Barrick Gold: A Wild Ride, But Worth It

| About: Barrick Gold (ABX)

Summary

Bought Barrick gold stock in November, 2015 on the belief that gold prices were bottoming. Stock is up 150% since then, but it has been very volatile.

While decision to buy was based on my view on the gold market, the decision to buy Barrick stock was based on its profitability profile and financial situation.

Logic would dictate that I should consider selling some of the stocks in order to lock in the gains, but the economic & geopolitical situation suggests otherwise.

Lately, there is not a single day that goes by, which will not remind us that the post WW2 global order is coming to an end. A much older trend, namely the Western world order, which arguably started about five centuries ago is also disintegrating. New challengers to the hegemony we became used to are rising. China is now the third largest economy, only slightly bellow the EU and the US. The non-Western economy is now larger than that of the Western world. The US, EU, Canada and Australia together make up less than 50% of the world's economy now, while back in 1990 the US, Canada and Europe's five largest economies alone made up 55% of the world's GDP. Adding the rest of the smaller EU countries and Australia we get up to about two thirds of global GDP in 1990. Less influence means that the world is increasingly shifting to playing by different rules, while we still insist on ours. Arguably, it is likely to lead to a very chaotic century from an economic and geopolitical perspective, with many of the effects already evident. For this reason I believe that owning some gold has become indispensable, because we live in an increasingly unpredictable and volatile world, which means that we need to hang on to something which is likely to always have some intrinsic value.

I own physical gold as well as Barrick Gold (NYSE:ABX) stock. I bought Barrick stock back in November, 2015 in expectation of a gold market turnaround, which it seems I managed to time rather well. It has been worth sticking with it, even though it has been a very volatile ride, with some of the steep selloffs causing me to question whether I perhaps made a mistake by not selling close to the recent highs. I then reminded myself of all the reasons why I decided to buy with the intention to hold for a longer period, which I intend to touch on later. First I want to touch on some of the factors which made me decide to buy Barrick Gold stock in particular.

According to the full year results, Barrick managed to produce positive net earnings of $665 million on revenue of $8.6 billion for 2016. In terms of net earnings to revenue ratio, it is doing better compared with its peers.

As we can see, Barrick's main competitors, Goldcorp, Kinross, Newmont and Yamana all have a lower net income/loss to revenue ratio, which in effect means that profitability is not as strong.

Other factors that make Barrick attractive include the fact that it has decent production costs, even if that production seems to be on a declining trend.

Source: Barrick Gold.

The fact that production costs are set to continue to stay near current levels, with perhaps only as much as a maximum of under 10% increase means that Barrick can continue to be profitable at current gold prices.

Better profitability means increased ability to keep debt in check, which in the case of Barrick, it is definitely an attractive trend we are seeing.

Source: Barrick Gold.

As I pointed out on many occasions, one of the main factors I am looking at when considering a resource extraction-related company is the interest on debt to revenue ratio. In the case of Barrick gold it had revenue of $8.5 billion and interest on debt of $513 million, meaning that for 2016, it paid the equivalent of 6% of its revenues on interest on debt. Ideally, I would like to see that number go under 5%, which I believe is achievable in coming years, given the continued decline in debt. As I usually tend to point out, I tend to start worrying once a company starts spending more than 10% of revenues on interest payments. It is most definitely not likely to be the case with Barrick in coming years, unless some of the most pessimistic predictions out there in regards to gold prices will come true.

Gold bears have it wrong.

While company specifics are important and looking at particular metrics allows for choosing the desired investment vehicle meant to play any particular sectoral trend, in the end it is the price of gold which will be the main determining factor in regards to where Barrick stock is headed. Since I bought this stock back in November, 2015, I am currently up about 150%. It is the kind of gain which would logically lead many investors to take some money off the table and lock in some of the gains. I have to say that I have been tempted to do the same at this point, but when I look at some of the global geopolitical and economic trends, I cannot help but feel that I need to stay all in on this one.

On the economic front, some of the trends I am looking at include the dramatically slowed global economic growth rate. In addition to the low growth rate, there is the issue of the growing global debt burden. I recently wrote an article pointing out the fact that the negative effects of rising total global debt/GDP has been to a great extent tempered by a steadily declining interest rate since the early 1980's. We are now at a point where that long-term trend has completely played itself out, meaning that current trends will lead to a doubling of global interest costs as a percentage of GDP, from less than 13% currently to over 27%, assuming current interest rates for the long run, by 2050. I personally believe this is by far the greatest threat to the global economy in coming decades. It is a problem which is largely ignored by most public discourse. Ignoring it however will not make the steadily worsening effects disappear. I believe we reached the end of the road on declining interest rates last year, after years of central bank rates of most developed economies being kept near the 0% mark. Interest rates do not have to rise further from here in order to make the interest rate burden increasingly intolerable going forward, because rising global debt will do that on its own.

On the geopolitical side of things, there is certainly no shortage of issues. As I pointed out in a previous article the ME-Africa region is most likely at the beginning stages of a massive Malthusian catastrophe. The cause of this is the fact that the total population in the region of about 1.5 billion people is set to double by 2050, given current birth rates. The current population is already at a point where it is not sustainable given current natural and economic resources available in most of the countries in the region.

As a result of the growing human desperation, we are getting more and more conflicts and unrest breaking out. We saw the aftermath of the "Arab Spring" which left behind it failed or failing states such as Syria, Libya, Yemen and arguably Iraq. We also have continuing or igniting conflicts in Afghanistan, Somalia, South Sudan, Nigeria and other countries. Countries on the brink include states with large populations such as Egypt and Ethiopia.

At first consideration, this might not seem like such as huge reason to expect global uncertainty. After all, aside from oil production in the gulf area and a few other countries, this region is not hugely important to the global economy. We saw however how fast the resulting inflow of migrants into the EU managed to destabilize the continent and create new geopolitical concerns ranging from Brexit, to the ideological polarization in the EU within countries and among countries, which makes it far less likely to function properly.

We also saw how global powers, as well as regional powers were gradually sucked into the Syrian conflict, on opposing sides, neither of which we could genuinely consider to be the "good guys". There is also an unofficial conflict in Yemen between Saudi Arabia and Iran, with Saudi Arabia resorting to direct military intervention, together with a number of allies, while Iran is thought to be supporting the Houthi militia in Yemen, which the Saudis are fighting against. Needless to say that the current environment could potentially ignite into a regional conflict. I doubt the US and Russia will come to blows over any incidents which may happen in Syria, but same cannot be said about regional rivals Iran & Saudi Arabia, which would definitely put to an end the current low oil price environment. In fact, it could potentially disrupt as much as 15 mb/d of global oil exports, plunging the world into a deep economic depression in the process.

In addition to the increasingly turbulent and unbearably sad situation in an increasing number of ME-African countries, there is also an increasingly tense situation in Asia, with China's growing power and assertiveness causing its neighbors to contemplate having to accommodate China's wishes, or take a more confrontational stance. There is also the very delicate North Korean situation, which is highly unpredictable and could escalate out of control at any moment.

Even in Europe, the Ukraine crisis is once more pitting old cold war foes against each other. I don't think it will lead to a major conflict, but I do believe that it is leading to a significant European country, namely Ukraine potentially becoming Europe's first failed state. Tensions in the Balkans are starting to rise again as well. The EU, which only recently was thought of as the mechanism which is keeping Europe peaceful, stable and prospering is showing more and more cracks. There is the East-West divide over the migrant issue. There is the North-South divide over financial issues, and more importantly, there are increasingly ideological cracks within countries as a result of both migrant issues, as well as economic issues. Although, as is the case of countries such as France, the migrant issue is also becoming an economic issue, given that the terrorist attacks it suffered recently most likely contributed to the 8.7% decline in non-resident tourist nights spent in that country in 2016, as reported by Eurostat. Tourism is an important French industry, therefore this is a painful blow to a country which is already suffering from a stagnated economy and an inability to bring its budget deficits under the 3% line, as demanded by EU treaties.

Even South America, which we have gotten used to largely ignoring in the past few decades from a geopolitical point of view, seems to be experiencing increased instability. We have the situation in Venezuela where it seems that the economy is collapsing. We also have the political and economical problems being experienced in Brazil.

The post-WW2 world order is clearly starting to decay from a geopolitical, social, ideological, and economic point of view. At this point, it is impossible to say how much longer it is likely to hold together. What is increasingly clear is that it cannot last much longer, and there have been no viable efforts made to make the transition to a new world order go smoothly. Within this context, I don't believe that anyone can afford not to own some gold on a permanent basis. In such turbulent times as we are now entering, we really cannot be sure of the value of most of our investments, whether it is stocks, bonds, real estate. Given the volatile trading record of gold in the past decade or so, one might think that it also lacks certainty. To some extent it is true and I expect this volatility to continue for many years to come. I also think however that once the rush starts out of investments which could potentially drop to zero value, money will flow into assets which will always retain some value, at which point these assets will gain a lot of value in relation to everything else. That is why I am holding on to Barrick stock, even though locking in the gains achieved so far might be very tempting at times.

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Disclosure: I am/we are long ABX.

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.

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