Recent Price Action
Barrick’s plight is illustrated by its recent price action. In a rapidly rising market, the firm’s stock has experienced a nearly uninterrupted downtrend. Less than two years after touching a high near $55 per share in September of 2011, Barrick currently trades at under $20 per share. While there are encouraging signs of a technical uptrend in its recent price action, it will take some time to repair the damage that has already been done. By comparison, Canadian’s far more volatile shares have declined by just a small fraction from their 2011 highs. While this certainly is not a market-beating performance, it is far more encouraging than Barrick’s depressing showing.
How the Deal Will Happen
This deal could help Barrick recover its standing in the eyes of the market. Valued at nearly $175 million, the transaction will send several profitable energy assets to Canadian. In addition to cash consideration, Barrick will earn some potentially lucrative royalty rights on currently productive parcels in Alberta’s energy-rich hinterland. Whether these royalties justify the sale of Barrick Energy’s assets is an open question, but they do provide Barrick with a much-needed sweetener. Meanwhile, Canadian will add about 4,200 barrels per day to its oil-production capacity and about 4.4 million cubic feet per day to its natural gas-production capacity. Crucially, these assets are not tied up in expensive tar sands properties.
Implications for Barrick and Its Competitors
This transaction should give Barrick some financial breathing room. However, its $173 million price tag is not enough to change the mining landscape significantly. Indeed, even the $475 million that it stands to earn from all of its pending asset sales will fail to cover its expected losses for the year. Nevertheless, this is a step in the right direction. If nothing else, it will provide Barrick with some of the capital that it needs to invest in potentially profitable mining projects around the world. If the market for gold recovers in the near future, the company will be in better shape than many of its competitors. Investors should take note.
Long-Term Outlook and Ways to Play
Adventurous investors may see this pending deal as Barrick’s “all clear” signal. However, it would be premature to say that Barrick’s stock has bottomed out. While the company is showing clear signs of recovery and has done far more to acknowledge the “new reality” than some of its competitors, plenty of factors remain out of its control. Accordingly, the best way to play this situation may be through a long position in Canadian. Investors who believe that Canadian’s new pickups will lead to revenue and earnings growth may find the company quite cheap at these levels.
The article How Will This Asset Sale Affect the Industry? originally appeared on Fool.com and is written by Mike Thiessen.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
