Perhaps the title should read, the wish for Founder and Co-Chair Peter Munk to resign-retire has come into view. Like so many events that create instant eclat, it is old news: since John Thornton was appointed Barrick (ABX) co-chair June 05, 2012 the plan was that he would gradually assume the duties of Munk, who turned 86 November 8. Mr. Thornton entered when CFO Jamie Sokalsky replaced Aaron Regent as CEO (previous link) and shifted priorities from growth to cost control.
This article will consider the price and prospects for ABX, the PM sector and the markets. The context for this discussion assesses the sentiment and pressure on shares of the over-reaction to news about Mr. Munk's upcoming retirement. Noise about the change obscures company fundamentals and other issues in the sector and economy that are more pervasive in their effects and powerful in their outcome.
Those who thirst to join a crowd screaming at a scapegoat have found a ready target in ABX during the past 2 difficult years for PM (precious metal) companies. The world's largest gold producer and leader in reserves and low-cost output, ABX now lags Goldcorp (GG) in market capitalization. An ambitious, twenty-year plan to become a major mixed commodity miner failed through a combination of bad investments (the acquisition of Equinox Minerals) and mad resource nationalism (Reko Diq in Pakistan). The latter project which also hurt Barrick's partner Antofagasta of Chile (OTC:ANFGY) may have sunk for geopolitical reasons: Pakistan's major institutions like the ISI are entangled with the diplomatic-intelligence-military establishment in America and England and their complex policies. The bearing of these goals on economic and fiscal matters is vital but beyond the scope of this piece.
The bottom line is that ABX, like the PM sector generally, has lost enormous value since 4Q 2011, fraying the tempers and trying the patience of stake holders. During most of 2011, ABX traded in the upper $50 / share range. By March 2012 a steep decline in bullion prices triggered a deeper sell-down in miners. Interrupted only by the July 23 - November 2012 recovery, ABX shares fell 75% in two years, hitting bottom at $13.43 in early July. They rose to $20.50, a 55% recovery off the low that reflected awareness of irrationally devalued pricing only to drop 28% of that comeback upon announcing that it would retire $1.2 billion in short term debt and some other obligations by a tender of 163.5 million shares (handled by RBC and BCS) priced at $18.35. The tender expires December 2. Since then, ABX has traded in a tight band, $17.75-$18.35 while equities blow through the roof in euphoria over Janet Yellen.
November 7, HSBC bucked the trend of Sept.-Oct. upgrades for the company, lowering its rating from overweight to neutral with a target price dropping from a low (relative to consensus) $21.10 to $19.60. HBC however did note ABX's "strong 3Q earnings." The main stumbling block to E&D, output, revenues, earnings and share price growth in the sector continues to be depressed bullion prices and the chance that despite strong demand they may again be pushed lower. It is likely that the "unregulated playpen" at COMEX, noted by Tocqueville Fund Group Senior Director John Hathaway will continue its gambits despite dwindling Western inventories of metal. Mining companies increasingly will sell their output directly to Asian Sovereigns and their proxies. But let us focus on ABX.
Soon after the tender got underway, stories appeared that Peter Munk, Founder and Chair of ABX would likely retire next year. Like many events, the news was over-played and not news at all: since the appointment of John Thornton as President in June 2012, it was stated that he would before long take over active management of the Company. Peter Munk just turned 86 and even if he wasn't a holocaust survivor and philanthropist whose donations to medicine, education, housing and more exceed $100 million, he has had a full life. Even if ABX went to $5 (if it does you will see Bank of America (BAC) at $3), his charitable giving and the wealth he has created (unlike banks which destroy wealth and economies) against daunting odds would more than suffice most mortals. But instant experts, eager obituary writers and sanctimonious "environmentalists" who, like eugenicists, seek a "pristine" world filled with glaciers, snail darters and "colorful indigenous natives" who can't feed themselves let alone anyone else have sought to bury their hatchets in Munk's head.
Let us review ABX's status and prospects and speculate a bit about the excessively hostile scrutiny it and Munk have received. The PM sector, after all, has fared similarly to ABX the past two years. First Majestic Silver (AG), in my view is the best among several superbly run PM miners that remain profitable under the most difficult circumstances. AG has increased its revenues to 12.5 x debts, continues to grow output while reducing costs and maintains a strong 63.2% gross margin, better than market darling Starbucks (SBUX). Yet since the five months bracketing the peaks in silver and gold from May - September 2011, AG has shed 64% of its share price. Its excellent 3Q results boosted it briefly and it has resumed slumping toward an absurdly low valuation.
As for the third largest PM producer, Goldcorp , it is Barrick's partner 40-60% at Pueblo Viejo in the Dominican Republic. Few if any raised an outcry when a GG-ABX cargo was held at the airport in Santo Domingo about supposed mislabeling of concentrate shipments. ABX is chastised for operating in Argentina and in the Andes, but so do most PM companies (like GG) in the high altitude, ore-loaded cordillera. In two years GG has shed 62.1% of its value similar to AG, the latter being a trimmer ship.
Let three other examples suffice to show that price declines at ABX are far from unique and result less from its own errors than to problems hurting the sector as a whole. Premier streaming company Silver Wheaton (SLW), with almost no overhead or mining costs, pays about $4.14 up-front for its silver streams and $414 for gold. SLW has a net income about 70% of revenues. Despite its insulation from the vicissitudes of mining, in the past two years, SLW traded down 63% from its 2Q 2011 peak to its late June low, $17.75 and since then has recovered 21%, less than half the spring-back of beaten-down ABX. SLW is a great company but the point is that the problems for which observers berate ABX have more to do with bullion prices, artificial trading in futures and hostile sentiment than in the relative merits of individual companies.
Another top silver company Endeavour (EXK) has revenues 6 x debt, 48% growth, a gross margin over 30% and ROE 11.2 nearly as good as that of AG. Yet, in two years it fell 77.8%, worse than ABX, to a 3-year low at $2.88 in late June before an intermittent recovery that leaves it tottering between $3.80 - 4.20 despite outstanding YTD and 3Q results from its three operating mines. Debt-free, trimly run and growing junior miner McEwen (MUX), on which I wrote my previous piece, fell from its 2Q high near $10 about 84% to its late June low at $1.63 before recovering 24% to date. MUX has world class sites at Gold Bar and Tonkin in Nevada and Los Azules in Argentina. It is ably run by Rob McEwen, founder and long-time chair and President of GG. Yet like the other superb companies reviewed above, it shares the woes of the sector. The 3Q reports of all these companies named for comparison with ABX show that increasing output, revenues and cost control have been undercut but the 2-year slide and YTD collapse of PM prices which are the flip side of the Fed's pushing assets into equities.
Some of the most brilliantly run companies in the markets commit costly managerial errors. Hot ticket SBUX, for example, was ordered November 12 to pay $2.75 billion to Mondelez (MDLZ), parent company of Kraft Foods (KRFT) for "prematurely terminating their grocery store distribution deal." If there was an animus toward SBUX even a smidgeon such as exists toward Munk and ABX there might be an outcry about this sharp-dealing that wiped out nearly as much capital as the Equinox Minerals fiasco. But few will criticize the vendors of upscale satori and socially conscious chic although the world needs ABX's copper, gold and silver far more than $4/cup tea and walls of loose leaf nirvana.
Perhaps some of the hatred of ABX may be that Munk has the wrong kind of "nose" for many people. Despite his great services to Canada and the Crown, acknowledged with high honors (the Queen's Diamond Jubilee Medal in 2012, Canada's 2002 Corporate Citizenship Award), the West's basic hatred persists. You can read about its mid-century human costs in this carefully documented scholarly work, one of many. It may help explain some of the stumbles, harsh sentiment and resultant share decline at ABX.
If an angry pension fund or gaggle of jejune money managers told a Chinese industrial magnate that he must chuck his eldest son off the board of the company he founded, they'd find themselves "banging their heads against the South Wall" (Chinese saying). I agree that the ABX board should include 2-3 metallurgists and mining engineers and have so written. Still, Munk & Co clearly have hired highly competent miners and prospectors: the quality of ABX's sites speaks to that. Consider a section of the ABX board about which municipal funds and teachers unions have complained.
John Thornton was appointed Co-Chair of ABX June 5, 2012. He has degrees from Yale, Harvard and Oxford, is Chair of the Brookings Institution, a member of the CFR (Council on Foreign Relations), a former President of Goldman Sachs and a Trustee on the Advisory Board of China's University for Foreign Affairs. Those concerned about Asian Sovereign buying of commodities should consider these affiliations. His pay package of $17 million roused ire but most of it went into purchase of 177.5k shares of ABX at 2012 prices.
Corporate Director Howard L. Beck was a senior partner at Davies, Ward & Beck from 1962-89 and appointed to the prestigious position of Queen's Counsel in 1971. Mr. Munk himself is a major donor to hospitals, advanced Cardiac care, founder of a school of International Studies and a Companion of the Order of Canada. His philanthropic work via ABX includes home-ownership programs for Chileans.
When the tender of shares expires and ABX has eliminated its short-term debt, pushing obligations out to 2023 and even 2043, short sellers may cause some sharp down drafts as they do regularly for the PM sector generally. However, the lifting of short-term debt service, continued progress on habitat protection at Pascua Lama, increasing distance from the failures with Equinox and at Reko Diq should let ABX shares rise. Its great properties in Nevada, the Dominican Republic, Argentina and Peru along with its copper output from Zambia (6 billion lbs. proven reserves) make it a major low-cost supplier of commodities vital to many industries. While artificial action in PM prices will limit what otherwise could be sensational gains, the intrinsic value of the sites and materials and the status and affiliations of ABX's board should produce strong gains beginning 2014 and accelerating as ensuing years put the turbulence of 2012-13 further behind us.
ABX now is an undervalued giant with sentiment still near extreme negativity. The focus on profitability that began last year will make it a titan of low-cost production in essential commodities. If you want quick gains from top PM companies, buy EXK, AG, MUX, SLW or Yamana (AUY). If you want deep value whose worth will unfold as 2014 proceeds, ABX invites. The markets are flying on QE which makes bond and real estate assets shaky and detaches equities from the economy. The prime value is in depressed PMs and in a world in which control of commodities is key, ABX is a king.