Will Barrick Gold’s Rally Continue?

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Gold

Yesterday, Barrick Gold (NYSE:ABX) reported its fourth-quarter earnings results. Despite the fact that the company’s gold and copper production fell year-over-year, and despite the fact that the company took yet another bunch of write-downs, shares rose over 4 percent to close just above the significant $20/share resistance level. If we ignore the company’s write-downs, it earned $410 million, or $0.37/share.  This isn’t bad considering the recent downtrend in the gold price, however, it is down from $970 million or $0.97/share from a year earlier. Still, despite the relatively strong “headline” number and the company’s strong stock performance, I would remain cautious on Barrick for the time being.

I have been critical of Barrick in the past. The company has made several poor financial decisions, such as hedging its gold production when prices were low. It has made lousy acquisitions such as Equinox Minerals in 2011. It has underestimated its mine construction costs at one of its largest mines — Pascua Lama — and as a result, it has decided to postpone development until the gold price rises. Additionally, the company carries an enormous amount of debt, which means that its interest payments raise its effective production costs, and it could be unable to service this debt in a weak gold market.

As a result, the shares have performed rather poorly and the company recently slashed its quarterly dividend from $0.20/share to $0.05/share. We also saw the company issue $3 billion worth of stock in a distressed market environment.

Barrick’s fourth-quarter results reflect this mismanagement. Gold production fell in 2013 to 7.2 million ounces from 7.4 million ounces in 2012. Furthermore, it is slated to fall again in 2014 to 6.5 million ounces. This is largely a result of the fact that the company divested two projects — the Yilgram mines in Australia and the Marigold joint venture project with Goldcorp (NYSE:GG) in Nevada. Unfortunately, both of these are low-cost producers in low-risk mining jurisdictions and so Barrick Gold is losing quality ounces despite the fact that it is telling investors that it is shifting its focus towards quality of ounces produced from quantity of ounces produced.

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