This year is a nightmare for gold investors. The precious metal has already lost 25% since January. The situation in the mining stocks is even worse. Companies like Barrick Gold Corporation (USA) (NYSE:ABX), Newmont Mining Corp (NYSE:NEM), and Goldcorp Inc. (USA) (NYSE:GG) are down 56%, 34%, and 32%, respectively. The prices are starting to look attractive. However, the falling gold price poses serious threats to the profitability of gold miners. Is it time to get in?
Here’s why Barrick is beaten more than the others
As you have seen, Barrick Gold Corporation (USA) (NYSE:ABX) is down significantly more that other big gold companies. The main problem of Barrick is the delay of its Pascua-Lama project. The project is suspended by the Chilean government due to environmental issues. Barrick would have to build a new water management system. The project is now likely to exceed its $8.5 billion budget, and the company would be lucky to finish it before the end of 2014.
Barrick Gold Corporation (USA) (NYSE:ABX) recently issued updates on this project. The company expects the ore from Chile to come by mid-2016, if the water management system is built by the end of 2014. Barrick plans to reduce capital expenditure at Pascua-Lama in 2013 and 2014. The total cut would come at $1.5 billion-$1.8 billion. It’s important to note that this is not a result of cost-cutting initiatives. This a result of the extension of the project schedule.
Other gold miners have problems, too
Other gold miners have their own issues as well. Newmont Mining Corp (NYSE:NEM) faces increasing protests on its Minas Conga project in Peru. Last year, the protests were violent and led to the suspension of the project. This year, the protests are calmer, but no one could tell for sure whether the protests will stay this way.
Goldcorp Inc. (USA) (NYSE:GG) recently faced an unpleasant surprise when Argentina’s Santa Cruz province imposed an additional 1% annual tax on mine resources. The percentage looks small, but it can cost up to $100 million for the company. Given the gold price dynamics, it is not the best time for governments to get greedy.
What’s Barrick doing to improve the stock performance
Share price underperformance has been a source of constant worry for Barrick Gold Corporation (USA) (NYSE:ABX)’s investors. A small activist fund called Two Fish Management has even sent a letter to Barrick demanding the company be split into three regional units. Given the size of the fund, this is just noise, but points to the potential escalation of difficulties for the company.
Barrick Gold Corporation (USA) (NYSE:ABX) is going to lay off up to a third of corporate employees at its headquarters in Toronto and some other offices. The company is trying to minimize its costs, as gold prices can stay low for an undefined period of time. After facing multiple claims about management pay, Barrick stated it is considering adding three new independent directors to its board. So far, the market is not much impressed by these initiatives.
Can write-downs be around the corner?
Newcrest Mining recently stated that it is going to write down $5 billion-$6 billion of the value of its mines. Investment firm Jefferies has stated that it believes that Barrick, Newmont Mining, and Goldcorp are among other producers that could face big write-downs.
A write-down is the worst possible scenario for these stocks. The companies know that their stocks would be severely punished if they state that their mines are worth less than they previously stated. My bet is that Barrick, Newmont Mining, and Goldcorp would do everything possible to avoid such a scenario. I think that gold prices would have to stay more than half a year at current levels to make the massive write-down scenario plausible.
Bottom line
Gold miners have gotten so cheap that is it increasingly becoming difficult to ignore them. Barrick Gold Corporation (USA) (NYSE:ABX) trades at a forward P/E of 5, although the current price reflects the difficulties that the company faces. When gold prices rebound, the stocks that have been beaten the most would most probably rise the fastest. That’s why, Barrick is the bet with the biggest potential. At the same time, it is the riskiest bet.
Newmont Mining Corp (NYSE:NEM) and Goldcorp Inc. (USA) (NYSE:GG), which trade at forward P/E’s of 10 and 13, respectively, are safer investments with a little less upside than Barrick. On the income side of the story, Barrick yields 5.08%, Newmont Mining yields 4.67%, and Goldcorp yields 2.43%. Keep in mind that if low gold prices persist, there might be a dividend cut.
All in all, if you are bullish on gold, it is a good time to seriously consider taking positions in these gold miners.
The article Now Is the Time to Look at This Gold Giant originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir 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.
