Barrick Gold (ABX) is now eclipsed as the world's largest gold company by market cap. Many investors preferred or felt safer holding the #1 in the sector. Now that this spot is held by Goldcorp (GG), there may be a shift in order. Indeed, It was a general consensus that ABX was a great play for the disconnect/disparity that exists between spot gold prices, and gold producer equities. The strength of ABX was mainly due to its scale, and that it had the lowest costs to produce. A big shocker came this past Thursday, when ABX's profit was cut in half versus the same time last year, and its costs increased.
In May, I wrote an article here detailing that ABX's cash costs were roughly $460 per ounce. Now as of the recent earnings release ABX's costs have been pegged closer to $585. This translates to roughly a 25% increase in costs overall. Anytime a business has its costs increase by 25% is bad thing as a general rule. As a result of these cost changes, adjustments will have to be made, and ABX has already curtailed Capex by $1 billion.
In the same previous article above, I was comparing Kinross Gold (KGC) to ABX, amongst other top tier players such as Iamgold (IAG) and Agnico-Eagle (AEM). Many readers were pointing out that KGC's costs were some of the highest in the industry at around $725 per ounce. Now what's interesting about that figure is that KGC's costs had increased roughly 10% Y/Y. Compare this to the recent 25% cost increase with ABX. The point here is that it would be naive to think that ABX was somehow immune to cost increases just because of their scale, and as a result not being able to foresee rising costs as an industry wide issue.
Fundamentally, ABX has a P/B of 1.4 versus KGC's 0.8. KGC received quite a bit of flak for overpaying for Red Back mining and the subsequent writedown that followed. However in perspective ABX is now stating that its Pascua-Lama mine on the Chile-Argentina border may end up costing as much as $8 billion compared to original estimates of $ 4.7 billion. When you juxtapose these two events there are some definite similarities cost wise. As a result, I remain bearish on ABX, having double the P/B of KGC, even though some analysts are saying that it is not all that bad. I would rather wait and see if this $4 billion in extra expenditures is due to come to fruition, and by how much this figure will be adjusted. How will the final numbers pressure the overall costs to produce for ABX is the real question. Some analysts say the costs for ABX with Pascua-Lama will be offset by silver production. As well, it is important to note that ABX's Pueblo Viejo mine is expected to operate at $320 per ounce, so costs will have to be averaged out for ABX.
The main issue at hand here is that much of the "easy" gold has been dug out of the ground, and what remains is gold that is in harder to reach places. Furthermore there is risk that some countries may or may not be as friendly to deal with. If governments need money, they may look at nationalizing gold that is in "their" ground. I once thought South Africa was an ok place to own shares in a gold mine, and was proven wrong the hard way, by that of labor disputes.
As for the rest of the miner's costs, ABX is approaching the mean of the lot. For example IAG's costs are roughly $636 per ounce. As for AEM/GG, $660, and $534 per ounce respectively. What is interesting to note here is that GG now takes the title from ABX as the lowest cost top tier player. In comparison I still like IAG, as it has no debt. Had anyone gone long with IAG on my previous article, they would of had a healthy gain. Getting out of ABX at that time would of also been a good move.
Additional analysis shows that GG's P/B is 1.6, whereas IAG/AEM are 1.6 and 2.7 respectively. When you compare ABX's P/B to that of the lot, it now comes in second for the lowest spot held by KGC. This has generally not been the case in the past. I am a big proponent of using P/B and costs to produce when analyzing gold producers. This is because anytime you can get the gold out of the ground for cheaper than it is selling for, is obviously a good thing. This is a sharp contrast to the current Nat Gas picture.
Moreover, it is a good thing when the book value of assets is selling for less than 1.0. In a crude way, I feel like I am giving 70 cents up for $1 of a gold business in KGC case. However, this can't be the only metric used, as cash is king when you are comparing it to junior gold producers. Looking at P/B only can get you into trouble when you examine a company like Great Basin Gold (GBG). There is nothing like having a market cap of $40 million, and looking for a $40 million loan to shutdown one of your mines due to being cash strapped as in GBG case.
In close, I remain bullish on KGC, even though their costs to produce are the highest. My prediction is that the lower costs producers will continue to have cost pressures to the upside, whereas KGC will get their costs under control. KGC has in a sense been a lead indicator of the cost increases whereas ABX has been the lag. I appreciate that KGC is still priced below book value and has some of the highest gold reserves. The lower P/B in my opinion adds a margin of safety that acts as a counter to the higher costs to produce.