Toronto-based mining giant Barrick Gold Corporation (USA) (NYSE:ABX) has not had a very good start to the year. In addition to intense downward pressure on gold prices that has sent stocks of virtually every gold-exposed miner into the basement, Barrick has had to deal with some regulatory and debt-related setbacks. Recently, the company announced that it would be suspending production at a supposedly lucrative mine in Chile due to a politically motivated court ruling in that country. At this point, it seems doubtful that the company will be able to restart construction at the mine until late 2013 or early 2014. Given the overtly political nature of the approval process, additional delays are possible.
Amid all this tumult, investors have a right to ask themselves whether Barrick is destined for the scrap heap. There is a wide range of opinion on this matter, and it is crucial that investors get all of the facts before committing to a specific course of action. Although the gold mining industry is notoriously dependent on “on-the-ground” conditions that cannot be gleaned from simple financial statements, a quick comparison between Barrick Gold Corporation (USA) (NYSE:ABX) and two of its close competitors is warranted.
Recent Problems
Barrick Gold Corporation (USA) (NYSE:ABX) has more to worry about than its debt load. The recent court decision to halt work on the company’s Chile project did little to resolve the overarching issues surrounding the mine. Given the relative newness of the regulatory authority that will issue a long-term ruling on the project this summer, it is difficult to impossible to predict the final outcome of this case. Market-watchers should not be surprised if the regulator moves to impose punitive or unreasonable penalties on Barrick. By contrast, the agency could decide that Barrick Gold Corporation (USA) (NYSE:ABX) has done enough to mitigate its environmental concerns and move to reopen the mine without imposing harsh penalties. Since Barrick has made a good-faith effort to cooperate with the agency’s demands, this outcome might be in the cards.
Separately, the Australian situation has troubled long-term Barrick Gold Corporation (USA) (NYSE:ABX) investors. In a perfect world, the company would continue to operate these profitable mines. However, they are not absolutely essential to its business model. Moreover, their sale will bring in some much-needed capital for the company. If there is any solace to be gained from this development, it lies in the vigor with which Chinese mining companies seem to be pursuing assets in Australia. Barrick Gold Corporation (USA) (NYSE:ABX) can be virtually assured of finding a suitable buyer for its Australian properties.
Falling Gold: The Other Problem
Of course, the spot price of gold has collapsed by nearly 25 percent over the course of the past 12 months. This has driven down the stocks of most gold miners, including Kinross and Goldcorp (NYSE:GG). However, Barrick Gold Corporation (USA) (NYSE:ABX)has fallen by more than its peers thanks to its perfect storm of debt and regulatory setbacks. Since touching a high near $55 per share in mid-2011, the company has slumped to around $20 per share.
Financial Comparisons with the Competition
Barrick, Kinross Gold Corporation (USA) (NYSE:KGC) and Goldcorp Inc. (USA) (NYSE:GG) have a similar range of operations in various countries around the world. Like Barrick, its two competitors have significant presences in miner-friendly developing countries as well as regulation-happy developed countries.
At just over $20 billion, Barrick Gold Corporation (USA) (NYSE:ABX)’s market capitalization dwarfs Kinross’s $6 billion figure and comes in slightly lower than Goldcorp’s $23.7 valuation. In 2012, the company lost $857 million on revenues of just over $14 billion. By comparison, Kinross lost a jaw-dropping $2.5 billion on gross revenues of $4.5 billion, and Goldcorp earned $1.6 billion on about $5.2 billion in revenues. Barrick’s debt situation is far more dire than that of either of its competitors. The company has nearly $15 billion in debt to offset a cash hoard of less than $3 billion. Although it has a solid operating cash flow of $5.5 billion, this is still troublesome. Kinross and Goldcorp both have roughly even amounts of debt and cash.
The Brighter Side
On the other hand, there may be some cause for optimism. After bottoming out in response to gold’s recent collapse, the company’s stock has been locked in a secular uptrend. More importantly, a long-delayed lease agreement between Barrick and the government of the Dominican Republic may finally have been cleared for approval. If this is truly the case, the company will soon begin to leverage the mine’s expected 25-year lifespan. This could mitigate the impact of Barrick’s Chile troubles and boost its 2014 earnings.
Can Investors Profit?
Now that Barrick Gold Corporation (USA) (NYSE:ABX)’s stock has made a short-term bottom, many investors believe that its fortunes have permanently reversed. While it may be too early for long-term, conservative investors to jump into the stock on a wholesale basis, short-term traders may be able to take advantage of its current momentum. However, Barrick’s persistent long-term debts and the political uncertainty that surrounds some of its key properties are real problems with no easy solutions. Despite its apparent bargain-basement price, Barrick may still be a riskier investment than Goldcorp.
In sum, Barrick Gold Corporation (USA) (NYSE:ABX) may offer some short-term opportunities for commodities-focused traders. If it can resolve the regulatory issues and debt problems that have impeded its growth, it could develop into an even more exciting prospect. However, this is by no means assured. As always, anyone who wishes to invest in this company must conduct their own due diligence before committing funds to the cause.
The article Is It an Oversold Value Pick or an Unsafe Falling Knife? originally appeared on Fool.com and is written by Mike Thiessen.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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