Is the Worst Finally Over for Gold Miners?

Source: http://www.flickr.com/photos/tao_zhyn/

Source: http://www.flickr.com/photos/tao_zhyn/

If the price of gold has been unkind to investors over the past couple years, then gold miners have been nothing short of downright cruel. As a group, the miners have drastically underperformed bullion prices and punished shareholders with a buy-and-hold strategy. However, the selling pressure appears to be easing as the world’s largest gold producer rebounds after its latest financial results.

On Thursday, Barrick Gold (NYSE:ABX) reported a fourth-quarter net loss of $2.83 billion, an improvement from the $3.01 billion loss a year earlier. Adjusted net earnings fell from $1.16 per share to 37 cents per share over the same period. Analyst were looking for adjusted earnings of 44 cents per share, but revenue of $2.93 billion was slightly better than expected.

Gold miners such as Barrick are coming to terms with the reality of lower gold prices. For the full year 2013, Barrick reported a net loss of $10.37 billion, including after-tax impairment charges of $11.54 billion. In the latest quarter, Barrick logged $2.82 billion in impairment charges, primarily related to Pascua-Lama, Porgera, Veladero and the Australia Pacific gold segment. In the last six months, Barrick announced agreements to divest Barrick Energy, six high-cost, non-core mines, and other assets for a total of nearly $1 billion.

“The disciplined capital allocation framework that we adopted in mid-2012 has been at the core of every decision we’ve made in the last year and half, and has put us in a much stronger position to deal with the challenging gold price environment our industry is facing today. Under a comprehensive plan to strengthen the company, we have become a leaner, more agile organization, better protected against further downside price risk and well positioned to take advantage of attractive investment opportunities going forward,” said Jamie Sokalsky, Barrick’s President and CEO, in a press release.

“We have increased our focus on free cash flow and risk-adjusted returns, and successfully executed on our key priorities, which include operational excellence, a stronger balance sheet, and the ongoing optimization of our asset portfolio. This required decisive action, including the temporary suspension of Pascua-Lama, and an even greater focus on generating higher returns even if that means producing fewer ounces. These were the right decisions for our shareholders and for the company, and we are now seeing the tangible benefits of our efforts.”

Last year, Barrick decided to suspend construction activities at the Pascua-Lama project in South America, which has faced delays and problems for more than a decade. The decision will postpone near-term cash outlays and allow Barrick “to proceed with development at the appropriate time under a more effective, phased approach,” the firm said. The move came after Barrick took a $5.1 billion charge related to the project located between Chile and Argentina.

The price of gold has not made things easy on miners. Since hitting all time nominal highs above $1,900 per ounce more than two years ago, gold has suffered an ugly correction. Over the course of only two days in April, gold plunged $200 to reach its lowest level since February 2011. In the process, gold posted its worst one-day percentage drop since 1980, the largest fall in dollar terms on record. On a technical basis, the precious metal reached its most oversold reading since at least 1975.

This year is a different story so far. The price of gold is up more than 7 percent, and the miners are outperforming for a change. Shares of the Market Vectors Gold Miners Index (NYSE:GDX) are up nearly 20 percent year-to-date, while its junior companion is up more than 30 percent. Despite missing estimates on the bottom line, shares of Barrick jumped 3 percent after reporting results and are up 10 percent for the year. After years of heavy selling pressure, the worst may finally be over precious metals.

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Disclosure: Long EXK, HL, PHYS

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