SPY - Barrick: Fool's Gold

2023-10-04 15:17:50 ET

Summary

• Barrick Gold stock has performed poorly since January 2023, both in absolute terms and compared to the S&P 500 and VanEck Gold Miners ETF.
• The last quarter showed positive results for Barrick, with higher gold prices and production levels, as well as lower costs.
• Despite the positive quarter, Barrick has a lot of bugs that make it problematic as a long term investment.
• We weigh the shorter term versus the longer term and tell you how we see this playing out.

Note: We have used Barrick to represent Barrick Gold throughout the article and any other reference to the word "Gold" is a reference to the commodity. This is necessary to point out as Barrick has GOLD as its stock symbol.

It has been some time since we wrote about Barrick Gold Corporation ( GOLD ). We tend to keep our trades reserved for the Marketplace Service and the last one involved us selling our positions out for a profitable exit .

That was on January 31, 2023, and the stock has done terribly since then. That is on an absolute performance basis, as well as relative to the S&P 500 ( SPY ) and VanEck Gold Miners ETF ( GDX ).

We consider ourselves extremely fortunate to have exited at that point. We examine the tea leaves and tell you why you might consider a long trade and why you most likely should hit the exits soon after.

Current Setup

The last released quarter was actually not bad at all. Barrick got the benefit of higher Gold prices and a higher production level relative to Q1-2023.

Barrick then went on to hit the trifecta with lower cost of sales and lower cash costs. Anyone who has followed Barrick's history for any length of time knows that it is pretty rare for Barrick to hit all of these in the same quarter. In fact, in the same graphic above, you can see the deterioration if you switch to a year-over-year view.

One remarkable aspect of this is the fact that Russia invaded Ukraine in early 2022 and oil prices and all other commodity prices spiked in the second quarter of 2022. All raw material costs for items used in mining are lower relative to that quarter. And yet, Barrick shows the higher cost of sales, cash costs, and all-in sustaining costs, relative to that of Q2-2022. As we have previously pointed out , this is a slow motion train-wreck of escalating costs, that never ever stops.

Outlook

The latest 10-year Gold and Copper production outlook disclosed in September was as follows.

Gold production is expected to be about flat with 4.1 million ounces expected all the way to the end of the decade. In 2020, the outlook was for 4.5 million ounces.

Ok, that is not a big drop. Only 10% is peanuts for this business. But let us look further back. Barrick's biggest acquisition was Randgold Resources that brought the highly revered Mark Bristow to the forefront of the combined operation. When the two (Barrick Gold and Randgold Resources) merged or rather were about to merge, their combined production was almost 6.0 million ounces of Gold.

So 6.0 million ounces of gold turned to 4.5 million ounces and that turned into a target of 4.1 million ounces. Ok, that is a 33% drop. But let us go past that as well. In 2006, Barrick as a stand-alone company produced 8.643 million ounces at a cash cost of $280 an ounce.

Riveting right?

So when you whine and grumble that no institutional investor has love for Barrick, it is probably because they have spent some time actually reading the financial statements.

Why Buy?

Ok, so the longer-term case is the same. Grinding down production with escalating costs, punctuated with new presentations showing how the future will be radically different than the past. That is why the chart looks like this. Note we have shown the return and total return (including dividends) below.

If you bought Barrick for leverage over gold prices, well that is how it has worked out. But in shorter timeframes, Barrick does look incredibly oversold.

The price is significantly below its 200-day moving average and the same can be seen for GDX as well.

Gold itself has been falling in response to a stronger US Dollar and sentiment levels are reaching extremes that are usually associated with a meaningful bottom. Gold tends to do better as we end September, but so far that bounce has been missing in action.

We think a bottom is due shortly, and we will likely get a rip-roaring rally to reset sentiment. Barrick should outperform in that period. After that it should be business as usual.

Verdict

It is very hard to make a long-term investing case for Barrick. The only reason we made positive returns was due to utilizing the high option premiums for covered calls that buffered things for us. The stock was actually lower when we sold it versus when we first bought it, but all those premiums saved us from losses. The lesson learned was that you cannot squeeze blood from stone and some asset classes are best just traded, rather than used as investments. If you have a retort there somewhere, feast your eyes on the XAU, the Gold and Silver Index, which sits 35% below its 1990 level.

Lots of trades there in that chart and there are some amazing experts who can navigate those turns. But it is not one for the believers. You know the ones that think the US Dollar will go to zero and gold will go to infinity. Even those believers are better off buying actual bullion for the long haul. Gold miners in general and Barrick in particular, remain poor ways to leverage that thesis. If you really have to wade here, then consider the royalty plays like Royal Gold ( RGLD ) which actually do create long-term value for shareholders. Buy for a trade and then hit the fade.

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