Barrick Gold Shares Continue to Underperform: Here’s Why

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Barrick Gold (NYSE:ABX), the largest gold mining company in the world, has been a disappointment so far this year. With the gold price up nearly 11 percent and the Market Vectors Gold Miner ETF (NYSEARCA:GDX) up over 20 percent, Barrick Gold shares are up a mere 10 percent. While a rising gold price is going to benefit the company and while the company claims that it has some of the lowest costs in the industry, there are reasons that I believe that Barrick Gold shares will continue to underperform the gold price.

First, Barrick Gold has an incredibly large debt load at over $13 billion. This has several negative consequences. First, if the company loses its cash flow due to lower gold prices or a mine shutdown, it can put the company into bankruptcy, which means the stock would be worth essentially nothing. Second, when Barrick brags about its low production costs, it does not include its interest obligations, which reached $800 million in 2013.

With 6.5 million ounces of gold production next year, that means that the company’s debt is adding roughly $123 per ounce of gold produced, which is a lot in this environment. While this number comes down when we consider that some of the cost of servicing this debt can be added to the cost of mining copper, the fact remains that Barrick’s debt load is adding to its overall production costs.

Second, Barrick Gold has been mining more and more copper and less gold. Gold production has fallen from about 7.3 million ounces to 7.2 million ounces year over year, and next year this figure is expected to fall to just over 6.5 million ounces due to divestitures of gold mines. On the other hand, copper production has risen from 472 million pounds in 2012 to 520 million pounds in 2013.

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