I would say confidence is a necessity since Silver Wheaton owns a 25% stake in Pascua-Lama’s silver production – an estimated nine million ounces for the first five years. For 2013, Silver Wheaton’s estimated silver output is 33.5 million ounces. That means Pascua-Lama accounts for about 5% of Silver Wheaton’s production, so you can bet that Barrick isn’t the only one worried about the mine.
Still, I agree with Silver Wheaton. I don’t think that Barrick will go as far as scrapping the project, but I do think the miner needs to accelerate the process of getting Pascua-Lama up and running again.
2. Costs down under going up
Last month, Barrick announced that it would be making significant cuts in Australia. These cuts include laying off some 50 employees and closing a Greenfields exploration unit in Perth, Australia. 50 people doesn’t seem too severe, but the downsizing underscores a bigger problem: rising costs.
According to Barrick’s website, the cost of producing one ounce of gold in 2013 will be between $880 and $950 per ounce. The cost is up around 14% from $803 per ounce in 2012. Australia has an abundance of gold and silver reserves, but that doesn’t matter if Barrick can’t extract them with maximum profitability.
3. Gold stumbles
A mining company is only as valuable as the commodity it provides. Unfortunately for Barrick, gold is no longer climbing. A look at the SPDR Gold Trust (ETF) (NYSEMKT:GLD) shows that gold fell 25% since October of 2012. Following the recession, gold went steadily upward as investors clung to its stable value and feared inflation. Now, as markets begin to improve, investors are loosening their grasp on the commodity and returning back to income producing assets. As a result, the price of gold is slipping.
Take a look at how closely Barrick’s stock price is tied to the value of gold. Using the past 20 trading days as the input, the current correlation is .93.
However, note the operating leverage inherent in the mining sector. Every dip the Gold ETF took, Barrick took more severely.
Final Thoughts
When a stock is trading as low as Barrick’s, it’s tempting to snap it up and hope for a turnaround. I say wait. Barrick may turn around eventually, but first the firm needs to regroup and do everything in its power to get Pascua-Lama back on track. Barrick may not be able to control the price of gold, but the miner should be able to keep its own operations running smoothly. Moreover, if Barrick does end up scrapping the project, the stock could descend even further.
I’m not saying Barrick is finished, but there are too many uncertainties to justify a long position. The miner could turnaround at some point, but in the meantime, stay bearish on Barrick.
Just as gold lost its shimmer, Barrick is ceasing to shine.
The article I Wouldn’t Buy This Gold Miner Just Yet originally appeared on Fool.com and is written by Randy Holcombe.
This article was written by Randy Holcombe and edited by Chris Marasco and Marie Palumbo. Chris Marasco is Head Editor of ADifferentAngle. None has a position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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