Everyone who engages with gold mining companies, very early stumbles upon Barrick Gold. It’s a household name and a darling of many. Even though the company describes itself as “world class”, the performance of the underlying business has been terrible – no understatement. There are so many myths about gold, silver and miners that I want to clean up with another such. It is not always the go-to strategy to just pick a household name, assuming size is all that matters.
Summary and key takeaways from today’s Weekly
– Looking at gold and gold miners, I show why it is by no means a bullet-proof strategy to just buy the stock of a household name, only because it is known.
– Barrick Gold has a rather weak historical performance.
– Gold and silver miners often are said to offer leverage to the underlying spot prices – however, most of them in reality cannot even beat the spot price.
Funny enough, but even on my own investing journey, Barrick Gold (ISIN: CA0679011084, Ticker: GOLD) was one of the first handful of stocks that showed up on my screen early and frequently. I can exactly remember that I used a financial app – to build a watchlist and get the news – where in the “most search for” section Barrick was listed almost every day.
This was certainly due to the gold mania around 2011 when the spot price of gold reached its all-time high back then. It was also the time when I made my first baby steps with stocks.
Suffice to say that stocks of gold mining companies were en vogue then.
They caught the attention on the way up, but even more so on the way down during the nasty bear market, as the buy the dip crowd was pulling hope as the main investment thesis for a further surge out of the sleeve.
Unfortunately, I was a victim back then, either. But I learnt my lesson.
I can remember exactly two names having been omni-present: Barrick Gold and Goldcorp. The latter has been acquired in 2019 by Newmont (ISIN: US6516391066, Ticker: NEM), priorly also known as Newmont Mining – see here – which is by far today’s biggest gold producer, leaving Barrick a distant second.
However, there’s a commonality and a difference between them.
Both, Barrick and Newmont, have in common that their stock prices – without dividends – are not up over the last thirty (!) years, just in nominal terms.
Barrick is even down massively.
As a reminder, the spot price of gold is up by a factor of 4–5x in USD since the mid-1990s, having gone up from below 400 USD in October 1996 to currently somewhere between 1,800–1,900 USD. Mining companies are a leveraged bet and outperform the metals on the way up, don’t they?
The difference is, during the run-up in 2022, Newmont at least managed to mark a new all-time high (or close to it, depending on which charts you look), while Barrick did not even come close to its heydays.
I can only shake my head when the name of Barrick Gold flashes up as a recommended pick in the gold and nowadays also copper mining industry.
It is a classic example of over-promising, but under-delivering, instead of the other way around. Today, I am going to uncover the past performance of Barrick Gold and show why it is not always the best move to buy an industry’s top name.
Either way, without having done your homework, it’s just gambling.
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Barrick Gold – celebrated for what?
As of now, Barrick Gold is the second largest gold producer, sitting in no-man’s land.
Newmont is already far away and it will even increase its lead massively with the ongoing acquisition of Australia’s biggest producer, Newcrest Mining (ISIN: AU000000NCM7, Ticker: NCM).
This is a major acquisition, as the combined entity will be roughly double as big as Barrick Gold, measured by gold output.
Then comes Agnico Eagle Mines (ISIN: CA0084741085, Ticker: AEM).
|rank||company||attributable gold produced in 2022 |
(in million ounces)
|2||Barrick Gold||4.1 Moz|
|3||Agnico Eagle Mines||3.1 Moz|
|…||Newcrest Mining||2.1 Moz|
Even I, despite by no means being a chartist, can recognize that when a stock price consistently underperforms for decades (!), it is a clear indication that something is not right with the underlying business.
Likely, few will deny that.
Below, you can see that the stock of Barrick is down by 36% over exactly 30 years. Again, a timeframe where spot gold multiplied by a factor of 4–5x.
Pulling out a longer chart, the message is even worse.
A quick look and you can see that Barrick Gold:
- is more than 50% below its 2011-high in CAD
- and even more than 70% in USD
- currently trading where it was in the 1980s even
at a time where gold is maybe 10% off its high around the 2,000 USD mark.
Of course, if timed well, one could have achieved a double or even tripple.
But it is frightening to see a “world class” and industry-leading corporation being such a value destroyer for its shareholders. This can already be said at this stage, even without having discussed anything fundamental which we are going to do next.
Otherwise, the share price would have been higher.
Let’s have look at their current investor presentation (see here).
First things first, some words about their business and their ambitions. While it is sector-leading measured by gold output, on the second point Barrick disappointed in the past and made its shareholders poorer in many cases, in nominal terms.
By adding inflation on top, you can more or less book a loss of 80% or so.
This does not have to be the case in the future, though, it leaves a bitter taste.
On the next slide, we can see Barrick being mainly active in North and South America plus Africa, Saudi-Arabia, Egypt as well as Pakistan.
What you can also see is that most projects are operated with partners, as Barrick only in a few cases owns entire projects alone.
Pakistan is a new project with vast copper resources in which Barrick is going to invest heavily (see here). Anyway, Barrick is shifting strongly towards copper which I dislike.
Not only is it pulling away the focus from its key commodity gold, despite both often being mined at the same time, but I am also not a friend of the mainstream copper thesis. You can read here why I am not buying the “safe copper bet”.
According to this source here, Barrick is currently not among the top ten copper producers. However, using their presented year end 2022 number of 1.7 bn. pounds, we arrive at a figure of 771k Mt (you can covert it here or using the factor 2,204) which indeed would place it in the top ten, with the leader, Freeport McMoran (ISIN: US35671D8570, Ticker: FCX) producing roughly double this amount.
But who knows at this stage whether Barrick will not try to acquire meaningful copper assets to boost its production capabilities. By the way, you can see in the headline “the merger” – I am coming back to that soon.
One can argue that Barrick is greatly diversified.
But I clearly prefer cases that are cleaner, offering a better overview and indeed more focus on the best projects. As my readers know from my ETF articles (see here or here), too much diversification limits the upside due to dilution of winners while at the same time the downside in case of a market crash remains.
If gold tanks, so do mining stocks, no matter how many mines they have.
In reality, you cannot have the best of all – the lowest costs, best jurisdictions, highest safety and the highest amount of producing mines, ideally with the longest reserve life. You also cannot focus on everything or many projects. I don’t know about you, but I personally rather associate more mines and projects with empire building, not necessarily with the focus on the highest shareholder returns.
Especially, as you cannot have many “best mines” in your portfolio.
What comes to my mind is the case of the gold miner Kirkland Lake Gold which unfortunately was acquired by Agnico Eagle Mines a few years ago. Unfortunately, because I would have written an exclusive report about it for my members, were it still available. Kirkland indeed had some of the world’s best mines, located in Australia, with ultra-high grade and low-cost operations well below 500 USD (!) per ounce.
Just for reference, if you find a mine with costs below 1,000 USD, it is already world class and maybe one of a few today. This somewhat compares to the unique silver miner that my members received a report about in early September. If you’re interested, you can find the corresponding Weekly here.
Later Kirkland also acquired one of Canada’s biggest mines with less favorable economics, but vast reserves for the next three decades to come. I can remember Kirkland’s stock having been a ten-bagger around 2017–2020 in a market where the price of gold was rising but clearly not that dramatically.
The key was focus on the best projects, not over-diversification for pretend safety.
With this, let’s come back to Barrick. First, a snapshot of their latest results with an important observation.
All-in sustaining costs, i.e. without growth expenditures, are currently 1,355 USD for gold and 3.13 USD for copper.
- In terms of gold it is okay, but certainly not world-class
- Regarding copper, this is rather dangerously close to current market price of around 3.60 USD per pound – likewise not world class as there are producers with way below 3 USD costs
Looking closer, you’ll see production costs have spiked dramatically year-over-year. However, most energy and raw material costs should have been lower or flat, as the underlying spot prices were lower compared to last year’s Q2, not higher.
Even if, let’s leave this as a side-note, because the big bang comes now.
If you open some of Barrick’s older presentations (which you can do here in their archive), you will find covers like these, not necessarily full of understatement:
What they were referring to was “the merger” which I briefly mentioned above.
In September 2018, Barrick acquired Randgold Resources, a top 20 gold miner of the size of about 25% of Barrick Gold back then by gold production in an all-stock deal.
This is how they pitched the deal (highlights by me):
The combination of Barrick and Randgold will create a new champion for value creation in the gold mining industry, bringing together the world’s largest collection of Tier One Gold Assets, with a proven management team that has consistently delivered among the best shareholder returns in the gold sector over the past decade. Our overriding measure of success will be the returns we generate and not the number of ounces we produce, balancing boldness and prudence to deliver consistent and growing returns to our fellow owners, a truly simple but radical and achievable concept.Barrick and Randgold Resources merger announcement (see here)
Before we dive deeper, here’s the timing of the all-stock deal – right at the bottom.
Very value-creative with maximal dilution! Share count increased by 50%, if you’re interested. Not the type of “value creation” I am looking for…
Maybe now would be again a good time for a stock-deal with the stock being at the lower end of its 10-year range?
Now, they said they want to be measured by shareholder returns, okay let’s do it.
Since the announcement shareholders achieved a positive return:
While they were off to a good start, significantly outperforming spot gold, the massively higher production costs have eaten into margins and stock valuations.
Even including Barrick’s dividend, it remains trailing spot gold, though just slightly.
Maybe the future will be better again?
Management explicitly said, they do not want to be measured by the produced amount of gold. As we already discussed shareholder returns, let’s nonetheless have a look at the production profile, because usually higher output is favorable for the results of the business. At least, I would not like to solely rely on higher commodity prices.
This is the current overview for the next ten years:
Gold production shall be in a range of 4 to 4.5 Moz (million ounces) p.a. – on average likely more on the lower end – while copper production could increase more.
However, this is not even the important stuff.
This is the important stuff, their expectations a few years ago – all post-merger:
Be on guard, this is the former expectation only for gold production.
The lower end expectation was around 4.5 Moz. Effectively, they have lowered their production plans by 10% in just three years, making it even harder to “create value”.
Shrinking companies even more rely on higher prices for their commodities.
If we go back just one more year, the lower end of the expectancy was even 5 Moz. – or around 20% higher than today or in other words, they cut their production profile already by 25% post the praised merger.
It gets even better.
Now look at the production profile of Barrick pre-merger:
- Pre-merger, Barrick was producing 5.3 Moz alone without Randgold (which produced slightly more than one Moz on its own)
- Just a year later, the combined entity should be able to produce 5 Moz
- Today, the expectancy for the next ten years is to produce 4–4.5 Moz p.a
In 2011, during the mania, production was even 7.6 Moz.
My paid version of TIKR only allows me to look back ten years, but you can already see that despite a higher gold price today (1,800–1,900 USD vs. 1,200–1,700 USD), operating cash flows did not grow.
Maybe it would not have been that bad of an idea to at least include gold production as a measurement for performance? Management did know why they did not.
To be fair, it is true that it gets harder to produce commodities. Production costs rise due to lower grades, but also due to input inflation of energy and materials. Also, Barrick sold of its assets. But nonetheless, I don’t see anything that hints towards value creation.
However, with an ever shrinking production profile and rising costs, it gets tough to create value.
I haven’t search for a gold stock idea, yet, but my members already received an idea for a silver miner. This sector is really tough, as spot prices of silver are so low that the majority of silver producers either is not profitable at all or cannot spend on exploration, because cash flows are only sufficient enough to sustain operations.
My idea has more than enough margin of safety in this regard.
Plus, first share buybacks have started and the balance sheet has a fat net cash position. As a bonus, the company is a clear takeover target.
Looking at gold and gold miners, I show why it is by no means a bullet-proof strategy to just buy the stock of a household name, only because it is known.
Barrick Gold has a rather weak historical performance.
Gold and silver miners often are said to offer leverage to the underlying spot prices – however, most of them in reality cannot even beat the spot price.
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