ABX - Barrick Gold Corporation

[Josh4580]

Barrick currently trades at $13.76 and has 1 billion shares outstanding.  This gives it a market cap of $13.76 billion.  The company has $14.8 billion in long term debt and $2.3 billion in cash, giving the company an EV of $26.26 billion.

 

Current management guidance for 2013 is for production of 7 million to 7.4 million ounces of gold and 480 million to 540 million pounds of copper.  Guidance includes all in sustaining costs per ounce of gold of $950 to $1050 and for C3 fully allocated costs for each lb of copper of $2.60 to $2.85. 

 

Using current gold prices of $1225 and current copper prices of $3.14 per pound, Barrick is set to earn $1.36 per share on the low end and $2.33 on the high end.  This includes current production only and ignores any expansion capex or new mine capex. 

 

This gives Barrick a P/E on current production of 6 on the high end and 10 on the low end of guidance. 

 

Gold has had its worst quarter since 1919 and should start to stabilize around these prices.

 

In 2012, Barrick had OCF before tax & interest / finance costs of 40 (7.016 billion/ 177 million).  In Q1 2013, Barrick had OCF before tax & interest / finance costs of 13.44 (1.452 billion / $108 million).  They are able to handle the debt load very well with current OCF. 

 

Most of Barrick's production is in lower cost regions.  69% of their Q1 2013 production was located in North America & South America.  These regions have all in sustaining costs of $770 per ounce and $638 per ounce, respectively. 

 

At the mid-point of current 2013 guidance, Barrick starts to lose money under $970 per ounce of gold.  This would require a further 20% decline from today's prices. 

 

Barrick's major development mine is the Pascua-Lama project in Chile & Argentina.  A description of the project is below from the company's Q1 2013 update:

 

Pascua-Lama is one of the world’s largest gold and silver resources with nearly 18 million ounces of proven and probable gold reserves, 676 million ounces of silver contained within the gold reserves, and an expected mine life of 25 years. It is expected to produce an average of 800,000-850,000 ounces of gold and 35 million ounces of silver in its first full five years of operation at all-in sustaining and total cash costs of $50-$200 per ounce and negative $150 to $0 per ounce, respectively.

 

Development of the mine is halted on the Chilean side due to alleged noncompliance with the environmental requirements of the projects Chilean environmental approval.  Barrick has provided a complete update on this project in the link below.

 

http://www.barrick.com/investors/news/news-details/2013/Barrick-Provides-Updates-on-Pascua-Lama-Project/default.aspx

 

They are now targeting first production in mid-2016 from the second half of 2014.  They have reduced capex on the project in 2013 & 2014 by a combined $1.5 billion - $1.8 billion. 

 

Barrick pays a yearly dividend of 80 cents per share, offering a current yield of 5.8%. 

 

I think Barrick is well managed, has great low-cost assets, pays you a high yield while you wait, and will earn substantial cash flow even at todays depressed gold prices. 

 

What am I missing?

 

[matts]

I have no comment on valuation, but I worked briefly for Barrick in Investor Relations in 2008. I interacted with the executives including CEO Sokalsky (then CFO). He was the most competent person there, but the overall culture struck me as very arrogant and wasteful. No focus on costs whatsoever. Maybe things have changed, but with Mr. Munk still running the place I doubt it. It's just my personal view, but I would look to play gold with some other stock.

 

 

[alertmeipp]

u will have to believe gold price is stabilize there to move in.

[ItsAValueTrap]

In general, I think that very few of the senior miners are well managed.  Maybe this is an extreme opinion but:

 

A- Their share performance has lagged physical gold over the last decade.

 

B- In general, many of them chased dumb projects with bad returns.  They should have simply stopped investing in new mines and returned the cash flow to shareholders; in hindsight, that was the best strategy for these miners to pursue.

 

C- They always say that they will grow production.  Yet production in ounces per share has stayed flat despite returning very little capital to shareholders.  The new CEO at Barrick seems to be saying that he will try to grow production; it doesn't strike me as a great idea.

 

D- Mine are depleting assets.  You should value the company based on discounted cash flow, not P/E multiples.  Unfortunately, analyzing mining assets is really hard... especially when the companies don't give you good information.

[stahleyp]

I know Burry owned some ABX when he was managing Scion a few years ago.

 

Wow, it looks like it hasn't traded this low since...1992.  :o

[Guest wellmont]

that the dividend could go down.

[Josh4580]

In general, I think that very few of the senior miners are well managed.  Maybe this is an extreme opinion but:

 

A- Their share performance has lagged physical gold over the last decade.

 

B- In general, many of them chased dumb projects with bad returns.  They should have simply stopped investing in new mines and returned the cash flow to shareholders; in hindsight, that was the best strategy for these miners to pursue.

 

C- They always say that they will grow production.  Yet production in ounces per share has stayed flat despite returning very little capital to shareholders.  The new CEO at Barrick seems to be saying that he will try to grow production; it doesn't strike me as a great idea.

 

D- Mine are depleting assets.  You should value the company based on discounted cash flow, not P/E multiples.  Unfortunately, analyzing mining assets is really hard... especially when the companies don't give you good information.

 

So how would you play Gold here?  What miners do you like that have low all in costs?

[Josh4580]

I have no comment on valuation, but I worked briefly for Barrick in Investor Relations in 2008. I interacted with the executives including CEO Sokalsky (then CFO). He was the most competent person there, but the overall culture struck me as very arrogant and wasteful. No focus on costs whatsoever. Maybe things have changed, but with Mr. Munk still running the place I doubt it. It's just my personal view, but I would look to play gold with some other stock.

 

Well im glad Sokalsky is the CEO now.

[BargainValueHunter]

Would Warren or Prem ever look at a gold miner even in the face of such a stock price collapse?

 

At what point would even these two legends have to consider an investment?

 

If gold drops to $400 then the survivors may warrant a look.

[matts]

I have no comment on valuation, but I worked briefly for Barrick in Investor Relations in 2008. I interacted with the executives including CEO Sokalsky (then CFO). He was the most competent person there, but the overall culture struck me as very arrogant and wasteful. No focus on costs whatsoever. Maybe things have changed, but with Mr. Munk still running the place I doubt it. It's just my personal view, but I would look to play gold with some other stock.

 

Well im glad Sokalsky is the CEO now.

 

Ya, he's CEO, but Mr. Munk is still chairman. He's a Canadian business legend, and I don't mean to take anything away from what he has accomplished, but he's very old now (85). Despite not being able to follow and understand the details of the business, he still has great influence and power on the executive floor. I consider this a fairly large negative for Barrick at this critical time.

[ItsAValueTrap]

Would Warren or Prem ever look at a gold miner even in the face of such a stock price collapse?

At one point in time, Warren hoarded physical silver.  I'm not sure but I don't think he bought silver mining stocks.

 

Munger has said something to the effect of... [Munger and Buffett] aren't good at estimating resources/reserves.  However, Buffett did invest in Cliffs and does invest in oil stocks.  I think he looks for situations where:

A- There is some margin of safety.  And/or...

B- Management has integrity.  This is very important!!  If they lack integrity, it is much more likely that the economics of the assets are exaggerated.  If they are raising capital, there are strong incentives to be promotional in reporting technical data.  I think Buffett is interested in oil majors because management seems decent enough and they are buying back shares at a low price.  If they are buying back shares, they are trying to make money for shareholders and aren't trying to create an empire.

 

I think the main reason why Buffett is brilliant is that he's mostly stayed away from things outside his circle of competence.  Yes he messed around with hoarding physical silver but it was a small position and he didn't lose money on it.

[ItsAValueTrap]

So how would you play Gold here?  What miners do you like that have low all in costs?

 

Altius Minerals - See the thread on this forum.  They have very little exposure to gold, but they are really really smart and are buying back shares.  They try to avoid most mining stocks when they can.  The mining world has a lot of problems that cause shareholder return to be poor.

 

Northfield Capital - illiquid.  They own mostly stocks, trade at a discount to liquidation value, and are buying back shares.

 

Pinetree, Aberdeen - Same idea as Northfield but with awful management.  Insiders are paid several times what Northfield Capital's CEO pays himself.

 

Physical gold - If I was any good at predicting future commodity prices, I might be interested in physical gold (or GLD, or futures).  Physical gold outperformed miners... that's how awful the miners are.

[Josh4580]

So how would you play Gold here?  What miners do you like that have low all in costs?

 

Altius Minerals - See the thread on this forum.  They have very little exposure to gold, but they are really really smart and are buying back shares.  They try to avoid most mining stocks when they can.  The mining world has a lot of problems that cause shareholder return to be poor.

 

Northfield Capital - illiquid.  They own mostly stocks, trade at a discount to liquidation value, and are buying back shares.

 

Pinetree, Aberdeen - Same idea as Northfield but with awful management.  Insiders are paid several times what Northfield Capital's CEO pays himself.

 

Physical gold - If I was any good at predicting future commodity prices, I might be interested in physical gold (or GLD, or futures).  Physical gold outperformed miners... that's how awful the miners are.

 

ValueTrap,

 

If you HAD to pick a pure-play producing gold miner, which would it be?

 

Any research into ANV, DGC.TO, or OSK.TO?

[ItsAValueTrap]

The only one I've researched is Osisko.

 

http://glennchan.wordpress.com/2013/06/22/osisko-tseosk-yet-another-promotional-gold-miner/

 

*I own Northfield, which owns a lot of Osisko.  The stock market doesn't make you swing at every pitch so... you don't really have to own pure-play producing gold miners.

[Josh4580]

2nd Quarter earnings out

 

http://www.barrick.com/investors/news/news-details/2013/Barrick-Reports-Second-Quarter-2013-Results/default.aspx?utm_source=investors&utm_medium=ABX&utm_campaign=2013-Q2

 

 

Cash Flow

Adjusted net earnings of $663 million ($0.66 per share)

Operating cash flow of $896 million

Adjusted operating cash flow of $804 million

 

Capex Cuts

Total reductions to budgeted capital and costs for 2013 of about $2.0 billion have offset the cash flow impact of the declines in metal prices that have occurred this year.

 

Reductions to budgeted 2013 capital expenditures and costs include approximately:

 

$600 million in operating costs;

$200 million in sustaining, development and mine expansion capital;

$600 million in project capital, primarily related to Pascua-Lama; and,

$50 million in exploration and evaluation expenditures.

 

Liquidity

At June 30, Barrick had cash and equivalents of $2.4 billion and $4.0 billion available under its five-year credit facility. The company generated strong operating cash flow of $2.0 billion in the first half of 2013

 

The company has approximately only $1.8 billion of cumulative debt maturing through to the end of 2015.

 

Costs

All-in sustaining costs of $919 per ounce for the quarter on gold, at the low end of guidance of $900-$975 per ounce.  Copper fully allocated costs were $2.27 per pound versus the guidance $2.50- $2.75.

 

Overall, I think this was a great quarter for Barrick. 

[alertmeipp]

Haven't got a chance to listen to their CC, did they mention about hedge some of the production?

[plato1976]

Heard quite some bad words about the gold corp management in general (destroy shareholder value, etc. etc.)

How is ABX 's history on this ?

 

2nd Quarter earnings out

 

http://www.barrick.com/investors/news/news-details/2013/Barrick-Reports-Second-Quarter-2013-Results/default.aspx?utm_source=investors&utm_medium=ABX&utm_campaign=2013-Q2

 

 

Cash Flow

Adjusted net earnings of $663 million ($0.66 per share)

Operating cash flow of $896 million

Adjusted operating cash flow of $804 million

 

Capex Cuts

Total reductions to budgeted capital and costs for 2013 of about $2.0 billion have offset the cash flow impact of the declines in metal prices that have occurred this year.

 

Reductions to budgeted 2013 capital expenditures and costs include approximately:

 

$600 million in operating costs;

$200 million in sustaining, development and mine expansion capital;

$600 million in project capital, primarily related to Pascua-Lama; and,

$50 million in exploration and evaluation expenditures.

 

Liquidity

At June 30, Barrick had cash and equivalents of $2.4 billion and $4.0 billion available under its five-year credit facility. The company generated strong operating cash flow of $2.0 billion in the first half of 2013

 

The company has approximately only $1.8 billion of cumulative debt maturing through to the end of 2015.

 

Costs

All-in sustaining costs of $919 per ounce for the quarter on gold, at the low end of guidance of $900-$975 per ounce.  Copper fully allocated costs were $2.27 per pound versus the guidance $2.50- $2.75.

 

Overall, I think this was a great quarter for Barrick.

[bmichaud]

Interesting break-up study by a small HF out of Indiana of ABX.

Barrick_Gold_-_An_Empirical_Study.pdf

[plato1976]

Mr. Munk will step down;

also they had a share offering to deleverage

Many things changed recently

 

 

I have no comment on valuation, but I worked briefly for Barrick in Investor Relations in 2008. I interacted with the executives including CEO Sokalsky (then CFO). He was the most competent person there, but the overall culture struck me as very arrogant and wasteful. No focus on costs whatsoever. Maybe things have changed, but with Mr. Munk still running the place I doubt it. It's just my personal view, but I would look to play gold with some other stock.

 

Well im glad Sokalsky is the CEO now.

 

Ya, he's CEO, but Mr. Munk is still chairman. He's a Canadian business legend, and I don't mean to take anything away from what he has accomplished, but he's very old now (85). Despite not being able to follow and understand the details of the business, he still has great influence and power on the executive floor. I consider this a fairly large negative for Barrick at this critical time.

[Josh4580]

Exclusive interview: Peter Munk on ‘hubris,’ ‘stupidity’ and the future of Barrick Gold

 

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/exclusive-interview-peter-munk-on-hubris-stupidity-and-the-future-of-barrick-gold/article15769699/?page=1

 

Barrick’s Thornton Said to Seek China Deal to Renew Miner

 

http://www.bloomberg.com/news/2013-12-01/barrick-s-thornton-said-to-seek-china-deal-to-rebuild-gold-miner.html

 

Barrick’s Thornton Weighs Return to Gold Hedging

 

http://www.bloomberg.com/news/2013-12-05/barrick-s-thornton-weighs-return-to-gold-hedging.html

 

Lots of changes going on at Barrick

[plato1976]

gold may still have room to drop, but...

 

hedging now ???

 

Is there a big gold corp that actually doesn't use a hedging strategy ? I am looking for one

 

Exclusive interview: Peter Munk on ‘hubris,’ ‘stupidity’ and the future of Barrick Gold

 

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/exclusive-interview-peter-munk-on-hubris-stupidity-and-the-future-of-barrick-gold/article15769699/?page=1

 

Barrick’s Thornton Said to Seek China Deal to Renew Miner

 

http://www.bloomberg.com/news/2013-12-01/barrick-s-thornton-said-to-seek-china-deal-to-rebuild-gold-miner.html

 

Barrick’s Thornton Weighs Return to Gold Hedging

 

http://www.bloomberg.com/news/2013-12-05/barrick-s-thornton-weighs-return-to-gold-hedging.html

 

Lots of changes going on at Barrick

[ItsAValueTrap]

Goldcorp doesn't have a hedging strategy I believe.  (Northfield Capital owns a lot of Goldcorp, so it's another way to buy Goldcorp.)

 

I'm not a fan of gold mining or exploration companies though.  These stocks are pretty bad in general.  Almost all of them are hybrids between pyramid schemes and real businesses.  There's a reason why Goldcorp's ex-CEO left to go run Tahoe Resources... he gets to start building a new pyramid scheme.

[plato1976]

Goldcorp 's all in cost should be about $50-$100 higher than ABX if my memory is correct

 

Goldcorp doesn't have a hedging strategy I believe.  (Northfield Capital owns a lot of Goldcorp, so it's another way to buy Goldcorp.)

 

I'm not a fan of gold mining or exploration companies though.  These stocks are pretty bad in general.  Almost all of them are hybrids between pyramid schemes and real businesses.  There's a reason why Goldcorp's ex-CEO left to go run Tahoe Resources... he gets to start building a new pyramid scheme.

[no_free_lunch]

ItsAValueTrap,

 

I am in agreement with you on gold mining stocks in general.  What do you think of the royalty companies?  Silver Wheaton in particular is looking interesting these days.

[ItsAValueTrap]

Unfortunately all of them play games with the cash costs figures (and also the "all in" costs).

 

- Exclude corporate G&A

- Exclude stock-based compensation

- Capitalize the cost of removing waste rock if it allows you to access lower levels of the mine.  I can't believe somebody created this rule... it's complicated, opaque to investors, and is begging to be abused by companies that want aggressive accounting.

- Add in by-product credits

- Capitalize exploration costs*  (this one is debatable; the devil is in the details)

etc. etc.

 

Honestly I find these companies very, very difficult to analyze.