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Stay Away from This Troubled Gold Miner

December 10, 2013 | About:
Patricio Kehoe

Patricio Kehoe

In a recent article I suggested that the current price of gold, which is currently hovering around the $1,200 per ounce mark, has put much pressure on gold miners. I concluded that a firm such as IamGold Corp (IAG), which has a diversified production and a moderate cost structure, is worth investing in. At the same time, I suggested Barrick Gold Corporation (ABX) had taken steps in the wrong direction, and is now suffering the consequences of its management’s decisions. Let’s take a closer look at the reasons why an investment guru the likes of John Hussman has recently reduced his stake in this industry giant.

Bad Management [/b]One of the main factors behind Barrick’s poor performance this year, is a series of poor management decisions. Expansion at the wrong time is one such decision, which has put a huge amount of pressure on the company. The firm began expanding when gold prices were at the peak, thus, as gold prices fell over the past half year, projects became less profitable. The increase in cost for the expansionary projects put a huge strain on Barrick’s balance sheet, and has led to debt levels around the $12.8 billion mark, representing 67% of the firm’s market cap. The hefty investment payments not only reduce cash flow levels, but expose shareholders to a significant amount of risk.

Yet the debt burden is not the only troubling factor. Barrick was forced to suspend the development of its Pascua-Lama mine in Argentina/Chile earlier this year, a project that was expected to generate considerable profit. The firm was expecting to begin production this year, yet it ended up taking a $5.1 billion write-down, since it overestimated the value of developing the mine. Poor stewardship was once again a problem.

[b]Recent Developments
[/b]It comes as little surprise that Barrick recently announced changes to its board and upper management. The firm’s chairman has resigned, and the company is looking to hire a new COO, in order to reverse the negative trend. Some suggest this change in management could be beneficial, however, there are no guarantees that new personnel will result in a positive outcome. For now, Barrick is still dealing with no free cash flow, high cash costs of around $925 per ounce, and failed projects. How it will solve these issues and once again become profitable is uncertain.

Despite its grim performance, which saw share prices drop around 56% this year, some analysts suggest the current low price of Barrick stocks present an attractive entry point. Although the stock is surely very cheap at the moment, I feel the risks involved are too great, especially considering there are no concrete projects for improvement underway. And, with the price of gold dropping, while cash costs are increasing, additional cost pressures will certainly constrain Barrick’s ability to reverse their poor performance.

[b]Comparing Metrics
[/b]Whereas Barrick is dealing with negative ROIC, huge debt levels, and reporting significant losses, rival miner IamGold is looking very good. Unlike its Canadian counterpart, IamGold has an impressive operating margin of 32.7%, and offers shareholders a 15.9% ROIC. Also, while Barrick’s only strong suit seems to be its 3.3% annual dividend yield, IamGold shares not only entail a 6.39% dividend, but an EBITDA growth of 20.8%. Hence, if you are looking for a savvy investment in the gold industry, and are not willing to incur in unnecessary risks, I suggest you stay away from Barrick, and rather look towards IamGold.

[b]Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.2/5 (6 votes)


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