The point of owning a gold mining stock like Barrick Gold Corp (USA) (NYSE:ABX) is to gain leverage to the price of gold. An investor owns ABX stock because she is bullish on gold — and because, if gold rises, Barrick Gold stock should rise even further.
A rough example is instructive. Assume a company can mine gold at $1,000 per ounce and has $200 million in annual corporate costs. At 5 million ounces of production and a gold price of $1,200 an ounce, pre-tax earnings should be about $800 million. Raise the gold price 10%, however, and earnings rise 75%, to $1.4 billion.
A gold mining company should act as an option on the price of gold. It should outperform when gold rises – and, in theory, underperform when it falls. Any mining stock, in theory, should be a leveraged bet on the underlying commodity.
But the problem with Barrick Gold stock is that the bet has rarely, if ever, paid off. ABX stock, to be blunt, has been a colossal failure. Its performance has been awful. Its executive compensation has ranged from excessive to obscene. And any investor buying ABX at the moment needs to understand that history — and believe that this time is different.
At the moment, that seems hugely optimistic.
The Disastrous Performance of Barrick Gold Stock
Again, the point of ABX stock is that it should provide upside leverage to increases in the gold price. Otherwise, investors could just buy gold, whether in physical form or through an ETF. And for Barrick, the performance should, in theory, be even better, given a substantial amount of leverage on the balance sheet.
Yet, over basically no period has Barrick Gold stock delivered that performance. Over the past year, gold has risen about 4%. ABX is down 29%. A three-year time horizon looks most beneficial, but Barrick Gold stock’s gains of 7% still lag the 12% rise in gold. Gold is down 9% over the past five years; ABX has fallen further (29%). And over the past decade, a 45% rise in the price of gold contrasts with a 66% decline in ABX stock.
Perhaps most incredibly, gold has better than tripled in the past 25 years. Barrick Gold stock has delivered negative total returns over that period. Only the most nimble, or most lucky, trader would have been better off with ABX than gold at most points during the past quarter-century.
To be fair, ABX isn’t necessarily alone. The shares of what are now the five largest gold producers all have declined over the past decade — even while gold has risen. Newmont Mining Corp (NYSE:NEM) has been the best performer, dropping 4.5% (and providing positive returns if dividends are included). But ABX, Goldcorp Inc. (USA) (NYSE:GG), Kinross Gold Corporation (USA) (NYSE:KGC) and AngloGold Ashanti Limited (ADR) (NYSE:AU) all have fallen at least 60%.
But even using the low bar provided by peers, ABX has been a middling investment. And it’s not hard to see why.
More Problems for Barrick
For one, Barrick remains a company that is notably unfriendly to its shareholders. Barrick’s executive compensation policies have been called into question on multiple occasions. In 2016, executive chairman John Thornton took a $10 million pay cut after shareholders twice voted against his compensation in an advisory capacity. Thornton’s compensation then more than doubled the following year, to $8.5 million in 2016 before dipping to $7.7 million in 2017. Yet, under his stewardship, ABX stock has dropped 14%, while — you guessed it — the price of gold has risen.
Second, the company’s asset quality remains exceedingly poor. Barrick has sold assets to pay down a debt load built up over the past years — but what’s left doesn’t look particularly attractive. A long-running debacle at the Pascua Lama mine in Peru led to some of that debt and has finally resulted in the mine being closed (to be fair, that property was acquired under prior management).
Barrick faces risk from tax authorities in Zambia, who targeted another miner in the country. Its majority-owned subsidiary Acacia Mining is in a dispute in Tanzania. Employees faced criminal charges in Argentina after a 2015 cyanide spill. Barrick sold half of its interest soon after.
Execution has been poor at best — for years now. Barrick simply hasn’t lived up to its promise. But its habit of compensating executives richly and its inability to improve that execution shows that management isn’t particularly concerned about that fact.
No Need to Buy ABX Stock
Barrick defenders might point out that some of the problems overseas aren’t necessarily Barrick’s fault, or weren’t necessarily foreseeable. And there’s some truth to that.
But that’s also kind of the point. Gold miners provide leverage to gold prices. But so do gold options — without the concerns about nationalization and taxation that arise from mining in developing countries or the need to pay executives outrageous sums of money.
In this day and age, with easy and cheap access to ETFs and options, there’s really no need to take on the risk provided by any gold miner. That’s doubly true considering the missteps and lack of devotion to shareholders Barrick has shown over time. Investors who believe in the long-term value of gold can do better.
And they should do better.
As of this writing, Vince Martin has no positions in any securities mentioned.