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4/4/17

Gold miners are real companies too (from IKN411)

A small op-ed on Goldcorp (GG) and Barrick (ABX) that helped open IKN411, last Sunday evening.
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Gold miners are real companies too
As I put together my thoughts on the deal done by Goldcorp (GG) this week to buy half of Cerro Casale and all of Caspiche (see ‘Producer basket’ below) I got to thinking about the way these tier one stocks are being run at the moment. The big turnaround story of the sector is, of course, Barrick (ABX), which has managed to pull back from the precipice since ex-GS-orthodox-capitalist Thornton took over from gold-prospector-hit-it-big Munk and the decision was made to run ABX like a normal company instead of applying the crazy pretzel logic that seems to prevail in the sector.

The difference at ABX has been its new, hard-nosed attitude towards the balance sheet and particularly to its debt position. In the 2009 to 2011 period Munk added nearly U$12Bn to the company’s liabilities, most of that as straight financial debt. Which is all well and good if the gold bull goes on forever, but what we now know is that the party came to a shuddering halt in 2013 and left ABX staring down the barrel of real financial problems. And that’s what has made ABX under Thornton the big turnaround success; he’s sold fixed assets, hacked down the debt and plans to continue to do so in the next two financial years (another U$2.4Bn or so to come off the debt in order to get it down to U$5Bn, he says).

What with the Garofalo decision last week to follow the samo samo route of mining companies and buy mediocre assets with real money, I got to thinking about the two companies and compared their balance sheets over the important recent period. There are plenty of interesting comparisons that show up and we could take a lot of space to chew them over, but the crux is in two datasets comparing the crisis year end of 2013 to the end-of-tunnel year end of 2016:

  • In the period end 2013 to end 2016, Goldcorp increased its financial debt by U$1.0Bn
  • In the period end 2013 to end 2016, Barrick reduced its financial debt by U$5.1Bn

  • At end 2013 Goldcorp had a market cap of U$17.1Bn. Today its market cap is U$14.6Bn
  • At end 2013 Barrick had a market cap of U$18.1Bn. Today its market cap is U$19.0Bn

In a nutshell, the decision by Thornton to treat ABX as a normal company that needs to show financial discipline and balance sheet strength has seen the market cap of the company under his charge increase by close to a billion from the start of the slump to the end of the tunnel. However the collective decisions of Telfer and Garofalo, prizing gold ounces and project collection over basic financial well-being have seen GG’s market cap (aka “the sliver of hope that lies between assets and liabilities”) drop by over U$2.5Bn.

The decision last week by GG to buy into Cerro Casale, plus the stated intention of ABX to keep reducing its financial debt by selling fixed assets (and apparently the next deal is close to hand) show that the trends we saw in both companies in 2013 to 2016 are only set to continue. In other words, one of these companies is doing it the old-school way, betting on projects and hoping gold prices makes it look smart later. Meanwhile, the other company is being run well.