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.
One positive from the quarter and the year is the fact that the company was able to reduce its production costs from $1,421/ounce to $1,305/ounce. This means that the company is still losing money at the current gold price, and as I hinted at above, a large part of this loss can be attributed to the fact that Barrick’s debt servicing costs are so high. Barrick’s all-in sustaining costs — that is, the cost of mining and “sustaining” its mines, was just $938/ounce. This means that debt financing and administrative expenses were nearly $370/ounce.
Thus, it is clear from these results that Barrick still has a long way to go in reducing its production costs. Barrick is on the right path towards achieving this in some respects. For instance, it will see a reduction in costs at its enormous joint venture project Pueblo Viejo in the Dominican Republic. Barrick’s 60 percent share (Goldcorp owns the remaining 40 percent) should generate 600,000 – 700,000 ounces for the next several years.
Ultimately, Barrick has taken baby steps in the right direction in that it has reduced costs somewhat, but we have yet to see the radical shift towards the more disciplined operating philosophy that management has been espousing for quite some time now. While it has shed some non-core assets, I believe that these were quality assets, and the end result seems to be simply a reduction in total gold production. Furthermore, the company has yet to outline any sort of growth strategy or any debt reduction strategy.
Barrick Gold will perform very well if the gold price soars in the near term — all of the company’s problems have lowered earnings expectations and increased the company’s leverage to the gold price. However, for investors looking for gold miners as investment opportunities, there are better options in companies with less debt and clear growth plans. For investors who want the aforementioned leverage to the gold price, there are smaller companies that offer this. Many of them have stronger balance sheets and yet they are undervalued and underappreciated because most of their production has yet to become a reality, or because they operate in parts of the world that are considered risky, but really aren’t, such as West Africa.
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