Barrick Gold (NYSE:ABX) has had a rough ride on the share market recently; its woes are of course driven by the weak gold price of late, but are exacerbated by a plethora of issues that continue to put the hand breaks on the performance of this gold mining company. Barrick accounts for more than 10% of the holdings of the Market Vectors Gold Miners ETF (NYSEARCA:GDX) which is viewed as a benchmark for the gold mining sector in general. The chart shown below illustrates the underperformance of Barrick Gold when viewed in the context of its peers in this sector ETF.
GDX data by YCharts
Barrick Gold lost its place at the top of the leader board of largest gold mining companies to Goldcorp (NYSE:GG) recently but holds on to number two with a market capitalization of $20.5B at the time of writing. The forward P/E is listed as low as 5.7 on Yahoo.com and 6.0 on Morningstar.com. The production guidance for 2013 has been stated as 7M to 7.4M ounces of gold and according to the latest reserve statement Barrick Gold controls proven and probable reserves of about 140M ounces of gold.
Replenishing 7+ million ounces of gold per year is no mean feat and has conceivably contributed to the mounting pressure on this mining giant. Interestingly, Goldcorp only produces 2.4M ounces and has reserves of 67M ounces. Barrick has obviously seen the signs on the wall and last year attempted to divest the interest in African Barrick (OTC:ABGLF). However, this sale fell through when Barrick could not agree on a price with would-be suitors from China. Presently, another Chinese entity is indicating an interest in three of Barrick's Australian operations. Jinyu International Mining controls more than 80% of Australian-listed Norton Gold Fields (OTC:NGLDF) and have shown that they are shrewd negotiators when they initiated this position. It will be interesting to see how dealings between Barrick and Norton Gold Fields proceed.
Barrick carries a substantial debt burden of over $14B which puts the company at a significant disadvantage in comparison to its peers. The debt to asset ratio at the end of 2012 was 0.27 (Goldcorp: 0.03) and the debt to equity ratio was 1.07 at the end of 2012 (Goldcorp: 0.37). A recent sale of $3B in debt was received reasonably well by the market despite a credit rating cut by Standard & Poor's at the end of April. The high debt is the result of a number of costly business decisions which are weighing on Barrick's balance sheets. The closure of the hedge book in 2009 comes to mind or the $4.4B write down of assets acquired as part of the overvalued Equinox takeover. While these issues have been put to rest, others continue to plague the company.
The construction of the Pascua Lama mine appears to have turned into a make-or-break exercise for Barrick Gold. Cost overruns and delays in delivering the project have been well documented here on Seeking Alpha and elsewhere. The conclusion of this saga is by no means foregone which has been emphasized by Jamie Sokalsky, President and CEO of Barrick Gold, who openly mentioned the possibility of shelving the project all together in the Q1/2013 earnings call on April 24. The uncertainty surrounding this project and the financial weight it carries by now will put a damper on the share price for some time to come.
As much as the Pascua Lama story is old news for investors, there have been two news items lately that provide more reason to worry for investors caught in a long position in Barrick Gold.
- Only a few days ago Barrick announced the resolution of a lingering conflict with the government of the Dominican Republic, host of the Pueblo Viejo mine that Barrick (60%) operates in JV with Goldcorp (40%). Government officials had been demanding a greater slice of the pie than originally agreed; and judging by the published outcome of negotiations so far, they are about to get what they have asked for. This of course means a smaller slice for Barrick Gold (and Goldcorp). Details are yet to be hammered out but the published headlines indicate that the Dominican Republic is set to receive an additional $1.5B over the 25 year life of mine with the majority of the additional earnings brought forward to 2013-2016. Obviously, this arrangement benefits the present government that has just come into power and will now have substantially more money to play with during their legislative period. It also begs the question of how future governments will interpret the example set by these recent negotiations.
- The New Zealand Superannuation Fund has sold their holdings in Barrick Gold citing concerns with regards to Barrick's business ethics. While their holding was worth only $2M the damage lies in the message sent by this action. A similar decisions was taken by the Norwegian pension fund in 2009. Barrick goes to a lot of effort to portray the company as a responsible corporate citizen. The reality is often shown to differ by the alternative media; the decision by the two pension funds is certain to lend more credibility to the voices painting Barrick in a very unfavourable way.
Times are tough for gold miners at the moment. However, while some of Barrick's peers are putting their head down and work through the slump it seems that Barrick is unable to generate positive momentum. A fellow writer here on Seeking Alpha stated that he would not touch Barrick with a pick axe. At this point in time we would like to second this call; we would not use a blunt stick or a wet fish either.
The downtrend for gold-related investments is presently still firmly in place. We are waiting for signs of this trend to turn before considering any investments in this particular market segment. However, we believe that there are better opportunities in the waiting than Barrick Gold once a bottom has been reached.