Barrick Gold (ABX) has been battered by bad news for more than two years. There is gold's decline from its September 2011 peak. A major development project, Reko Diq in Pakistan, halted by court stays 30 months ago was terminated formally by Pakistan in January; ABX and its partner in the 9.5 million oz. gold, 11.8 million lbs copper project, Antofagasta of Chile, conceded an end on May 8, 2013. The sale to China of African Barrick Gold, one of Barrick's more costly properties, fell through. Its April 2011 $7.8 billion acquisition of Equinox Minerals, secured by a $5 billion credit facility from RBC and Morgan Stanley, led to a $3.4 billion writedown. The government of the Dominican Republic made increasing demands that put the great mine at Pueblo Viejo in jeopardy until ABX settled in May on a 50.8% tax and royalty package that has allowed this vital project (owned 60%-40% with Goldcorp) to proceed.
But the major issue, aside from the depressed price of gold and a forbidding debt/equity ratio of nearly 7:1, was the suspension this spring of Barrick's gigantic and low cost development project of Pascua Lama, high in the Andes and straddling the borders of northern Chile and Argentina. During this process, Barrick's share price has fallen 74% from $54 to a low last week of $14.67 from which it has twice risen above $16 only to settle July 1 at $15.25, down 3.11% on a day when nearly the entire precious metal mining sector saw gains of 2.4% or better. On July 3 at midday it was trading at $14.64. There are more problems to be noted below, but the major issues of Pascua Lama, low gold prices, and debt likely will be resolved. In the mid- to long term there are several reasons for ABX to recover and sustain a strong, profitable stance. But first, let's look at the additional hurdles.
Late in June, two law firms filed suits against Barrick on behalf of shareholders. On June 28, Pomerantz, Grossman, Hufford, Dahlstrom, and Gross filed suit in the southern district of New York (docket 13C1V4123). They, like Kessler, Topaz, Meltzer, and Check in Pennsylvania, are claiming that investors who bought ABX shares between May 7, 2009, and May 23, 2013, when Barrick issued revised guidance on Pascua Lama's production timeline were buying on misleading information about development costs and schedules. ABX will say that it gave its outlook on production based on best efforts to proceed. The outcome of these legal matters is unclear, but the outcry does not help ABX with negative sentiment already at an extreme. The possibility of damages is real, although not a major impediment to production at Barrick's extensive and productive sites in North America (60 million proven and probable oz. gold, most of it in the rich Carlin trend in Nevada, one of the world's best mining jurisdictions).
Most of the processing and shipping works at Pascua Lama are on the Argentinean side of the project, but nearly all the ore is in a mine on the Chilean side. After being bird-dogged for two years by Greenpeace and ad hoc local groups, ABX ceased operations when a regional court in Copiapo issued a stay in April. Then Chile's High Court fined Barrick $16 million for failing to ensure tailings dust would not blow onto three nearby glaciers and sully the water supply in the area. By itself, the fine is a small matter: ABX already has spent $2.5 billion on the site, and development costs are expected to reach $8 billion by early 2016 when amelioration of pollution concerns and mine development is achieved. ABX already has re-sequenced develop and cut capex to allow for production beginning 2016.
But the delays, increase in costs, and declining gold prices have worsened Barrick's debt burden and alarmed investors and analysts. In the last six weeks, the 12-month target consensus of major firms following Barrick has fallen from $30/share to $28 to $26 on July 3. ABX was trading at $45 when Q4 2012 began, so the decline to $14.65 has been staggering, though not unique, in the sector. However, it also should be noted that the severe downward revision on pricing still expects an 85% rise from today's level. That is, those paying attention believe that the bad news has been more than priced in, that many people have forgotten ABX's huge production and reserves at secure sites, and that the delays at Pascua Lama are not terminal blows.
The government of Chile, including the president, has stated explicitly that it wants the project to proceed. Back in April when the court issued its stay, Barrick appointed two senior Chilean mining experts, Marcelo Awad and Eduardo Flores, to work with regional and national government to facilitate advancement of the project. My view is that this change in governance, in tandem with the clear interest of Chile in securing 25-plus years of revenues from the completed project, will enable the project to proceed in its amended timeline. ABX may need to sell off ABG and some or all of its dozen Australian sites to generate cash flow and facilitate additional credit to complete Pascua Lama, but this can be done.
Numerous observers have worried about Barrick's contract to supply Silver Wheaton (SLW) with silver by-product from Pascua Lama by late 2015 or be fined. What they fail to note is that the contract stipulates that if ABX is not meeting 75% of Ag by that time, and it will not as things look now, it can provide silver from its major sites at Lagunas Norte in Peru, Veladero, and Pierina in Argentina. These mines already produce about 1.63 million oz gold/year from reserves of 51.7 million oz.
Moreover, SLW CEO and President Randy Smallwood has specified that "as long as Barrick is advancing construction of Pascua Lama at the end of 2015, SLW does not intend to cancel the contract." So that concern is a non-issue. Production at the other three South American sites will satisfy the contract and SLW is confident and eager enough about Pascua Lama to be flexible about dates. It is similar to the Freeport McMoRan (FCX) situation at Grasberg in Indonesia and Tenke Fungurume in Katanga, DRC -- relevant top government officials have made clear their flexibility on addressing details and wish for the project to proceed.
Debt issues and the "buzz" about delays and suits at Pascua Lama will continue to dog ABX in the short term, although the impact and novelty of the former will diminish soon. Compensation that may arise from shareholder claims, if they are upheld, might result in increased debt. But in the scale of Barrick's operations and reserves are not mortal issues. Another matter that should be addressed is that of executive compensation in a time of significant company short falls. In June 2012, Barrick Chair and Founder, Peter Munk, brought in John L. Thornton as co-chairman of the board and eventual successor. At the same time, Jamie Sokalsky, who had joined Barrick as treasurer in 1993 and became CFO and executive VP in 1999, became president and CEO. For 2012, a year in which ABX shares declined 24%, Thornton received a $17 million package, albeit $11.9 million of that was for purchase of ABX shares -- that is, for direct re-investment in the company. Six other executives received a total of $47.4, more than Thornton minus the share purchase part.
Rarely, if ever, noted in these discussions -- which have more to do with style and perception than substance -- are the credentials, prestige, and affiliations that John Thornton brings to ABX. With degrees in economics, law and management from Harvard College, Oxford and Yale, Thornton brings contacts worth their weight in gold and more. He is chair of the liberal Brookings Institute, a former president of Goldman Sachs, and director of Global Leadership at Tsinghua University in Beijing. As chairman of the board he will be able to marshal partnerships and ideas that few can match. In concert with Sokalsky's experience with the company, financial expertise and focus on profits the next five to 10 years in conjunction with constructive fundamentals have a high probability of seeing a significant restoration of Barrick's status, projects, and worth. People should worry more about obscene salaries for starlets and athletes than for professionals with these kinds of collegial relationships and ability to bring wealth into the world.
Former Canadian PM Brian Mulroney gets $2.5 million to be an "ambassador" for ABX and Munk gets $4.3 million. In the context of professional sports, this is small potatoes. Even for highly positioned lobbyists (like former presidents) it is not without precedent. While many view the timing as ill-considered, especially with a new president and co-chair still settling into their roles as restorers of profitability and deal development and completion, perspective on these matters can reveal an aspect more positive than headlines suggest.
Still, the disjunction between plunging price performance and strategy and operational snafus roused the ire of Barrick shareholders including Canada's six biggest pension funds who passed a motion for Munk to re-cast Thornton's package. As of last week, he had not done so and has said he would not do so. In the scale of things this is a small matter, the $5.1 million in salary not put back into the company is outweighed by positive aspects of the appointment. Still, given other issues facing ABX, Munk might rethink the deal or Thornton, set to steward the company to a renaissance could act unilaterally to purchase additional shares particularly given their depressed level. Surely he thinks the company is set for a substantial rebound even before PL begins producing. But, again, keep things in perspective amid storms of sentiment and current news. The main waves have broken.
To sum up, Barrick is burdened by a high debt level and a recent history of bad decisions. Its problems at Pascua Lama came in April-May, just as precious metals prices were hit by massive short-selling and price drops. Still, the project is likely to proceed albeit delayed and to add its large output (18 million oz. gold reserves, 676 million oz. silver) to Barrick's already massive 60 million oz. North American gold reserves and the 16 million oz. at its other South American sites. While the share price may suffer additional declines, it looks to most analysts like a value buy at current levels, "a contrarian play" Deutschebank termed it on June 30. I believe in two to four years it will restore its luster and repair, at least in large part its balance sheet. Continued buying of gold by Sovereign and retail investors and official calls for a new reserve system pegged to gold will also help Barrick and its entire sector. Its reserves enable it to sustain its 4.2% dividend, and unless you already are full to the gills in the sector, it now is a value buy.