Lets start off with with the obvious. Barrick Gold's share price has not only under performed the market, but has also under performed gold mining peers. Many uncertainties remain at Barrick Gold and the CEO stated this up front last shareholder meeting on April. In addition, Barrick's main asset (gold) has also not been fairing favourably with investors. As a result of Barrick Golds stock price has taken a massive tumble over the following months, and is currently at all time lows. To some investors, this looks like a classic value stock (trading under book value), at all time lows and looks "cheap".
But before we come to the conclusion that this company would be a good buy, we need to first look at the financial statements of the company, and the future outlook for gold prices. Below we use Q1 2013 earnings as the "latest" earnings.
Assets
Total assets come in at just under 49 billion, while liabilities come in at 23.7 billion.
Equity, or book value comes in at a grand total of 25.23 billion. Currently as of Monday, 10 June , 2013, the stock trades at 20.81, and has a market cap of 20.8 billion.
At 1 billion shares, and at 25 billion in shareholder equity, the book value of the company subsequently comes in at $25 per share. While the stock currently trades at $20. Seems like a great deal! Right? Get $25 worth of equity for only $20. Free money! Well... Not exactly..
A closer look and we see that the assets are not all they appear to be.
Cash and Cash equivalent come in at only 2 billion dollars. While inventories come in at 2.8 billion. Although inventory can easily be liquidated, I would still take caution in taking this number for face value, as sale price could be substantially lower than quoted. Receivables and other current assets come in at 1.1 billion.
For sake of argument lets take the inventories value for face value, and add that together to the the receivables and cash. We get a total liquidable asset value of only 6.2 billion.
Of course, we can't forget about the non-current assets! Right off the bat I notice a large irregularity. Goodwill is a whopping 8.8 billion dollars! I don't know what about this company commands such a high premium for company branding and people, but surly it can not be 8.8 billion dollars. I know the company may try to justify this, but it is simply unjustifiable. Remember you as a shareholder can not extract value from goodwill, and therefore is meaningless to you, and should not be considered in valuing a company based on assets.
Then plants,property and equipment comes in at an even more mind boggling 30 billion dollars! This is really a mixed bag. Value can technically still be extracted from mining sites, and machinery can still have usefulness, but I usually like to discount these things. For one thing, Sale price of these items are usually nothing or substantially lower than the stated price, and these values can not be fairly assessed. Therefore, these assets do not give any real value to shareholders.
Discounting the property and machinery assets, with goodwill we find that assets are really only 11 billion dollars.
What's worse is that the company has 23 billion dollars in liabilities. Currently liabilities exceed current assets, and the company can be seen as illiquid. But once again, we can not discount that their machinery and property have some value and are being used to generate profits for the company. But, this is still a far cry from the stock being seen as a "cheap company" below book value.
For assets I rate this company a C
Management
Management has been doing a decent job tackling through the gold "crisis", but has failed in some areas as well. For example the closure of the Chilean mine in mid April sent the stock tumbling due to environmental concerns. Surly, management or someone in the company could of recognized something and avoiding this all together.
During the shareholder meeting the CEO, started upfront by talking about the major decline in the stock price. That is a good sign, showing that management acknowledges what is going wrong, and realises that they need to improve. The CEO was talking about uncertainties in the gold market, and really putting the blame on others, rather than his own team. To some extent this is true, but I feel like he could of outlined initiatives rather than bad mouthing others.
Currently global production average per ounce of gold is at $1200, while Barrick's is only $919 per ounce. Giving the company a significant pricing advantage, and giving the company more room to wait out further declines in gold prices. Managements ability to keep costs below average could definitely be shown as a good sign. If I had to pick 1 gold miner to wait out gold prices, I would definitely pick this company.
For management I rate this company a B+
Future Gold outlook
Wall street is not bullish on gold at all, with Goldman Sachs forecasting lower gold prices in the coming year, and Deutsche Bank forecasting an even gloomier $1100 per ounce for gold. I'm not an expert on gold, and I really can not comment on these forecasts, but you can clearly see where gold may be heading in the near future. If forecasts are correct, than Barrack along with other gold miners will get crushed. The lower the price of the gold, the lower the margins, and the more pressure put on the company. It is also important to note that demand for physical gold is at unprecedented levels.
Future gold outlook C+
Conclusion
Overall company outlook B
I am neither bearish nor am I bullish on this stock. I am currently neutral and have mixed feelings. I feel like gold may be oversold, but I also feel like more downside is possible. The risk reward , is just not there for me and so therefore, I would not recommend buying this stock, nor would I recommend shorting it.
If gold prices do rebound, this stock would return back to the 30's, and if gold prices continue to tumble, we could see this company making new all time lows. Right now this is all a gamble on gold prices, and no on knows for sure where it will be.
If you are a speculator, I would buy the stock in hopes of making big returns in a rebound of gold prices. But bear in mind of your downside risk as well.
For other investors, I would recommend waiting out on the sidelines.
If you have any questions feel free to leave a comment.
No comments:
Post a Comment