As most of us know, the only way to describe the price action in gold and silver on April 12th and April 15th is panic selling. There were several reasons for the initial bearishness on April 12th which led to technical and panic selling into April 15th in the precious metals market. We have witnessed the strongest sell-off in gold since 1980. Much of the selling seems to have subsided for now, as gold has stabilized this week, coming up each day of the past week. Gold has come back from the lows of the week and is currently at $1407, while silver is at $23.23 an ounce. The pain in the precious metals has sent the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV) down considerably, trading now at $135.47 and $22.44, respectively. The pain in the metals has crushed the miners. The Gold Miners Index (GDX) is down another 6.5% this week, and down 40% year to date. The drop in gold prices is leading to one of the top gold producers, Barrick Gold (ABX), to contemplate selling some of its assets in an effort to control costs and possibly save its current dividend yield.
ABX to Sell Australian assets
ABX is reportedly in talks with Bank of America (BAC) and UBS on a possible sale of three of its gold mines. ABX is considering the sale of the Darlot, the Granny Smith and the Lawlers mines, all of which are in Western Australia. Selling these assets is a huge move for the company, as all three together produced 452,000 ounces of gold in 2012 at a cash cost of $768 an ounce. This accounts for over 6% of the total gold ABX (7.4 million ounces) produced in 2012. Thus, a sale of these assets would result in an immediate reduction to anticipated 2013-2015 gold production estimates, as well as projected revenues from gold sales. However, depending on the sale price of these mines to a prospective buyer, the finances from the sale could be used to maintain the dividend or be reinvested in other mining sites. Time will tell what the impact will be long-term, however sales of this nature are usually a negative catalyst for the stock of a mining company.
Other Recent Bad News for ABX
Barrick has been selling assets, cutting costs and halting projects since the summer of 2012. ABX also has plans to sell its stake in Barrick Energy Inc. and the Kabanga project, a nickel producing project which ABX co-owns. This possible sale follows news of a large setback, in which the company suspended construction work on the Chilean side of the Pascua-Lama project while working to address environmental and other regulatory requirements to the satisfaction of Chilean authorities. In the interim, activities deemed necessary for environmental protection have continued as authorized, but this delay will likely push possible peak production back another year or so (assuming ABX doesn't sell its stake in this project). One positive is that construction activities in Argentina, where the majority of Pascua-Lama's critical infrastructure is located, including the process plant and tailings storage facility, have not been impacted as of yet. Still, this issue, coupled with the possible sale of Australian holdings are two major setbacks for the company in the month of April. The latter is likely a symptom of the sudden drop in gold prices, which added to the slow drop in gold prices seen from November 2012 to February 2013.
ABX stock has been crushed in the last three months along with all other gold companies as a result of the selloff in gold. With a reduction in gold prices, ABX will struggle to remain profitable. In an effort to save cash (even though production will be harmed), ABX may be selling their Australian properties. Combined with news of the Pascua-Lama event, I would recommend against buying this stock.
While I believe the stock has come down so much that it may become attractive again in the near future, there are better companies in the space I would rather own, such as Sandstorm Gold (SAND) or Yamana Gold (AUY). If you own ABX for the long term, you should still hold the stock unless you need the money in the near future, as there could be more selling ahead. With the stock at $17.92, there is not much more downside left (provided gold doesn't move to $1000), but the impact of the current lower gold prices could result in estimate cuts from major firms which could hurt the price a little more. I would look to add to a long-term position around $16.00 provided gold stabilizes. I will add that I still think gold is still in a long-term bull market, despite the action of the last few months. Further, I believe that ABX is taking necessary steps to survival. Thus, I will revisit this stock once the price of gold starts moving up toward $1500, as a profitable investment could then potentially be made.