With Barrick Gold (NYSE:ABX) releasing its third quarter earnings, is the world’s largest gold producer a BUY, a WAIT and SEE, or a STAY AWAY?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
The Canada-based miner does not have the best record in terms of increasing earnings over each quarter. Barrick reported adjusted earnings of zero cents in the second quarter, missing estimates by 96 cents. The results were a declined from the $1.09 per share earned in the prior quarter, and $1.17 per share in fourth quarter of 2011.
On Thursday, Barrick announced financial results for its third quarter. Net income came in at $618 million (62 cents per share), down from $1.37 billion ($1.36 per share) a year earlier. On an adjusted basis, earnings fell to $849 million (85 cents per share), compared to $1.38 billion ($1.38 per share) a year earlier. On average, the adjusted earnings missed estimates by 14 cents a share.
Jamie C. Sokalsky, chief executive officer, explains on the conference call, “The lower earnings primarily reflect lower gold and copper sales volumes, a higher cost of sales per gold and lower realized gold prices.”
Looking forward, Barrick narrowed its guidance for the full 2012 fiscal year to a range of 7.3 million to 7.5 million ounces of gold, compared to a previous range of 7.3 million to 7.8 million ounces of gold. Due to higher cash costs from Australia Pacific and African Barrick Gold, the company expects total cash costs for gold between $575 and $585 per ounce, up from its previous guidance of $550 to $575 per ounce. Net cash costs are anticipated to be $480-$500 per ounce, slightly higher than the previous guidance of $460-$500 per ounce.
Barrick operates in one of the strongest trends in the marketplace. Over the past decade, precious metals such as gold and silver have vastly outperformed other asset classes. Between negative real interest rates, quantitative easing programs and central bank demand, there are many factors set in place to support gold prices.
Recently, the Federal Open Market Committee launched yet another quantitative easing program, known as QE3. This time, the Federal Reserve buys agency mortgage-backed securities at a pace of $40 billion per month. Interestingly, QE3 will be open-ended, meaning that the Federal Reserve has no set limit to how long the fresh money printing will last. It will also conduct additional asset purchases if the labor market does not improve. In a press conference following the announcement, Fed Chairman Ben Bernanke explained, “We’re looking for ongoing, sustained improvement in the labor market. There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”
The supply side of gold is also bullish. A new extensive study was recently conducted by James Turk, the founder and chairman of GoldMoney, along with the assistance of Juan Castaneda, who has a PhD in Economics and currently teaches at the University of Buckingham in the United Kingdom. The study analyzes data between 1492 and 2011 to conclude that official estimates of the world’s gold stock is overstated by 10.3 percent. Turk estimates that the world gold stock at the end of 2011 was 155,244 tonnes, or 16,056 tonnes below the commonly used World Gold Council estimate.
Considering the growing need for investors to protect their wealth in hard assets such as gold, the current trend is firmly in place.
E = Excellent Relative Performance Versus Peers and Sector
Unfortunately, rising gold prices do not always translate into higher equity prices on the miners. As the chart below shows, shares of Barrick are down almost 20 percent year-to-date. Meanwhile, other miners such as Yamana Gold (NYSE:AUY), Goldcorp (NYSE:GG) and Agnico-Eagle Mines (NYSE:AEM) have all climbed higher this year. Heavy weight Newmont Mining (NYSE:NEM) is also in the red year-to-date, but has still outperformed Barrick and offers a sizable dividend linked to the price of gold. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is up about 1 percent for the year.
We are bullish on gold and silver prices in the long-term, as our premium subscribers know, but investors must be careful when investing in the miners. The companies face many risks ranging from labor strikes to higher operating expenses.
In the earnings report, Barrick notes higher-than-expected costs in regards to its Pascua-Lama project. The miner states, “In July, the company announced preliminary results of a review indicating an increase in capital costs to $7.5 billion to $8.0 billion and a delay in first production to mid-2014. Since then, Barrick has been working with Fluor on a more comprehensive top-to-bottom review. This review will be complete by our 2012 year-end results release; however, work to date suggests capital costs will be closer to $8.0 billion to $8.5 billion, with first production in the second half of 2014.”
Mr. Market was disappointed in the results. Shares of Barrick fell more than 9 percent on Thursday. The uncertainties surrounding the Pascua-Lama project is exactly why we cautioned premium subscribers in September to book profits in Barrick. While we like buying discounted stocks, Barrick is a WAIT and SEE. Shares need to find support first so investors avoid trying to catch a falling knife.
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Disclosure: Long EXK, AG, HL, PHYS