ABX - Barrick Gold Corporation

[ItsAValueTrap]

What do you think of the royalty companies?  Silver Wheaton in particular is looking interesting these days.

 

Many of them seem like they are following the pyramid scheme + real business model.  Many of them seem overpriced.  If the company is selling stock... it is probably overpriced.

 

But look at:

-Altius Minerals - There is a big huge thread on it here on CoBaF.  They have good management and are buying back shares.

-Virginia Mines (Altius is a better way to play this)

-Labrador Iron Ore Royalty Corporation - they own equity and royalties on iron ore mine(s).  I don't like iron ore, but this company's management team is fine.

 

*I only own Altius Minerals.

[plato1976]

After some study, I really want to pull the trigger soon

But the recent comment from ABX that they may consider hedge again concerns me - I buy this one mainly as an option and hedging will make it less attractive. Need to understand their strategy better - maybe next ER call we will have a better idea

 

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?

[Phaceliacapital]

However, the companies that actually mine gold have not appreciated or stayed flat with the gold price in 2014. The two biggest, Barrick Gold (which we own) and Newmont Mining (which we do not), have seen their share prices decline by 33% and 20% respectively through early December. Since gold last peaked three years ago at about $1900 per ounce (though still above its price of a decade ago), Barrick’s common stock price has declined by about 80% while Newmont is down nearly 74%.

 

Such declines are usually worthy of examination and asking what, if anything, has changed. Barrick has the largest and lowest cost reserves of any major gold miner, new management focused intently on profits and cash flow rather than growth, and no near-term debt maturities (though long-term debt is too high and bringing it down is a management focus). It’s worth pointing out that the company probably generates positive cash flow from operations at a gold price of $800 an ounce or less from its major properties. 19 In the last year, Barrick recruited a new Chairman – highly respected John Thornton (a former President of Goldman Sachs who built much of Goldman’s international business).

 

He took over Barrick after a disastrous acquisition led to management and governance changes, much in the same way Hewlett-Packard was forced to change following a similar misstep. Our research indicates that John is working night and day to improve the operations and balance sheet of Barrick, and to position the company to prosper in coming years. Although he does not control the price of the commodities that the company mines, he appears to be making excellent progress controlling those things within his reach, such as recruiting top managers, providing sensible compensation policies, reducing costs, improving the balance sheet, and examining capital allocation opportunities.

 

In early December, he bought roughly $5 million dollars of stock in the open market for personal accounts at a price of $12 per share (while a number of other insiders also made significant purchases around the same time). Today, gold miners are one of the most hated and despised sectors of the economy. Gold has declined in price by nearly 40% in the last three years, reducing cash flows and forcing valuations lower. Although we cannot predict the price of gold, we note that this commodity has historically been the antithesis of hyperactive central banks. Throughout millennia, the metal has acted as some protection against severe currency depreciation or its kissing cousin, high inflation. Though we cannot predict, we can make an educated estimate as to the effect on a few securities should gold prices recover to any significant degree. Given management’s focus, the asset base, and the inherent operating and financial leverage, Barrick’s stock represents an extraordinarily cheap warrant on gold.

 

A modest rise in gold prices, or a collapse of confidence in any major national currency (perhaps Japan?) could lead to a doubling, tripling, or more in Barrick’s stock price (we note that when gold was $1900 per ounce roughly three years ago, the company was earning more than $3.75 per share and its common stock traded at more than $50 per share). Although financial turmoil may serve to bolster Barrick’s price, we do not expect an apocalypse nor can we predict “black swan” events. Furthermore, it is entirely possible that we will lose money despite Barrick’s large asset base, low cost production, and a new cadre of talented and motivated leaders.

 

However, we have always believed in owning a few “mispriced” warrants in the portfolio, particularly those that seem uncorrelated to the business risks inherent in our other investments and which could act as potential hedges against unpleasant and unexpected financial surprises. The riskreward, the contrary nature of the position, and a severely depressed stock price make us believe that an exposure here is both justified and desirable. In our opinion, the time to be most aggressive is when headlines suggest the financial world is disintegrating, valuations are low, and markets are in disarray; the time to be most cautious is when investors generally believe that material index declines are no longer possible, volatility has nearly disappeared, and valuations are high. For example, the market value of common stocks compared to Gross Domestic Product (GDP) (a favorite indicator of Warren Buffett, and one we have mentioned before) is at its highest level ever other than the peak of the tech bubble in 2000. Price-to-sales ratios and price-to-earnings ratios for S&P 500 companies are similarly elevated. Margin debt has been at or near all-time record highs.

 

 

What can we expect at 6? Another (ill) timed capital raise or a double/triple bagger?

 

[influx]

something positive regarding Thornton is that in the last six months he bought over 7.7M worth of barrick shares.

it might be because he has to own x amount of minimum common shares holding as a chairman. havent checked that though

[Guest notorious546]

I have really followed ABX but the guys at goodhaven recommended the last annual report. It's a good read.

 

http://www.barrick.com/files/annual-report/Barrick-Annual-Report-2015.pdf

 

[Pondside47]

https://www.wsj.com/articles/goldman-banker-takes-on-worlds-largest-gold-minerand-gets-pushback-1533571339

 

I came across this article yesterday and the article mentions Thorton is a fan of the "Outsider" book. I wonder if anyone still follows this.

 

 

[muscleman]

No one interested in it? I see a lot of gold miner stocks setting up.

 

[shamelesscloner]

What do folks think of Barrick as a play on Gold as a hedge against inflation, while also benefiting from a business that generates cash? Which Berkshire manager do you think picked it up?

[Spekulatius]

What do folks think of Barrick as a play on Gold as a hedge against inflation, while also benefiting from a business that generates cash? Which Berkshire manager do you think picked it up?

 

Some folks on Twitter think it was Todd. Does it really matter? I think it is just a trade.

[CorpRaider]

What do folks think of Barrick as a play on Gold as a hedge against inflation, while also benefiting from a business that generates cash? Which Berkshire manager do you think picked it up?

 

I think it was Ted.  He's a boomer and that fits the title of my coming book: "How Gold Swindles the Boomer."  ;D

[omagh]

What do folks think of Barrick as a play on Gold as a hedge against inflation, while also benefiting from a business that generates cash? Which Berkshire manager do you think picked it up?

 

Some folks on Twitter think it was Todd. Does it really matter? I think it is just a trade.

It may have been Buffett.  ABX was going for about 10x forward EBIT in the last quarter -- a typical metric that he triggers on.  He did a number of trades over the years in copper miner Freeport McMoRan.  The trades were always <5% of portfolio.

[Xerxes]

With Barrick down now 40% of so since it is peak (guess due to the 10-year spiking) , thinking putting some dollars in.

This is not Peter Munk's Barrick 1.0 which was levered to the tilt and unable to move. This is Barrick 2.0 with Bristow & Thornton duo running the show, so i think pre-2018 Rangold merger stock chart is somewhat irrelevant.

From the site: 

- Achieved zero net debt from a peak of $13.4 billion in 2013 

- Tripled when compared to the $0.03 per share dividend in Q3 2018, prior to the Randgold merger

- Return of capital of $750 million proposed (via 3 tranches)

- No significant public debt maturities until 2033

- Higher gold and copper prices delivered annual operating cash flow of $5.4 billion and record annual free cash flow of $3.4 billion (take that FCF and compare it with market cap of $38 USD billion)

 

The company is primed to churn out cash and return to shareholders. With Chairman John Thornton following the 8 CEO Outsider playbook. Yes, it all depends on gold prices and sure gold lost a bit of marker share to Bitcoin etc. etc. but here you got a business that cleaned up its balance sheet and has a low all sustaining cost, with lots of lever to pull, and is a business of digging out the yellow stuff that gold bugs and central bankers want. 

 

 

[Xerxes]

Well, with Bitcoin now losing "some" luster among institutional investors (i am not counting maximalist like Michael Saylor who have every reason to push), gold may get its traditional cohort backers back and perhaps more.

Sam Zell, an investor who never bought gold and who compares 2021 to the early 1970s, has made gold as an investment allocation, imagine that.