Five Reasons to Dump Barrick Gold

James West
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You know, its remarkable how the members of the bought deal syndicate on the hook for Barrick Gold’s (TSE:ABX) (NYSE:ABX) $3 billion raise have suddenly all come racing out of the chute to produce “research” calling Barrick a “buy” and predicting a $20 share price.

Less funny is the absolute avalanche of apparently bullish Barrick “shareholders” who have materialized on every investment blog from Seeking Alpha to Motley Fool to proclaim the company is the “buy of the century”. No less than five separate articles published on Seeking Alpha all appeared over the weekend since Barrick announced the private placement.

One blogger in particular stands out on Seeking Alpha. Writing under the anonymous handle “Achilles Research”, this blogger claims to be a “financial analyst” (not a CFA or other industry-accredited analyst) who in his profile advises “issuers and other investors can also hire my research services”. This is not an allegation that “Achilles Research” is a paid tout for Barrick. I just find it suspicious that he/she has written no less than 3 articles in support of Barrick in the last 30 day period, claiming to be “long” Barrick.

How can one verify the holdings of an anonymous blogger who admits accepting payment for coverage? There’s no link to email or web site to give the reader any idea what sort of author we’re talking about here.

The coverage over at Motely Fool is less bullish, pointing out the risks to Barrick by deciding to stop work at Pascua Lama.

I heard Ned Goodman of Dundee Corp. (TSE:DC.A) speak in glowing terms about Barrick Gold on Canada’s BNN the other day, calling it the “best on the board”. I just about fell out of my chair. I’d just finished publishing a piece on the difficulties Barrick was experiencing at Pascua Lama, in Australia, and in Papua New Guinea. The next day, they announced they will suspend construction of Pascua Lama, and yesterday, a $3 billion sale of common stock to “reduce debt”.

I’m wondering best on what “board”?

Then, to my not overly great surprise, out comes the Globe and Mail with a video clip stating unequivocally that Barrick’s earnings last quarter were “pretty decent”. Now I’m not a regulator, but does that not constitute an opinion on the value of the company as an investment? Considering the sensitivity of Canadian regulators toward such statements by non-registered market participants, I’m at a loss to explain how that video continues to be present on the Globe and Mail site, and with not a peep from regulators.

Mind you, we are talking about one of their perennial advertisers here, so that would explain the motivation to paint the company in a positive light on the day after they announce a $3 billion stock sale. No disclosure as to the fact that they are advertisers though. The state of Canadian regulation continues to deteriorate, but thats another story.

About those earnings, though.

1. Earnings

The number one reason NOT to invest in Barrick is those earnings.

Compared to the 3 months ending September 30, 2012, the last quarter of revenue for Barrick saw a 12.18 percent decrease in revenue while suffering a rise in cost of sales of 9% to 59.9% And this is in a quarter that was bolstered by the sale of Barrick’s Yilgarn assets for $266 million and of Barrick Energy for $435 million. The company’s own Management Discussion and Analysis sums it up rather succinctly: ”

Net loss for the nine month period of 2013 was $7.5 billion compared to net earnings of $2.5 billion recorded in the nine month period of 2012.

2. Pascua Lama

is quickly becoming an albatross around the throat of Barrick investors. Indigneous groups, environmental groups and the company’s own workforce are all legally attacking the company over what amounts to bad corporate citizenship – a position one could hardly argue with, given the very public disregard for human rights beheld by founder Peter Munk.

3. Porgera

has become the flash point for human rights issues against Barrick after various NGO’s expressed outrage over Peter Munk’s decidedly insensitive opinion that rape was a “cultural pastime” among Papua New Gunieans. Munk is quickly becoming the company’s biggest liability, having fired Aaron Regent for doing a fine job despite a compromised gold price.

4. Debt

is threatening the company’s very viability as it has risen from CA$12 billion at the end of 2012 to $14.6 billion as at September 30th, 2013. The company has $1.5 billion in notes coming due by 2016, and so with earnings dropping and mega-debt on the horizon, this is no doubt what prompted Barrick management to head to the well at this most inopportune of times. The likely theory is that the hemorrhaging of the company’s share price will somehow be staunched by the removal of such fiscal time bombs.

5. Gold Price

is certainly not a reason to be buying Barrick right now. Despite soaring demand for physical gold in China that outstrips global mine supply by 400+ tonnes, the future price of gold remains range-bound in the $1250 to $1350 range by the unregulated futures market. If one was to judge by the rhetoric in the mainstream financial press, we could see gold heading to $1,000 per ounce or lower, which would force Barrick to seek bankruptcy protection, in view of its enormous debt load relative to its all-in costs of $900+ per ounce, which are themselves at risk of moving higher.

The level of risk associated with Barrick in its current state demands investors understand the risks of an investment in this bloated behemoth. The chances of its share price rising in the near term are equal, if not worse, than the odds that this company will cease to exist in the next 24 months.

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

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