Barrick Gold: African Mines Could Sink This Stock In 2013

Apr.25.12 | About: Barrick Gold (ABX)

African Barrick Gold, a unit of Barrick Gold (NYSE:ABX), is not doing well at present, with potential backlash for the company's stock price on the horizon.

The reason African Barrick Gold, one part of the whole, is not doing well is largely due to the Buzwagi mine in Tanzania continually producing lower head grades. The company is still suffering from the long-lasting ripple effect caused by numerous power outages last year, with each significantly slowing production in the mine. This led to the use of and reliance on a more expensive generator power in an attempt to keep the mine at an operational level. This, combined with rising inflation and the need to pay wages, caused the company to see a 41% increase in costs for the first quarter of this year. If the financial situation is not stable for this unit of Barrick Gold, then the losses will be felt throughout the company and will eventually translate into losses for stockholders. So although gold prices rose, share prices for the African Barrick Gold company dropped significantly.

Even though this weak start was far from unexpected, investors are still expressing disappointment in the company. At this point, the only thing that could potentially ramp up the process of returning to profitability is a sudden improvement in gold prices. However, we simply can't expect that to happen soon, as gold and silver are both trading at very low levels currently and are no longer considered to be the safe options they once were. Barrick Gold may already regret the existence of African Barrick Gold, its spin-off company, as it has been suffering significantly ever since being listed on the London Stock Exchange.

Despite these numerous setbacks, African Barrick Gold maintains that it will still achieve the production levels initially estimated at the end of last year. Net profit attributable to shareholders decreased 30% and attributable gold production dropped 17%, significant losses for the company indeed. The company also expects to experience a significant step up in production as the year progresses, indicating that things may get better form here on out. Stockholders, however, should remain suspicious of the company's likelihood of recovery, and there are many who see African Barrick Gold's challenges as a direct reflection of the larger Barrick Gold company itself.

Another company that appears to not be doing very well at the moment is Barrick Gold's competitor, Kinross Gold (NYSE:KGC). The weakening of gold prices means that Kinross has experienced major declines, with its stock dropping 17.7% this year already. There seems to be very little chance that the company will be able to turn this around. In a broader context, the company has been seen to underperform in every way, meaning it is no longer considered to be the sure thing that it may have once been. Despite this, however, there has been an increase in interest in this company and it seems that many investors may still willing to take the risk.

Other companies trading in gold appear to be fairing slightly better than Barrick Gold and its African unit. One of the main competitors of Barrick Gold, NovaGold Resources (NYSEMKT:NG), is launching a new spin-off by the name of NovaCopper, after shareholders voted overwhelmingly for the move. The majority vote may be due to the fact that there is no action needed on the half of NovaGold shareholders to receive NovaCopper shares and investors will also retain their NovaGold share certificates. Although this all sounds great, be careful before simply switching from Barrick Gold to NovaGold. There are a number of regulations in place regarding just who will be eligible for NovaCopper shares, and it is suggested that you consult with your financial advisor before making a decision of this kind.

Another company that seems to still be ahead of the game in certain respects is AngloGold Ashanti Limited (NYSE:AU), which is considering making certain acquisitions in Brazil. AngloGold is already the third-largest producer of gold, but it plans to hopefully double the output from Latin America through the acquisitions that are currently under consideration. New discoveries and asset purchases will eventually allow the company to expand even further and it has set its sights on acquiring smaller companies in Brazil. These companies will be purchasable at a bargain due to the current undervalued status of gold, giving AngloGold a clear path to expansion. AngloGold is interested in Brazil now, mostly due to the fact that its South African mines, on which it currently relies for production, are beginning to show signs of aging and are yielding less value than before.

Newmont Mining (NYSE:NEM), on the other hand, is experiencing difficulties in the development of mines in the Peru area. The key problem is the protests that have arisen due to the company's indication that it wishes to replace several naturally occurring lakes with man-made reservoirs. This is just one of the several proposals to which the people of Peru have responded negatively. A compromise has been suggested, namely that the company will leave two of the lakes intact, while increasing the amount of water kept in newly developed reservoirs made in the place of the other two lakes. Despite this compromise, opposition to the mine remains strong. Newmont is looking to establish a deal soon so it can begin its production.

Though its competition is experiencing mixed success currently, Barrick needs to keep going strong or else it may be dumped to the wrong side of this industry. Mainly, it needs to invest its resources to ensure that African Barrick Gold picks up, as this seems to represent more than just a minor stake in the company's success.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.