $2200. I think that the financial crisis has not yet been sorted out, and levels of debt in countries like Japan are rising. Gold prices may be in for a correction this year during these global uncertainties.
Gold mining companies pay rich dividends when the price rise of gold resumes and investors can expect a huge capital appreciation. But can that happen with Barrick Gold? That is a big question to decide whether to buy the stock or not. If I look at the other gold miners, all have fallen relatively, but Barrick fell by the largest percentage, around 8.5%. While Newmont Mining Corp fell by 5.9% and GoldCorp by only 4.9%.
This suggests to me that Barrick has been facing other problems apart from the slump in demand of gold. Even if gold prices rise, Barrick is not going to be a good investment. Let's discuss why.
Impact of Pascua-Lama disaster
Pascua-Lama is considered to be the most important future gold mine project of Barrick, and is located on the Argentina-Chile border. The mine is supposed to produce gold from with a cost per oz. of less than $100, and is considered one of the cheapest. Operational excellence is another key strategic priority of Barrick's, but in case of this project, it has been a disaster. The mine is already behind schedule and over budget. Initial estimated cost of the project was $3 billion in 2009, but today, the estimate has reached $8.5 billion. Moreover, it was expected to be completed in mid-2013, but now just 40% of the work is completed, and the project is delayed to 2014 at least.
Recently Barrick management announced that it will suspend work on the Chilean side of the project due to environmental and regulatory issues of the Chilean authorities. The Argentinean side of the project is working fine. But the chances of completing the project quickly are looking slim, and Barrick may have to spend another $500 million to $1 billion to sort out the issues. Barrick has other mines in South America, with 2 in Peru and 1 in Argentina. But it cannot stop the Pascua-Lama project, as its potential is huge. Once Barrick starts production, it can fetch Barrick 0.80-0.85 million ounces of gold and 35 million ounces of silver annually. Barrick targets a production of 8 million ounces in 2016 and this project is crucial to achieving the target.
The peer market
Goldcorp is now the most valued gold miner, but is still lagging behind Barrick in terms of production. Goldcorp currently trades at 10.7 times forward cash flows, compared to 5.3 times of Barrick. Barrick may have better production capacity, however Goldcorp has a better growth profile. Also due to its secondary production of silver, copper and other metals, Goldcorp is not dependent only on gold. And it enjoys lower costs and higher margins than Barrick.
Newmont Mining has a market capitalization of $18 billion and had a revenue of 9.9 billion dollars in 2012. Recently, it has witnessed positive earnings while Barrick has experienced losses. Also it pays a higher dividend and has more copper growth expectations. The Merian Gold Project is going good and has not experienced setbacks like Barrick's Pascua-Lama.
To conclude, I think the Pascua-Lama project disaster is proving to be a huge damage to Barrick Gold. The share price has been constantly been on the downside for the last six months and eroded much in value. Growth prospects are still high, but it also depends on the efficiency of project completion. By losing the crown of the most valued gold miner, it is very difficult to regain investor confidence for Barrick. I would also expect gold demand to continue being low this year. Hence I would recommend against buying Barrick in the near term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.