Barrick Gold (ABX) beat analysts on both counts this morning with its first quarter 2013 earnings report. Earnings came in at $.92 instead of the $.89 from analysts and it barely beat revenue estimates, $3.44 billion versus $3.43 billion. Revenues are down 5.7% from the year before which is understandable as a cost of gold continues to go down and mining costs continue to climb. Revenue increased year-over-year in the fourth quarter of the last fiscal year, snapping a two-quarter streak of falling revenue. Revenue climbed 10.6% in the most recent quarter. Since the price of the stock has dropped so much is it a good time for an investor to consider investing in the company?
Is John Thorton a Reason to Invest?
John Thorton, as co-chairman of Barrick Gold Corp., is going to be facing a hostile shareholder group at the shareholders meeting as the company continues to struggle with cost overruns, write-downs and something more personal to him - opposition to his $11.99 million signing bonus because of how bad the company is struggling. Canada's sixth largest pension fund managers are not happy about that bonus in the midst of the company's 54% plunge in market value over the last year.
If you didn't know, Mr. Thorton is to be the hand picked successor to Peter Munk, the founder of Barrick Gold Corp. John Thorton is from Goldman Sachs. During his 23 year career with the company he spent the latter half of the 90s as chairman of the business in Asia. Maybe Mr. Monk is smart enough to see that "new blood" is exactly what is needed to reignite Barrick Gold. Mr. Thorton is known as a good strategist and raising the question: "Where should the company go?" is something that would be right up his alley.
The challenge is great for John Thorton, as he comes into a company that appears to be in disarray. Many analysts believe the mistakes that were made at Barrick were avoidable and who is responsible for recent actions has not been pointed out. As an example to its many problems, the company had to halt construction on the Chilean side of its Pascua-Larna project in the Andes because an injunction filed by indigenous communities was accepted by a court. There are concerns over water supplies. This dark cloud comes after two other setbacks when the company increased projected cost twice last year to the amount of $8.5 billion. Not only are they struggling there, but now the Dominican Republic is looking to change it to in the governing of Barrick's newest mine in Pueblo Viejo.
Investors have lost patience and they want the inconsistent decision-making to stop. For this reason shareholders meeting will probably stay focused on returns and cash flow instead of increasing output since the global market does not condone that. Part of the problem that shareholders are having (I briefly mentioned earlier) is the $17 million compensation package warded to Mr. Thorton, and they are definitely not happy the $11.9 million signing bonus he was given. Canada's sixth largest pension fund managers are set to vote against this package.
Investing in Mining Companies Right Now Still a Risk
Even though gold has dropped significantly I believe it still has a place in a diversified portfolio, but it is also important that we have realistic expectations of what we are supposed to get from gold. It is important not to "buy on panic" and increase too much gold risk in one's portfolio. Some analysts believe 3% to 5% of gold related assets should be enough. Many people speculate why gold fell 13% over two trading days last week. It could just be "money chasing returns." Many investors are getting into the market too late and are chasing the "gold returns" from bygone days. The recent price fluctuations are spooking many people into selling and sometimes when they get all spooked at the same time they bail on the yellow metal. I believe there was a lot of "build up" and anticipation into something going wrong that would lift gold quickly, but it never developed. We had many opportunities with the Fiscal Cliff, the Sequester, Europe's sovereign debt crisis, etc. This just shows that speculating or betting on short-term moves with gold can be very risky.
While there is a place for gold, some investors gravitate toward mining stocks and this is a risky place to be right now. Sometimes the lure of high dividends brings investors to these types of stocks but at the same time when the price of gold falls, this forces companies to also provide lower payouts. As an example, some mining companies have their dividend policies tied directly to the price of gold so that when the price lowers so does the payout. Mining companies have the risk of a drop in the price of gold and a drop in the market in general. This "double jeopardy" took place last week. For this reason it is important to know the risk that is involved, as many analysts are presently cutting ratings on companies like Barrick Gold, Kinross Gold (KGC) and Newmont (NEM).
ABX Selling Mines
Barrick Gold is considering selling three of its Australian gold mines which combined to produce 452,000 ounces of gold in 2012. The company has been prepared and poised for a slow down as the CEO has been selling off assets and cutting costs and projects have been put on hold - it's just a rough time for gold. The metal is not enjoying the resurgence that some thought it would have in 2013 and with the recent turn of events some doubt that it even will. Barrick has an enormous amount of debt and even though it says it has $2 billion in cash in 2013/14 it needs to repay back $3 billion in debt plus $1.2 billion in interest. It appears that halting operations and selling assets are a necessity and not just an option.
I do not believe the mining arena would be a good place to invest at this point. My reasoning behind this is the "double jeopardy" risk that the mining companies have right now with the way gold and stocks have been falling at the same time. Combining this atmosphere with Barrick Gold's debt level, I would research other opportunities if I was interested in investing in gold or stay away from the mining sector at this point.