This assumes that the cost of production will not rise. But if there is general inflation, the costs of production most certainly will rise, and it will not be that easy for Barrick to deliver the gold and still make a profit.
Over 85% of Barrick's reserves are unhedged, and an average of 75% of the 5.5 to 6 million oz Au annual production over the next 5 years are unhedged so in my mind Barrick's income statement is as leveraged to the gold price as any other 3-4 million oz producer. If the goldprice stays in the range that it is currently in, Barrick is just like any other 5.5-6 million oz Au producer as their hedges mature at $345 or so.
If inflation goes up and the goldprice fails to follow a lot of gold producers, hedged and unhedged will go out of business before Barrick. All gold producers (indeed all companies in existence) run the risk that inflation on key cost inputs could wipe out profit,...if gold does not rise along with inflation,...but if gold keeps pace with inflation, Barrick has little to worry about as shown above.
A lot of people think Barrick's near term lagging shareprice performance is due to the hedging vs non-hedging crap, and there is no doubt that the anti-hedging marketing campaign waged against the hedgers by several self-interested parties (Goldcorp, TanRange, Newmont/Franco Nevada, etc,...)was a brilliant ploy to divert speculator dollars from the hedgers to the anti-hedgers. In past gold rallies the big producers like Barrick, Anglo etc., got a large percentage of investor attention and buying interest, but this time the tables were turned on the big producers,...score one for the anti-hedgers. But now the facts and figures in the financial statements must collaborate those claims, or graphs comparing the hedgers to the anti-hedgers may start to reflect a different reality.
I think Barrick's flagging share price has more to do with the damage done by past quarters of lower production and higher costs of production. The last two years has seen production decline by a million oz or 15 % due to depletion of existing mine reserves, and cash costs per oz increase by 15% due to declining ore value (which Barrick says is a temporary production and mine management problem) As a mine matures, normally dilution increases and headgrades diminish,...it is only natural that miners go for the lowest cost ore first. When Barrick took over Homestake they added a large number of mature mining properties. Closing down these inherited higher cost mines together with several of their own has dropped production. Over the next few years Barrick will be significantly changing their mine composition from mainly mature higher cost mines in heavily explored camps, to large scale, high tonnage, high output, low cost new mines in districts with considerable exploration potential. The future looks bright.
Ultimately, the success or failure of goldie company share prices, will rest on future income statements. Increasing production at lower costs is what really matters, and Barrick is trying to do both, and has done same for nearly two decades, the hard way,...without counting on a rising POG. Some mid tier gold producers are not that profitable, even with the increased gold price. Barrick is, and has development on stream to greatly increase production and profitability.
If the goldprice stalls out near present levels, a lot of gold companies will underperform investors expectations that are currently being reflected in current high eps (100x or more is fairly common) for many producers (hedged or not).
Additionally, Barrick has no net debt,...indeed they have a billion dollar war chest, and as they reduce their forward sold gold contracts from 18 million oz to 12 million oz this year and last, they free up a further 1.5 to 2 billion US$ from the hedge book bond portfolio. So depreciation of capex is irrelevant to cost of production calculations for Barrick (they don't have to give any of their cashflow back to the bank to pay off principle,...they have already paid for all the mine production),...cash costs are all that really matters to current profits and they are paying for their new mine capex with current cashflows so the chances that the costs of production will rise above current real cashflows are rather low,...a lot of mine companies will go out of business before Barrick should inflation of input costs and lower gold prices wipe out profits.
I have the impression from other threads, you have a lot of capital invested in oil and gas companies,...where hedging against a variable commodity price is normal business procedure. Currently many oil and gas companies are hedging about a third or more of their annual production, and oil and gas trusts can hedge a lot more to insure stability of distributions. Many will hedge small amounts out several years as evidenced by futures contracts going out 5 or more years. Also many mines of all types will enter into supply contracts to guarantee floor and ceiling prices for their production. Few, if any, question these companies making a statement that "for a small percentage of our production, we are prepared to make this concession in order to limit the risk to our shareholders of this commodities possible downside". Some PGM producers have hedged all of their production for 5 years or more. So why do people question gold hedging?,...
Anti-hedgers have the same problems with mine development and production as hedgers. All will have bad quarters, as well as good. Successful exploration and bringing on new low cost production from new mines has more to do with good business practice and mine management, than stumbling on new resource or speculating on a rising POG and other companies shareprices as Goldcorp has done. If the POG drops back, McEwens past and current speculations might look a little less brilliant.
I notice you think it would be better to remain with midtier producers (Goldcorp, Wheaton, K/TVX) than with Barrick,...this will definitely depend on the future income statements and future exploration, mine management etc. Everyone will look good with an increasing POG,...but just when everyone thinks the POG will keep rising,...???
Me, I'm rotating out of your mid-tier producers and into the small junior explorers/producers/marginal producers/soon to be producers. In a rising POG environment, these will outperform the midtier producers, just as the midtiers have outperformed the big guys in the last few years. The bigger you are, the harder it is to double production, revenues, profits and ultimately eps and shareprice. During the last big goldrush in the early eighties, area plays dozens of miles away from main plays attained market caps in excess of $100 million,...I'm thinking of Hemlo here. One may want to consider the Redlake area plays, or Nevada, etc. Australian exploration is in its infancy,...large tracts of greenstone belts remain unprospected and unstaked. Small cap gold stocks doubling is now a daily event.
In short, I think a Barrick "buy" now would be speculating that future quarters income statements are going to beat the street significantly, and raise expectations for the future. It may be possible for a 20% or higher move in shareprice if this should occur, and Barrick will leverage that with positive announcements on future increased mine production and lower cash costs. Their eps is much lower now than the average of their peers, so it becomes a kind of arbitrage play on the inefficient market.
If they bash the crap out of the hedging lawsuit, a similar move could occur as the street begins to realize that the effect of Barrick hedges on income growth is miniscule and greatly overwhelmed by the unhedged portion of production and reserves in a rising gold environment, and the hedges will not blow up. A visit to Barrick's website would be prudent as they are finally making a better effort at explaining their hedge program and future prospects. They obviously realize they need to market their stock like their peers are doing.
In any event, good luck with your investments. I hope gold continues to shine too.
What a great day in the gold neighborhood this is turning out to be!! |
