Why It's Too Early To Buy Barrick Gold And Other Mining Stocks

| About: Barrick Gold (ABX)

Barrick Gold (NYSE:ABX) shares have cratered this year along with investor interest in the precious metals sector. This stock recently traded for as little as $13.43 and started to rebound from those lows, but after the company announced it would suspend operations at a mine and also do a secondary offering of $3 billion, the stock has been heading lower again. Some investors might see the recent drop as a buying opportunity, but it could be way too early to buy the shares now.

Barrick Gold is planning to use some of the newly raised cash to pay down a substantial debt load of about $15 billion, but even after this move, the debt load will still remain high, which is an additional risk factor for shareholders to consider. The secondary offering consisted of about 163.5 million new shares, which were priced at $18.35. With around a billion shares outstanding before the offering, this secondary offering dilutes existing shareholders by about 16%. This means that future profits will have to be split up between more shareholders, and that is why the stock sank on this news. A recent Barron's.com article details the view by analysts at Stern Agee stating:

If over-allotment option is exercised in full, Barrick would receive net proceeds of approximately $3.3B. The company intends to use $2.6B of the net proceeds to redeem or repurchase outstanding debt…
We believe shares may be range-bound near term as market digests the $3B stock issuance, new operating cost reduction program, pace of asset sales and board changes.

The plight of Barrick Gold is similar to many other gold mining stocks. Profits in this industry are declining along with the price of gold, and this has caused increased concerns over debt servicing and even dividend cuts. Furthermore, this stock is trading for about half of the 52-week high of $36.91, and that means many investors have significant losses. At this time of year, stocks that have performed poorly are likely to see substantial tax-loss selling pressure as investors want to harvest losses to offset gains in other assets. This is why many gold stocks like Barrick are likely to remain under pressure for the next few weeks.

As the chart above shows, this stock has recently dropped below the 50-day moving average of $18.80 and the 200-day moving average of $21.58. These are often considered to be key support levels. The chart also shows that the stock is now very close to possibly breaking below a recent short-term uptrend (as evidenced by the blue trend line), and that could lead to another leg lower. With tax-loss selling season just about to get started, and with the recent secondary offering, this stock is likely to remain weak, and investors who rush to buy could get burned. However, it might be worth buying a small position and averaging into this stock in mid-December while these issues are digested, as it could rebound a bit into January as this tax-loss selling pressure ends.

Investors who want more diversification while still having the potential of playing a rebound into January as tax-loss selling ends could consider the Market Vectors Gold Miners ETF (NYSEARCA:GDX) which (as shown in the chart above), has also fallen sharply in 2013.

Here are some key points for ABX:
Current share price: $18.01
The 52-week range is $13.43 to $36.91
Earnings estimates for 2013: $2.67 per share
Earnings estimates for 2014: $2.42 per share
Annual dividend: 20 cents per share which yields 1.1%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

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.