Transparency/Disclaimer: I was compensated modestly by Pershing Gold Corporation to write this article. While I have vetted each company, researched it thoroughly and I've done my own due diligence, my due diligence is not a substitute for your own.
Barrick Gold (ABX) has a new CEO, its old CFO, Jamie Sokalsky. The abrupt change in leadership is supposed to signal to the market that the board is proactive and knows that changes need to be made. Whether that change needed to be Aaron Regent can be debated.
What isn't disputable is the fact that there are fundamental issues at the core of Barrick's business that need to be addressed. For one, across the sector and industry, there are rising mining costs, the culprits of which range from the price of labor to geopolitical barriers.
With the company's Pascua-Lama mine in Chile for instance, an inflation in raw materials has prodded management to reassess its initial budgets there. The project's now estimated to cost the company more than $5B, up from roughly $4B, which is in line with what other large producers and miners are having to go through.
Inflation in the costs of inputs have been coincided with stiffer competition in regions such as Argentina and Chile, for Barrick and other miners that operate there. Barrick's CEO has said in interviews that there isn't only a competition for raw resources, but there's also competition amongst mining firms for human resources as well: contractors, engineers, manual labor, etc.
And then there's the matter of valuations in currencies. Mining firms, such as BHP Billiton (BHP) had reported lower earnings (lower by $1.4B) in the second half of 2011, citing the U.S. dollar's lower valuation as the culprit.
What all this amounts to is a macro scenario that looks a lot like American healthcare, wherein inflation reigns and the biggest players in the game crumble under the weight of its own size and scale - as is the case with Barrick which is the largest of the miners by market cap.
But miners such as Barrick need to figure out its logistics and cost issues, because, ultimately, the world needs more gold. There's no way around it. The largest economies in the world, including the G7, have functionally agreed together (by keeping their reserves intact) that gold is a standard way to store value.
This is what's driving up demand. China is in hot pursuit to store as much gold as it can-despite what it might say publicly, and so are other developing economies. And this interlocking (inadvertent) agreement about gold isn't going to become undone any time soon, so miners such as Barrick don't have a demand problem. Their problem is a logistical, financial, and politic one, that shows both externally and internally.
From this top-level view, you might be able to relate to what Barrick's former CEO was trying to do in a kind of frantic way: he was trying to keep the machine going at the size and scale it was at, without over extending the organization. As one analyst put it, he was leading the charge for diversification.
But it wasn't enough, and Barrick's founder, 84 year old Peter Munk, decided (as chairman) it was time for Regent to go.
And perhaps Sokalsky will mark a turn in fortunes in general for the Barrick. The odds are stacked against him, however. Barrick as an organization is many times larger than Goldcorp, and is consequently more difficult to keep profitable and manage - let alone grow at an expected pace.
During Barrick's Q1 conference call, there wasn't anything "exciting," that anyone of the listeners could latch onto. Regent went on about his reporting of the company's various projects, then handed the baton off to the next speaker. Contrast that against Goldcorp's, where the call was accompanied by web media, and its CEO was vibrant, offering vital statements such as, "Over the past 10 years, Goldcorp has outperformed the physical metal as well as our industry peers by delivering on those very attributes and we expect this performance to continue in the future." Chuck Jeannes just frames his report in a way that's more interesting.
And you know, that's the kind of leader I could get behind. This shakeup at Barrick, it's good that they're not sitting on their hands about adapting to what's going on out there with rising mining costs and raw materials and energy inflation. But firing Regent wasn't exactly something that incited a vote of confidence in the organization either.
Right now, Barrick is the company to beat, and Goldcorp stands a good chance at doing this. The legal battle between the two companies over El Morro perhaps signifies that the two are poised to go head to head again in the future. They already rival each other in terms of market cap.
Barrick is simply unfocused as an organization. In less than a year, the company's pleaded guilty to a number of lawsuits in Australia alone, one involving safety and the death of an employed miner; another involving not filing required financial reports.
All of this doesn't bode well. If you hold a considerable position in Barrick, consider reducing your exposure to this single security. And if you're still bullish on the sector, consider an ETF for the mining sector on the whole, such as the Market Vectors Gold Miners ETF (GDX), which attempts to replicate the performance of the NYSE Arca Gold Miners Index.
Another gold sector development to watch closely is Dr. Phillip Frost's $9.3 million investment in a small mining company called Pershing Gold (PGLC.OB), which is in the process of restarting the Relief Canyon Mine in Pershing County, Nevada. Dr. Frost is a highly regarded value investor known for his ability to spot undervalued assets. The Relief Canyon Mine has a lot working in its favor. First, Pershing bought the mine out of bankruptcy, so overhead costs are extremely low. Second, the mine is located in a proven gold field. Third, its location, in a historic part of Nevada, which is politically stable, compared to foreign countries like Brazil, Ghana, and Indonesia. While there are risks to Frost's investment, this development is definitely one to watch closely, as it has the potential to provide huge gains for Pershing investors. I urge investors to research Pershing Gold further and consider buying if the development suits your appetite for risk.
Undeniably, Barrick Gold needs a shakeup to get back on the right track. The worldwide economy isn't going to rebound in a dynamic way anytime soon, the best it can hope for is gradual growth. Investors should hold on for any big news stories before flocking toward Barrick, especially with other options available.