Glance At Big Golds: Barrick, Goldcorp

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Includes: ABX, GG, GLD, SLV
by: Goombarh

The earnings season for large cap gold miners has just kicked off on February 15th and the reports from the gold darlings, Barrick (NYSE:ABX) and Goldcorp (NYSE:GG) should be interesting.

Prior to looking at the recently completed and announced financial years, below are the charts for Barrick and Goldcorp for 2011. The companies' stock prices are compared with the price of the GLD ETF (used as a proxy for the gold price) in the yellow trace.

Stock Price Charts for 2011

Barrick Gold Corporation - ABX

(click on chart to enlarge)

There are two main observations from the above chart other than that the Barrick stock price is rather choppy over the past year while presenting little appreciation considering the gold price rise.

Firstly, there was a sharp price drop in May 2011, marked with the white oval and I wondered what was the cause of that.

Secondly, the Barrick stock price has been declining since September 2011, marked with the sloping line following the gold metal's price decline downwards.

Goldcorp - GG

In the chart above, Goldcorp's stock price is rather choppy as well while offering little gain for investors, even with the significant rise in the price of gold. There is a sharp price drop for Goldcorp in May of 2011, and now I am really curious as to the cause that would move two gold miners' prices downwards. Goldcorp's price has been in a declining mode since the gold price peaked in September of 2011.

I struggled to find the cause for the sharp drop in stock prices in May 2011. I looked for an economic event that happened in May 2011, that may have triggered the sharp drop in price for both Barrick and Goldcorp. Last year, there was a series of world events including the Japanese tsunami, the Arab Spring and European shudders of the PIIGS. None of these large economic events happened within the specific time frame that I was looking at. I looked at the movements of the S&P 500 and the Shanghai Index hoping to discern a clue. Nothing I examined seemed to correlate with the May 2011 timeframe for the drop in the gold miners prices.

Then quite by accident, I pulled up the chart of the SLV silver ETF - BINGO! The chart of the SLV ETF follows and the timing matches perfectly with the gold miners' sharp decline.

SLV ETF

Stock Price Observations

It turns out that the May 2011 event that impacted both Barrick's and Goldcorp's share price was the collapse of the silver price from its sharp peak. Now, being a miner of gold does automatically allow the miner to harvest some silver in the ores, as gold and silver are often found together geologically. However the sharp declines in the stock prices of about 15% seems to be overdone considering that silver is only a by-product. Though silver is a mined product, but it is not a large contributor to the financials of either Barrick or Goldcorp. I suppose having one of the mine output product drop in price by 40% does merit some consideration for the investors.

However it does seem that the gold miners' stock prices moves more strongly on sentiment rather than actual hard numbers. The sentiment at that time for the silver plunge was one of fear, and impacted both Barrick and Goldcorp's stock price adversely.

The swings in investor sentiment towards the precious metals may help also to explain the volatility of the stock prices of these two precious metal miners. It appears from the charts that the dual declines of both the silver prices from the 2011 peak and the gold prices from the 2011 peak are largely reflected in the stock prices of Barrick and Goldcorp. As a result, both Barrick and Goldcorp, even though they are leaders in this precious metal sector, are not showing any leverage to the rising gold prices and in fact they are both actually underperforming the gold metal's price rise itself for 2011.

Analysis of Key Figures

Selected key numbers were pulled and manipulated from both Barrick's and Goldcorp's 2011 financial statements to examine in the following chart:

Barrick & Goldcorp Comparison

Gold Production Specific (in Millions)

Barrick Gold

Goldcorp

Dec-11

Dec-10

Growth

Dec-11

Dec-10

Growth

Gold Oz Sold*

7,550

7,742

-2%

2,740

2,756

-1%

Gold Revenue

11,914

9,507

25%

4,625

3,798

22%

Mine costs*

4,836

4,286

13%

2,736

2,078

32%

* Goldcorp's 4th qtr 2011 was multiplied by 4 to obtain an annual measure

* for gold operations only

Revenue

14,312

11,001

30%

5,362

3,738

43%

Net Income

4,484

3,582

25%

1,881

2,043

-8%

Earnings per share

4.67

3.56

31%

2.34

2.79

-16%

The gold production ounces sold for both Barrick and Goldcorp did not show any increase for 2011. The resulting revenues in 2011 from the gold sold for both miners shows a 20+% increase, due mainly to the higher gold prices. The increasing mine costs of producing the gold metal ate up a portion of the higher product prices.

Revenue increase for 2011 was 30% for Barrick and 43% for Goldcorp. Net income increase for 2011 was 25% for Barrick and -8% for Goldcorp. The earnings per share increased 31% for Barrick and decreased 16% for Goldcorp.

Mining Operations Opinion

Both Barrick and Goldcorp are top tier and well-managed gold miners; that is why they are the darlings of this precious metal sector.

Both Barrick and Goldcorp have completed high profile acquisitions in the past few years to supplement their mineral reserves and their future production. Barrick executed a low cost and diversification strategy with more exposure into copper with the acquisition of Equinox Minerals for $7.8 billion in 2011, beating out Minmetals and Lundin Mining. Equinox's main project is the Lumwana copper mine in Zambia.

Goldcorp acquired Andean Resources in December 2010 for $3.6 billion in acting out their high grade gold strategy. I expressed an opinion at that time that the price was too high here. Since then Goldcorp has doubled the resources for their Andean acquisition, but I was still critical. Goldcorp further divested their minority ownership of the low grade Osisko Malartic deposit. Goldcorp has also purchased a 70% interest in the El Morro copper-gold project in Chile in 2010.

Both Barrick and Goldcorp did not increase their gold production for 2011 and their revenue increase is largely attributed to the increase in the gold price. Difficulties in expanding production and the ever spiraling higher costs of mining may be holding these miners back from higher production. Their newer projects coming on-line are still a few years away. The market realizes this and penalizes these companies relative to the increasing price for gold by not awarding them any premiums to the gold price.

Investment Outlook

In summary, the outlook for both Barrick and Goldcorp IMHO, is that even though they are top gold producers, they may still underperform the gold price for the foreseeable future. My opinion about exiting gold miners presently is expressed here. I am also of the opinion that the precious metals prices will decline further before we see any sustained rise in the precious metals prices.

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