Sell Barrick and Kinross On The Gold Rally
ABX data by YCharts
Amid the recent surge in gold prices, most (but not all) gold mining stocks are on the rise. As the saying goes, a rising tide lifts all boats.
While I'm not discounting the possibility that gold prices rise even further from here (from $1,245 an ounce to $1,300 an ounce or higher) if stocks continue to drop, I think taking some profits is a pretty wise decision. After all, how often over the past 5 years were gold investors able to do so?
In my opinion, gold investors should use the recent rally to sell two gold miners in particular: Barrick Gold and Kinross Gold . I just think there are better opportunities out there, and I am not that optimistic about the future of both companies for the reasons I'll discuss below.
Barrick Gold: Simply Too Much Debt
Barrick's problem pretty well-known by now: the company has too much debt. In 2015, the company set a debt reduction target of $3 billion; at the end of the last quarter, the gold miner said it had managed to reduce its debt by 15%, from $13.1 billion to $11.2 billion. Assuming Barrick will complete its objective, the company will have ended the year with total debt of $10.1 billion.
Okay, so that's a good start, but I have a few issues with the stock. First, that's still just an enormous debt load and by far the highest in the industry. For example, highly-indebted mining peer Newmont Mining (NYSE:NEM) has $6.35 billion in total debt (the second-highest sum I could find), while AngloGold Ashanti (NYSE:AU) has $2.76 billion in total debt, and Goldcorp (NYSE:GG) has $2.7 billion in total debt (Source: Yahoo Finance).
Barrick's debt required $435 million in interest payments for the first nine months of 2015, according to financial statements. Should gold fall from here, it puts the stock at more risk than its peers.
Next, the debt isn't being paid off from free cash flow, unfortunately. Instead, Barrick has been selling numerous assets to repay the debt. While Barrick refers to some of these assets as "non-core," a few are actually pretty attractive assets in my opinion and when I look back at the sales, the timing was bad.
For example, Barrick sold its 70% interest in the Spring Valley project and 100% interest in the Ruby Hill mine back on Dec. 17, 2015, at the firesale price of $110 million in cash. That's when the price of gold fell to $1,073 per ounce, almost near its lowest point in 6 years.
Another sale back on Nov. 12, 2015 fetched a better price in my opinion, when Barrick sold 100% of its Bald Mountain mine and 50% interest in the Round Mountain mine for $610 million in cash. However, yet again the timing was poor, as this sale was done when gold prices were trading below $1,100 an ounce. These sales would have been fetched a better price had Barrick waited for higher gold prices, but I guess hindsight is 20/20.
Finally, Barrick also divested its Cowal mine in Australia for $550 million and 50% of its Zaldivar copper mine in Chile for $1 billion (this was actually the best move by Barrick in my opinion, as the company should be focusing more on gold in my view).
Now, Barrick had some positive news recently, when it announced that it achieved 2015 production guidance of 6.12 million ounces of gold. Financial results will be released on Feb. 17. But the goal is still to maximize free cash flow and reduce debt. Investors should keep a close eye on the company's cash costs, as well as Barrick's plans to further reduce its debt in 2016.
Despite Barrick's efforts, I still think the stock is a sell for the reasons mentioned above.
Kinross: Cash Costs Need to Come Down Further
I also take issue with Kinross' debt, as the company ended the 2015 year with $1.73 billion in long-term debt and total liabilities of $3.8 billion (although the balance sheet is clearly in better shape than Barrick's). My main issue is the company's ability to manage cash costs, its high capex spending and its future growth.
Kinross says in the last quarter, it produced gold at all-in sustaining costs of $991 per gold equivalent ounce sold; for the full-year 2015, that figure came in at $975 per ounce. For 2016, that figure is expected to range somewhere between $890 - $990 per ounce. So this really doesn't give Kinross that much downside protection to lower gold prices.
Should gold re-test its 2015 lows or go even lower, the company would be losing a significant amount of cash. For comparison's sake, peer Goldcorp produced gold at $848 AISC last quarter, while Agnico Eagle (NYSE:AEM) produced the metal at $759 AISC last quarter and New Gold (NYSEMKT:NGD) produced at $788 AISC.
Another issue is high capital expenditures, as Kinross spent $610 million in 2015, which was down only slightly from 2014. Now, total capital expenditures for 2016 are forecast to be approximately $595 million, another slight decrease ($140 million of this is non-sustainable capital as the company ramps up production to 12,000 tonnes per day at its Tasiast mine in Mauritania). In my opinion, Kinross should be looking to cut its capital expenditures further for 2016, as there is no guarantee gold prices will hold up here. Meanwhile, I think Kinross should try to divest some of its higher-cost gold assets, such as the 100% owned Maricunga mine in Chile, which is producing gold well over $1,000 AISC.
So what gold stocks are a buy here? I think investors should be focusing on miners with solid balance sheets and low-cost assets and development projects. I recently highlighted my top 10 gold stocks for 2016, and most of the picks have worked out quite well. In particular, my #3 pick is up 35.98%, while the #4 pick has gained 38.19%, the #5 pick has gained 40.75%, and the #10 pick is up 40.2%. So most have outperformed the benchmark gold miner index, which is up 31.23% year-to-date.
In conclusion, gold prices have surged from under $1,100 to $1,250 per ounce, with gold miners outperforming the metal. However, there is no guarantee this rally will last, and I think investors should use this opportunity to lock in some profits - in particular, I think investors of both Barrick and Kinross should sell shares here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.