Barrick Gold (NYSE:ABX) has a conundrum. Is it a commodity/interest rate train wreck waiting to happen. Or is a deep value play where buy ugly sell pretty applies in spades.
The stock has dropped dramatically and is just south of $20. Dividend yield is around 4% at depressed stock prices. Some talk about revisiting dividend payment seems to be dissipating given the recent $3 Billion dollar bank loan. Bond ratings still in toilet.
Barrick is a Gold producer with significant interests in copper and energy. Therefor they are a commodities company. Get over it. They may be selling off the energy assets and create a significant liquidity. Thats a good thing.
Barrick has successfully developed many gold properties. Pascua-Lama is one of the largest gold and silver resources in the world, with almost 18 million ounces of proven and probable gold reserves, 4,675 million ounces of silver, and an expected mine life of 25 years. The property is large but will eventually come on stream within a few years and will be a significant cash flow contributor.
Gold prices and interest rates are highly influenced by political influences which are out of the control of management and investors. The stock is deeply discounted with a pay while you wait 4% yield. Pascua-Lama when on stream is expected to have a $200 per oz extraction cost. Accretive cash flow is close at hand.
Interest rates are a wild card. Over time they can only go up. Barrick’s ability to generate wealth for shareholders will be more impacted by its ability to shed debt and or replace expense rates with low rates. Financial engineering needs to rule the board room.
Follow very carefully the temptation for off-balance sheet arrangement will be enormous.
George Gutowski writes from a caveat emptor perspective.