Barrick Gold (NYSE:ABX) is the world’s largest gold mining company. Last year it produced nearly 7 million ounces of gold, and this year that number should decline slightly, but it will still exceed the production figures from every other gold miner in the world. Meanwhile Barrick has been a lousy investment. It has substantially underperformed the price of gold over long periods of time. In fact since the SPDR Gold Trust (NYSEARCA:GLD)—the world’s largest gold ETF—began trading in November, 2004 Barrick shares are down 30 percent, whereas GLD shares are up a whopping 173 percent. Those investors who bought Barrick hoping for leverage to the gold price have been significantly disappointed, and shockingly they would have been better off in cash.
Barrick has had a history of making value-destroying acquisitions, investing in failed expansionary endeavors, and making lousy market bets that have led to this. For instance in 2011 the company acquired Equinox—a base metal company in Africa—that cost it billions in write-downs, thanks to the fact that management failed to do due diligence on the company. The company has dumped an enormous amount of capital into its Pascua Lama Project in Argentina and Chile that has been repeatedly postponed due to regulatory issues and an ever-rising initial capital expense estimate. Finally all throughout the first part of the gold bull market—that is, when gold was trading below $1,000/ounce—Barrick hedged its gold production. In other words the company was net short of gold.
These poor decisions led to a management shakeup late last year, as well as a secondary offering that added 30 percent to the share count. It also cut its dividend by 75 percent, although admittedly this was the norm for the industry. But so far the management shake-up and the secondary offering have had little effect. The company is now once again trying to put its seemingly hopeless Pascua Lama Project back on the path towards production instead of giving it up.
Furthermore, the company still has an incredible amount of debt that makes it extremely vulnerable to a fall in the gold price. While I am bullish of gold I also realize that it can trade down before it trade higher, and this can really hurt companies that have a lot of debt-related and other fixed expenses.