The last few years have not been kind to resource firms—especially to Barrick Gold Corporation (NYSE/ABX). But with China’s stock market crash and Greece halfway out of the eurozone, now may be the perfect moment to buy gold stocks.
Gold prices have dropped 11.4% over the last 12 months. The yellow metal is a safe haven asset during periods of market uncertainty. It’s a place to go when you’re bearish on the stock market.
Rock bottom interest rates from the Federal Reserve have propped up a bull market that’s kept money flowing from commodities to stocks. However, there’s some indication that the market is about to turn.
Leading hedge funds are pouring money into mining companies that were hit hardest by the downturn. David Iben of Kopernik Global Investors LLC. is stockpiling shares of Barrick and Kinross Gold Corporation (NYSE/KGC).
And he’s not the only one; big name money managers like First Eagle Investment Management, Renaissance Technologies, and D.E. Shaw also hold large stakes in Barrick Gold.
Gold Stocks at Bargain Basement Prices
David Iben is a really smart guy and first-rate stock picker. He is a founding partner and chief investment officer of Kopernick Global Investors LLC., a prominent hedge fund with roughly $400 million in assets.
According to his most recent 13F filing, Iben increased his stake in Barrick Gold by 164%, bringing his firm’s total investment to $57.46 million. He also increased his holdings in Kinross Gold to $37.1 million, up 76% from his previous filing. Together, these two holdings account for almost 24% of Iben’s portfolio. (Source: SEC Filings, July 6, 2015.)
If he and the rest of the smart money are heading for gold, you can bet they have a good reason. So what do they see that we don’t?
Barrick Gold has taken a beating in past years—its share price plummeted by more than 40% in the past 12 months. An office that used to house 500 people is now sparsely filled. Mass layoffs in recent years have left just 140 staffers at the company headquarters in Toronto. (Source: Canadian Business, July 3, 2015.)
But maybe that’s exactly what Barrick needed in order to execute a turnaround.
Peter Munk, the father and founder of Barrick Gold, had a vision for his company. He wanted to build a diversified mining company that could operate across different metals and in a variety of locations. It was an ambitious plan—one that ended in failure.
In 2011, he orchestrated the acquisition of copper miner Equinox Minerals. The deal cost Barrick $7.3 billion but became a fiasco almost immediately. The company’s core asset was a Zambian mine called Lumwana. It was underperforming so badly that Barrick had to write down $3.8 billion off the mine’s value within two years.
Management Musical Chairs
The gold boom in the 2000s was a key factor in Munk’s expansion plans. The company borrowed heavily to fund its growth, but was left holding the bag when gold prices collapsed. A Macquarie estimate suggests that just two of the acquisitions blew a $15.9 billion hole in Barrick Gold’s finances.
Luckily, Peter Munk retired in 2014, handing over the reins to a former president of Goldman Sachs, John Thornton. Thornton may be an outsider to the mining industry, but he knows how to run a business efficiently.
He’s devised a strategy to slim down bureaucracy inside Barrick and pay off the company’s debt. There used to be four layers of executives between mine managers and the CEO. Thornton axed all those positions and has a weekly call with all of his mine managers, so the on-the-ground realities actually make their way up the food chain.
He wants to bring the firm’s geographical focus back to Nevada and South America. An Australian mine was sold earlier this year wherein $850 million from the sale is designated for debt repayment. Thornton has pledged another $2.15 billion towards debt relief. The funds will be from the sale of non-core assets and the firm’s coffers.
However, Thornton’s tenure has already been marred by his excessive salary. He got an $11.9 million signing bonus in 2013, and scored a $12.9 million compensation package in 2014. To put that in perspective, the company lost a third of its value in 2014. (Source: Canadian Business, July 3, 2015.)
Shareholders showed their outrage at the firm’s annual meeting when 75% of them voted to reform the company’s compensation rules. “We have heard you loud and clear,” Thornton said after the vote. “We will go back and refine our system, particularly as it relates to me.” (Source: The Globe and Mail, April 28, 2015.)
With those changes in the works and all the smart money pouring into Barrick, I’m optimistic about the company’s prospects.