Barrick Gold (ABX) freaked out the gold sector on November 1 with news that it would raise at least $3 billion in a new stock offering.
At a minimum of 163.5 million shares, the offering represents 16% dilution for current shareholders. (Earnings would have to be spread over 16% more shares.)
And that has raised fears across the sector as traders and investors try to figure out which company might be next. Of course, as is usual, the initial reaction is to sell first and figure out the danger to any specific company later
Shares of Barrick Gold fell 11.2% on November. Want an example of collateral damage? Shares of Yamana Gold (AUY) dropped 5.6% on the day. (Yamana Gold is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
Here’s the problem at Barrick Gold in a cash flow nutshell. With the drop in the price of gold, Barrick’s revenue has tumbled and that has put a big strain on cash flow. The company finished the September quarter with $2.28 billion in cash and cash flow from operations of $1.23 billion. But because Barrick has such a big investment program that operating cash flow turns into just $26 million in free cash flow. And that’s after cutting dividend payments in the quarter to $50 million from $200 million and reducing capital spending to $1.21 billion from $1.56 billion
Without those reductions Barrick Gold would have been free cash flow negative for the September quarter.
That left CEO Jamie Sokalsky with just a few options.
The company could further cut capital spending by suspending construction at projects such as the Pasua-Lama mine n the Argentina-Chile border. Barrick announced that it would do just that at the same time as it announced its stock offering. Cutting capital spending, however, is a tricky game since it does delay future revenue gains even if it saves money now
Barrick could sell assets—but with the price of gold and copper assets so low, this assures that assures that the company sells on the cheap
Or the company could bite the bullet and sell stock.
Beyond the effects at Barrick, the stock sale raised worries across the sector that 1) Barrick was expecting gold prices to fall even further, and that 2) other gold miners will have to sell stock and dilute current shareholders.
I can’t predict the price of gold from here. With the U.S. and global economies showing signs of weakness I think you can certainly make an argument that gold isn’t a good candidate for a rally from here in the coming months.
I think you can get a handle on the dangers of dilution, however, at any company by taking a long look at cash flow. Read more
Traders and investors who were hoping that a government shutdown and a possible U.S. default if Congress doesn’t raise the debt ceiling would send fear soaring and gold prices climbing have got to be disappointed at today’s action. Gold prices are down today with the December contract falling to $1287 an ounce for a drop of 3.04%. That’s the biggest drop since July 5.
And it doesn’t look like the market for gold is headed for a quick turn—short of a zombie attack on world population centers
Holdings of gold bullion are down with gold held by bullion ETFs falling 27% in 2013 to the lowest level since May 2010.
Today Fitch Ratings threw in the towel on $1200 an ounce as a floor for the market. Read more
Gold has spiked higher today on news of more violence in the Middle East and an afternoon tumble in the dollar. Gold for December delivery is up 2.34% to $1364 an ounce. Gold stocks are up even more. Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ members Goldcorp (GG) and Yamana Gold (AUY), for example, were up 5.94% and 5.55%, respectively, as of 2:45 p.m. New York time.
But the medium-term trends make me cautious here. The second quarter numbers from the World Gold Council, out today, show a multi-year high in demand from the jewelry sector and record demand for gold bars and coins. But big outflows from gold ETFs and slowing demand from central banks more than balanced that out. Gold demand fell 12% in the quarter of a four-year low.
Of course, that’s backwards looking. The one piece of data that makes me especially cautious looking forward is that a 6% year over year drop in gold supply in the quarter, which helped support gold prices, was almost totally due to a reduction in recycling as individuals held onto to gold jewelry rather than selling it because of low prices. Mine output increased by 4% in the quarter and supply from recycling fell 21% to 308.3 tons, the lowest since the third quarter of 2009. If gold supply from recycling picks up (or doesn’t fall as much) that will remove some support for the price of gold and if it picks up enough it could lead to another round of production cuts from gold miners.
What’s hard to call, of course, is the level of demand from ETFs. Read more
Too early to buy except as a trade, but stock pick Yamana is doing what a gold miner should be doing now
It’s early in the transition of gold mining companies to the lower price of gold, but I think we can already stake out a few of the important differences among the mining companies.
On this scorecard, I think Yamana Gold (AUY) is a good example of what you should be looking for in the sector even if it may still be a little early in the transition to buy anything. (If you disagree with me on timing, I’d start with a stock such as Yamana. Yamana is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ And I do think Yamana is a good trading vehicle for this market in gold.)
First, write downs. This is an obvious difference and all things else being equal, you’d prefer a company with less in write downs (such as Yamana) to one with more in write downs (such as Barrick Gold (ABX.) But the absolute size of the write down is actually less important than the details. A write down is just a paper expression of the fall in the price of gold if a company is simply writing down the value of current reserves. These write downs will go back into the company accounts when gold prices rise. They are, however, important in a more lasting way if they express a more permanent impairment of assets either through a sale or a closing or abandonment of a project.
Second, how aggressively the miner is moving to reduce costs. Read more
Goldcorp (GG) took a $1.96 billion write down when it announced second quarter earnings today. Including that write down, the company reported a loss of $2.38 a share, considerably lower than the 26 cents a share in profits reported in the second quarter of 2012 and the 23 cents a share earnings consensus among Wall Street analysts.
So why was the stock down just 0.78% as of 3 p.m. New York time. (Goldcorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
First, because the big write down is a non-cash item. Goldcorp wrote down the value of potential exploration assets at its Penasquito mine in Mexico. Lower market prices for gold mean that Goldcorp put a lower value on the assets in the ground at Penasquito. But the write down didn’t cost the company any cash and Wall Street analysts have basically shrugged, saying that what was written off the books today will get written back on to the books tomorrow when gold prices rally.
Second, because the write down was a non-cash item and a one-time non-cash item at that, Wall Street pretty much discounted it when it compared the company’s announced earnings with Wall Street projections. From this point of view Goldcorp showed adjusted earnings of 14 cents a share. That’s still lower than the 23-cent consensus but not nearly the disaster suggested by the unadjusted earnings numbers. If you figure in the huge big drop for Goldcorp shares of 39.5% from the September 20, 2012 high, even after the recent rally, some part of today’s earnings miss, you’ve got to figure, is already in the stock.
All that’s true, but there was some more bad news in today’s earnings that may not yet be figured into the current low price. Read more