There’s a secret way to take advantage of an upswing in gold, with potential for huge returns. But no one in the media will tell you about it. Gold prices have been in decline since the summer of 2011; we all know that. The yellow metal fell over eight percent year-to-date, but gold miners took far larger hits. Barrick Gold Corporation (NYSE/ABX), for instance, dropped by more than 36% in the same timeframe.
Its decline doubled the gold sell-off! Why did Barrick’s stock price fall so much further than gold prices? The obvious answer is that mining is a capital-intensive industry, and low commodity prices mean smaller margins. But here’s the key takeaway: the reverse is also possible.
When gold prices make their eventual resurgence, Barrick will likely be the big winner. If it fell twice as far as gold, it can also rise twice as high. The company’s vulnerability during periods of weak prices is equal to its strength during times of persistently high prices.
Let me explain.
The New Barrick Gold Could Jump 75%
Barrick isn’t the company it used to be. The change in Barrick’s identity is mostly synonymous with its change in leadership. Founded by famous miner and philanthropist Peter Munk, Barrick’s ethos was one of stature and grandeur. Munk wanted a behemoth of a firm, one that could expand operations across the planet and diversify its range of metals.
Munk drained Barrick’s cash reserves on costly acquisitions, leaving the company indebted and overextended. Two of his larger purchases, a copper mine in Zambia and a gold mine between Chile and Argentina, cost the company $15.9 billion. Coincidentally, the firm has $13.0 billion in debt. Like I said, Munk wanted a large and dynamic firm, but it didn’t work because his vision had no place in reality.
Enter, John Thornton. When Munk retired in 2014, Barrick brought in a stranger to the mining industry as his replacement. Brilliant and competitive, John Thornton had previously risen through the ranks at Goldman Sachs, eventually helping run the firm as President and Co-Chief Operating Officer. (Source: The Wall Street Journal, March 25, 2003.)
In his short tenure, he’d begun to carve Barrick into a different company altogether. No more stature, no more grandeur —Thornton just wants to earn profits. Middle layers of bureaucracy were axed because information was getting lost between mine managers and upper executives, and greater autonomy was given to local operations. Thornton sees his job as mainly operational; streamlining costs while letting miners do what they do best. (Source: Canadian Business, July 3, 2015.)
Barrick Poised to Win if Gold Regains Safe Haven Status
Thornton’s strategy is not only clever; it shows how clearly he sees the road ahead. Prices are in decline and you need cost cutting to survive that kind of environment, but you want to stay nimble.
The company is using the current lull to pay down its debt. Nearly $850 million has already gone towards repayment, with another $3.0 billion scheduled in the remainder of 2015. Barrick’s all-in sustaining cost for producing gold is $860.00 to $895.00, meaning they can weather the storm until gold prices rebound. (Source: Barrick FY2015 Outlook, last accessed August 3, 2015.)
But are gold prices going to rebound? Well, there’s increased buying activity in China. In June, the Chinese stock market crash thundered around the world and investors could only watch, spellbound as the Shanghai Composite Index slid by 30%. But when an aftershock sent the market plunging again last week, investors finally started heading back to safe haven assets like gold.
If gold returns to its previous peak of $1,900, it would reflect a 75% gain from its current level. We’ve seen Barrick’s losses double the decline in gold prices. Consider this; a rout in prices will drive smaller mines out of business. They do not operate at economies of scale, meaning they have a higher cost of production. As the supply of gold shrinks and demands rises, market consolidation could drive Barrick’s upswing to double gold’s rise, leading it to a 150% gain.